Summary
Accounting and disclosure scandals unfortunately have become part of the business landscape in recent years. We investigate potential antecedents of this phenomenon by developing a framework examining the effects of employment capital and board control on the likelihood of misleading disclosures. Our findings show that executives of high-return firms seem motivated to protect their employment capital by issuing misleading disclosures to give the appearance of continuing high performance. We also identify structural antecedents rooted in the power of the CEO and the board, with CEO equity ownership bearing a U-shaped relationship with the issuance of misleading disclosures and board tenure exerting a moderating influence that appears to be effective primarily in high-return firms. We conclude by discussing the implications of these findings and offering directions for future research.
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Extract
Employment Capital, Board Control, and the Problem of Misleading Disclosures*
Recent years have witnessed unprecedented levels of accounting irregularities and scandals, leading to a thorough re-examination of governance practices and the institutionalization of mandated governance and accounting standards such as those incorporated in the Sarbanes-Oxley Act. Left unanswered by all of the publicity and legislation is the question whether the phenomenon has been fully and properly understood. Although agency theory (Fama and Jensen, 1983; Jensen and Meckling, 1976) speaks to the issue of monitoring and control of executive discretion, do we know enough about how governance structures operate in different contexts to be confident that we can reduce the incidence of problems such as misleading disclosures?
We seek to contribute to our understanding of the dynamics of the disclosure process and effective governance design by examining die response of CEOs to threats to their employment capital and the relationship between the board and the CEO. To date, the majority of published research on misleading disclosures has appeared in the accounting literature and focuses rather narrowly on audit and litigation issues (e.g., St. Pierre and Anderson, 1984; Stice, 1991). More recently, work investigating misleading disclosures has started appearing in the management literature (e.g., Dunn, 2004; Latham and Jacobs, 2000; Reed et al., 2004). Like this emergent research, our work is grounded in management tiiought rather than accounting theory and practice. We draw primarily on agency theory (e.g., Fama, 1980; Jensen and Meckling, 1976) to focus on the tension between managerial motivations and die ability to control managerial decision making. In short, this research adopts more of a governance perspective than a broad behavioral approach. Although we apply prospect theory (e.g., Kahneman and Tvers...See the full content of this document
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