The role of financial reporting and transparency in corporate governance

Armstrong, Christopher S.; Guay, Wayne R.; Mehran, Hamid; Weber, Joseph P.

Journal Article

The role of financial reporting and transparency in corporate governance

Abstract: The authors review recent literature on the role of corporate financial reporting and transparency in reducing governance-related agency conflicts between managers, directors, shareholders, and other stakeholders?most notably financial regulators?and suggest some avenues for future research. Key themes include the endogenous nature of governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the corresponding heterogeneity of the associated governance mechanisms. The authors also emphasize the role of credible commitment to financial reporting transparency in facilitating informal multiperiod contracts among managers, directors, shareholders, and other stakeholders. Finally, they discuss the importance of regulatory supervision and oversight as a class of governance mechanisms that is particularly important for banks and financial institutions.

Keywords: financial accounting; contracting; financial institutions; information asymmetry; executive compensation; corporate transparency; corporate governance; board structure; informal contracts;

JEL Classification: M42; G21; M55; G24; G23; D86; M41; G30; M50; M40; G38; G28; D82; G34; M52;