The effects of governance structure and ownership structure on the informativeness of earnings

This study draws upon prior research on corporate governance structures and corporate ownership structures and examines whether the informativeness of earnings, proxied by the earnings response coefficient (ERC) varies with the percentage of outside independent directors serving on the board, the absence of CEO-duality, the presence of independent audit, compensation, and nominating committees, the percentage of the firm's outstanding shares owned by management, the percentage of shares owned by outside independent directors, and the percentage of shares owned by institutions. Much has been written regarding the possible benefits that outside independent directors can bring to the firm in the forms of increased financial performance through their individual expertise as well as increasing the capabilities of the board to monitor and control the decisions of management. Similarly, much has been written regarding the benefits to the stock market of better aligning the interests of management with the interests of the shareholders viz-a-vi stock ownership held by management, directors and institutions. This study utilizes a regression analysis to determine the effects (if any) of the proportion of and the positions held on the board by outside independent directors and variations in stock ownership of the firm on the informativeness of earnings to the stock market. The results suggests that earnings of firms in which management holds an ownership interest are perceived to be more informative by the stock market thus supporting the belief that earnings are more informative to the market when management and shareholder interests are better aligned. The results also suggest that earnings of firms owned in part by institutional investors are perceived to be less informative by the stock market thus supporting the belief that management of such firms maintain high levels of voluntary disclosure about the firm's financial activities. However, the results do not suggest an association between the presence of outside independent directors or their stock ownership in the firm and earnings informativeness thus supporting the belief held by the market that outside independent directors are unwilling or unable to take decisive action against management. These findings support the position taken by Berle and Means (1932) and Mace (1971) that the market believes that the board of directors is formed to maximize management's control of the firm and that the board's ability to monitor management is neither important nor attainable.