The Dark Side of Good Corporate Governance:
AbstractWe argue on theoretical grounds that obligatory compliance with stricter financial reporting rules (e.g. the US Sabanes-Oxley Act) may entail important unintended consequences. Paradoxically, the amount of misreporting may increase because corporate boards spend more valuable resources fulfilling statutory mandates rather than involving themselves in forward-looking strategy setting, As these surveillance devices are substitute methods of gauging management quality, when boards focus on the firm's internal control and accounting system they become semi-detached from strategy - their business acumen falters. Top executives are then judged primarily on the basis of financial metrics as opposed to long-term fit. Since the balance sheet review carries more weight in the board's decision-making process, the return to managerial book-cooking (a purely ¶influence¶ activity) and the risk of endorsing flawed business plans swell. This confirms a burgeoning sentiment among business leaders and scholars that boards should perhaps pay less rather than more heed to codified, verifiable 'good ' governance principles.JEL classification: D23, G30, K20, M21, M40.Keywords: Corporate� Governance, Earnings Manipulation, Auditing, Misreporting, Sarbanes-Oxley Act, Combined Code on Corporate Governance
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp559.
Date of creation: May 2006
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Find related papers by JEL classification:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- K20 - Law and Economics - - Regulation and Business Law - - - General
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2006-05-27 (Accounting & Auditing)
- NEP-ALL-2006-05-27 (All new papers)
- NEP-BEC-2006-05-27 (Business Economics)
- NEP-FIN-2006-05-27 (Finance)
- NEP-FMK-2006-05-27 (Financial Markets)
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