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Theory of corporate governance and earnings quality

Author: ChenHongQing¡¡WangBing From: www.yourpaper.net Posted: 2009-04-26 21:22:32 Read:
[Abstract] corporate governance theory to guide the design and arrangement of the corporate governance structure. I believe that the low-quality of accounting earnings because the positioning of the existing corporate governance theory bias to guide corporate governance, stakeholder theory, to further improve the quality of accounting earnings.
[Words] theory of corporate governance; Earnings Quality; stakeholders

Corporate Governance and Earnings Quality has been many scholars studied extensively the topic, both from the norm or from the empirical research, the convergence of view, the advantages and disadvantages of the corporate governance structure largely determines the level of quality of accounting earnings, China accounting earnings quality is due to the imperfections of the corporate governance structure.
By definition, corporate governance structure is the corporate institutional arrangements in the national economy. This arrangement the narrow sense refers to the separation of ownership and management conditions, investors (investor) and the distribution of benefits among the listed companies and control relationships; broadly can be understood as a business organization, control mechanisms, the distribution of benefits of all legal, institutional, cultural and institutional arrangements, defined not only business owners relationship, and the relationship between enterprises and stakeholders (Leung et al, 2000). Corporate governance structure is not a one-size-fits-institutional arrangements in different countries have different structure models, such as the Anglo-American model and the German and Japanese models. Specific to different companies, there is a different contract binding.
However, the corporate governance structure is subject to theoretical guidance, corporate governance theory to guide the design and arrangement of the corporate governance structure. The governance structure of each company can vary widely, but the theory is relatively concentrated. Corporate governance theory ¡ú ¡ú Earnings Quality of corporate governance structure. Through the analysis, I believe that the quality problems led to China's accounting earnings is an important reason is that: the existing corporate governance theory too much emphasis on the protection of shareholders' interests.

Second, the theory of corporate governance: an overview
Is generally believed that the theory of corporate governance, including two representative view: one is the traditional theory of "shareholder first" a stakeholder theory.
"Shareholders first" traditional theory limited to be understood from the technical aspects of business, is about the enterprise as the business of the owners of capital, the purpose of business is to maximize shareholder value, resulting capital wage labor is the most efficient the corporate governance structure (Yang Rui, 2002).
The stakeholder theory breakthrough "shareholder first" logic is a combination of approximately stakeholders to emphasize the nature of the enterprise, as each property rights to businesses to invest in specific assets, they have equal status. Enterprise remaining contribute more than just shareholders' investment in physical assets, including input from operating personnel dedicated human assets, creditors invested assets as well as government and so the enterprise proprietary asset investment. In accordance with the principle of contribution income, they are entitled to participate in the distribution of residual income and share control of the company.
Corporate governance theory to guide the design and arrangement of the corporate governance structure, the differences of the theoretical point of view directly determine the role and effectiveness of the corporate governance structure.

Third, the "shareholder first" theory analytical framework and problems
"Shareholder first" logic, "the standard of corporate governance is defined as the protection of the interests of shareholders" (Tirole, 2001). From the principal-agent framework to maximize shareholders plays the role of the principal, through the introduction of various measures to solve the principal-agent problem caused by information asymmetry and opportunistic behavior in order to achieve the drop-down agent and realize their own interests purposes. "These measures can be summarized into three types: reporting system, incentive system, supervision system. "Reporting system, incentive system and supervision system in theory should be able to solve or at least mitigate the separation of ownership and management of the principal - agent problem, but to make this mechanism effectively run, can not be separated from the activities of the audit (Xu Zheng Dan, 2002), and audit supervision mechanism, the necessary and sufficient condition for its existence is the ability to reduce monitoring costs.
I believe that the theory of corporate governance in China "shareholders first". As China's "Corporate Governance Guidelines" first explicitly pointed out: "The shareholders of listed companies should be established to ensure the full exercise of their rights of corporate governance structure. Out of the need to protect state-owned assets and, most listed companies are state-owned enterprises decoupling restructuring and the formation of the country in the establishment of a listed company, the division of the state-owned shares, legal person shares and social public shares, and the state-owned shares and legal person shares can not free circulation, thus led to the split share structure and solidification. Although listed company has completed the split share structure reform, but is unlikely to change in the short term due to the dominance of state-owned shares of the status quo. The shareholders first Theoretical Orientation and constraints due to the dominance of the status quo difficult to form an efficient corporate governance structure of listed companies. Specific analysis is as follows:
(A) due to legal emphasis on protection of the interests of shareholders, due to the dominance determines the controlling shareholders with the company's decision-making power, leading to the controlling shareholders against other stakeholders
China's "Company Law" Article 43 provides that: "the shareholders' meeting by shareholders to exercise their voting rights in proportion to the amount of investment. Because the shareholders' meeting to decide on all major issues, including the election of directors, supervisors and managers, due to the dominance of the conditions is equal to the controlling shareholder indirectly interested in the company's decision-making power. Hu Ru silver completed a survey report shows that the governance of listed companies in China, on average, the number of directors from major shareholder has more than 50% of the board seats, basically from the largest shareholder and manager of the company. So in this corporate governance structure, the Board of Directors, managers more representative of the interests of the controlling shareholders.
It showed, the managers control at the present stage, the company's principal agent problem is not Bailey, Means (1932) proposition, but shareholders against other vulnerable groups. Dongxiu Liang, and Xuefeng Hui (2003) also believes that the core governance issues of listed companies in China are conflicts of interest and the controlling shareholder of the controlling shareholders and minority shareholders its ultimate principal - between countries of conflict of interest, and the latter agency costs ultimately still to seek private benefits of control performance of the controlling shareholder of listed companies and minority shareholders "predatory". From this perspective, we can easily understand the frequent occurrence of major shareholder in China's securities market accounted for models of security breaches and false associated party transactions in breach of regulations.
(B) As the core of corporate governance agency problems, making the original principal-agent analysis framework failure
From the accounting reporting system, the role of the accounting reporting system that shareholders be able to use it to alleviate the problem of asymmetric information, and provides a basis for judging whether the operating personnel to fulfill the fiduciary responsibility. At the same time, managers use it to reflect a fiduciary duty to fulfill the process and the result. Accounting report is proof of performance of a contract between shareholders and managers. Obviously, this is the shareholders and managers in the opposing point of view, but in fact the controlling shareholders decided the appointment of managers, so their main interests are the same. This objective provides an opportunity for the benefit of major shareholders and managers conspire against small shareholders and other stakeholders.
Managers incentives including material incentives and reputation incentives, controlling shareholders largely determine the appointment of managers, the appointment and removal of the incentive makes managers attached to the power of controlling shareholders.
3 from the point of view of the audit, at this stage, management and directors are part-time, determined by the management (the Board) the auditors employed about rights, it was decided auditor and can not be corrected shareholders deprivation.
(C) to maximize shareholder value is difficult to guarantee
Shareholders first representative of maximizing shareholder value, but in the conditions of the existing shareholding structure, goals and interests of the controlling shareholder and minority shareholders are not entirely consistent, it is difficult to get coordination; especially of minority shareholders in the IPO pricing, the company decision-making power, is deprived of their status, so that simply maximizing shareholder value can not be sustained.
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