| In this dissertation, I investigate whether the quality of corporate governance of a firm is associated with how credible investors perceive its reported earnings numbers to be. Specifically, I test whether the relation between governance quality and the credibility of accounting numbers varies with the level of agency costs in a firm. I measure the credibility of reported earnings by the volatility of stock returns in earnings announcement periods (a non-directional measure), and the earnings announcement period excess returns (a directional measure). Based on several proxies for agency costs, I form 3 groups of firms using cluster analysis (agency cost groups), and conduct my analyses separately for each agency cost group. To determine the quality of corporate governance of a firm, I apply the principal components analysis procedure on 23 governance variables to obtain 8 factors that represent the different dimensions of governance for a firm. The results indicate that most aspects of governance, in particular, the composition and functioning of the board of directors, the CEO's dual role as the chairman of the board, the effectiveness of the audit committee, and shareholder rights are significantly associated with the credibility of reported earnings for firms in the highest agency cost group. On the other hand, a very limited number of the governance factors are significantly related to the credibility of earnings for the lowest agency cost group. Overall, the evidence indicates that a significant association between governance, in particular the aspects related to the board of directors, and investors' confidence in reported earnings numbers exists primarily for firms with high agency costs. This supports the argument that the usefulness of corporate governance policies in affecting the credibility of disclosures is not uniform across firms, as well as provides evidence of the importance of various characteristics of the board of directors as a governance mechanism. |
