The Effects of Internal Governance Mechanisms on Voluntary Disclosure

Abstract

Researches on the effects of internal governance mechanisms report contradictory results. Some researchers argue that internal governance mechanisms are able to reduce agency problems, but others assert that they are not effective and just spend firms’ resources. This study suggests that internal governance mechanisms may have different effects depending on managerial activities. Managers tend to comply with internal governance mechanisms in the managerial activities, such as disclosing activity, whose results are obvious and assessable because the consequences of their actions can be easily observed and evaluated by governance mechanisms. In the other hands, because it is difficult to evaluate whether managers’ actions are for shareholders’ value in ambiguous and non-assessable activities, managers eagerly entrenches themselves to protect their position and privilege. Therefore, internal governance mechanisms are more effective in obvious and assessable managerial activities than ambiguous and non-assessable ones. In this study, I investigated the effects of internal governance mechanisms on voluntary disclosure; the obvious and assessable activity. An empirical test was conducted on 331 Korean firms in 2017. This study found that the stronger internal governance structure, such as outside directors and stock option, the more a manager is likely to disclose the performance expectation or goal.