Does the Disclosure of Corporate Governance Structures Affect the Market Valuation of Earnings Surprises and Firms’ Earnings Management?

Abstract

The Sarbanes-Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. We investigate whether SOX’s recently mandated disclosure of corporate governance structures affects the market’s perception of earnings informativeness and firms’ earnings management. We find that the market valuation of earnings surprises is significantly higher for firms disclosing stronger corporate governance functions. We also find that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure. Specifically, the empirical evidence shows that the informativeness of accounting earnings increases after the SOX’s mandated disclosure which strengthens the link between financial reporting and corporate governance functions.