Abstract
The purpose of this paper is to investigate how governance systems of large public U.S. corporations vary with information properties of numbers produced by their financial accounting systems. We argue that in firms whose current accounting numbers do a relatively poor job of capturing the effects of the firm's current activities and outcomes on shareholder value, the accounting numbers are less effective in the governance setting. We predict that such firms will substitute costly governance mechanisms to compensate for their less useful accounting numbers. We explore whether governance systems vary with the timeliness of earnings by examining the cross-sectional relation between proxies for earnings timeliness and subsequent corporate governance systems of 784 firms in the Fortune 1000. The governance systems we consider include board composition, stockholdings of inside and outside directors, ownership concentration and the structure of executive compensation. Our results support a significant negative relation between our timeliness metrics and subsequent costly corporate governance mechanisms after controlling for other firm characteristics.
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