The dark side of 'good' corporate governance: compliance-fuelled book-cooking activities

Kirchmaier, Thomas ORCID: 0000-0002-8938-2206 and Selvaggi, Mariano (2006) The dark side of 'good' corporate governance: compliance-fuelled book-cooking activities. Financial Markets Group Discussion Papers (559). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We 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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://fmg.ac.uk
Additional Information:	© 2006 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics K - Law and Economics > K2 - Regulation and Business Law > K20 - General G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M40 - General D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
Date Deposited:	16 Jul 2009 14:34
Last Modified:	13 Sep 2024 20:00
URI:	http://eprints.lse.ac.uk/id/eprint/24513

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