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

Kirchmaier, Thomas and Selvaggi, Mariano (2006) The dark side of 'good' corporate governance: compliance-fuelled book-cooking activities. Discussion paper, 559. Financial Markets Group, 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.lse.ac.uk
Additional Information: © 2006 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: 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
Sets: Research centres and groups > Managerial Economics and Strategy Group
Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 559
Date Deposited: 16 Jul 2009 14:34
URL: http://eprints.lse.ac.uk/24513/

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