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Corporate governance, earnings manipulation, and information quality in capital markets

University of British Columbia

This thesis was inspired by the accounting scandals around the world at the beginning of the 21st century and the reforms in corporate governance law that followed. We use both theoretical and empirical analysis to focus on several aspects of corporate governance mechanisms. The first study focuses on the board of directors. We develop a dynamic agency model with renegotiation to analyze the interaction between the board’s monitoring and the manager’s earnings manipulation in a firm. The second study broadens the perspective to consider the information in the capital markets with a focus on the role of financial disclosure regulation. It examines how financial disclosure regulation affects the information quality in capital markets, using a strategic investor model in an insider trading setting. The third study investigates these ideas empirically. We construct measures of public, private, and total information quality, and study how they change following the Sarbanes-Oxley Act of 2002 (SOX) in the United States. The key findings of the thesis are as follows. The first study shows that the dynamic incentive contract motivates the manager to work hard on the one hand and to manipulate earnings on the other hand. Even though the board anticipates the earnings manipulation, the board does not unambiguously choose to monitor the manager. The second study demonstrates that the equilibrium market price reflects both the public and a fraction of the private information. While tightened disclosure regulation might improve the quality of public information, the changes in the quality of private information and of total information are ambiguous due to the subtle interplay between public reporting and private information acquisition. The third study provides empirical evidence showing a temporary improvement in the quality of public information following the SOX. The quality of private information decreases and there is no significant change in total information quality. The thesis contributes to the literatures of earnings management and of corporate governance, adding to the growing debate on the costs and benefits of governance reforms. By identifying important indirect effects, we stress the need to consider "substance over form".

Text

2010-01-16

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http://hdl.handle.net/2429/18531

Business Administration

University of British Columbia

UBCV

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