Wayne R. Guay is the Yageo Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on a recent article authored by Professor Guay; Chris Armstrong, Associate Professor of Accounting at Wharton; Hamid Mehran, Assistant Vice President at the Federal Reserve Bank of New York; and Joseph Weber, George Maverick Bunker Professor of Management and a Professor of Accounting at MIT Sloan School of Management.
In our article, The Role of Financial Reporting and Transparency in Corporate Governance (Economic Policy Review, 2016), we review the recent corporate governance literature that examines the role of financial reporting in resolving agency conflicts among a firm’s managers, directors, and capital providers. We view governance as the set of contracts that help align managers’ interests with those of shareholders, and we focus on the central role of information asymmetry in agency conflicts between these parties. The general conclusion in this literature is that financial reporting is valuable because contracts can be more efficient when the parties commit themselves to a more transparent information environment.
