Topics in Corporate Finance

Global Corporate Governance and Accounting Transparency


Volume: 6 Topics in Corporate Finance

Author(s): U. Bhattacharya

Year: 2003

ISBN: 90-805728-6-1

Price: € 20.00

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This study is divided into two parts.  In the first part, we discuss the meaning of corporate governance, look at the various mechanisms of corporate governance, and then survey recent changes in global corporate governance.  In the second part, we explore in great detail one mechanism of good corporate governance – good accounting – and ask how much investors really value good accounting.

Corporate governance refers to the ways in which suppliers of finance to corporations assure themselves of getting a fair return on their investment.  It refers to the mechanisms owners of capital use to try to align the interests of the controllers of capital – the firm managers – with their own interests.  We review seven general corporate governance mechanisms in the first part of this document, with particular emphasis on how these are being affected by globalization.  The seven corporate governance mechanisms we study are: corporate boards, ownership composition, certifiers (like auditors, banks, bond raters, securities analysts, financial press, regulators), market for takeovers, disclosure laws, legal system and the nature of the dominant shareholder.

One facet of corporate governance is good accounting.  Accounting is the language of capitalism.  If one loses faith in the language, as many have done because of the recent accounting scandals, one loses faith in business itself.  No amount of good corporate governance can substitute for bad accounting.  The second part of the paper investigates the importance of accounting.  Do investors really reward good accounting and punish bad accounting?  A careful analysis of 58, 653 financial statements from 34 countries reveals to us that investors do demand a higher cost of equity and they trade less often in countries with higher earnings opacity.

We hope that you enjoy reading it, and that this publication contributes to a constructive debate on Global Corporate Governance and Accounting


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