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Corporate governance, shareholder conflicts and audit quality

Frantz, Pascal and Instefjord, Norvald (2007) Corporate governance, shareholder conflicts and audit quality. Social Science Research Network.

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Abstract

A string of high profile corporate failures over the past years have led to strong regulatory responses for corporate governance, some of which are aimed at strengthening the audit function of the governance process. This paper introduces an analytical model investigating the desirability of mandatory corporate governance requirements in the presence of shareholder conflicts. In this model, investment in governance and audit serves to protect outside shareholders' claim from decisions made by a dominant shareholder (entrepreneur) with conflicting preferences. The paper provides conditions under which an entrepreneur requiring equity financing selects weak as opposed to strong corporate governance. We find no evidence of governance failure and hence no case for intervention as long as the market for audit services is fully competitive. In contrast, when this market is not fully competitive, governance failures, in which the entrepreneur selects the weak governance regime when the strong governance regime maximizes economic welfare, may arise. Mandating strong governance may however have an adverse effect on economic welfare as weak governance can be welfare-maximizing.

Item Type: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/
Additional Information: © 2007 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce > HF5601 Accounting
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M42 - Auditing
Sets: Departments > Accounting
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 10 Aug 2012 10:38
URL: http://eprints.lse.ac.uk/45324/

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