Accountability and Value Creation Roles of Corporate Governance

Abstract

We examine the twin roles of accountability and value creation of corporate governance in the context of financial reporting. We investigate the accountability role by examining the association between governance structures and abnormal accruals, and the value creation role by investigating the association between abnormal accruals predicted by governance structures and future performance. We differentiate between governance mechanisms that have direct roles in the financial reporting process (audit related governance structures) from mechanisms that have indirect roles (non-audit related governance structures). Our evidence suggests governance attributes important to financial reporting are the existence of independent and active audit committee and board independence. Also, we show that both audit and non-audit related governance structures are value enhancing.