Essay on The Impact Of Corporate Governance Related Factors

Essay on The Impact Of Corporate Governance Related Factors

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This thesis examines the impact of corporate governance-related factors, particularly CEO incentive compensation, discretionary accruals and firm technical efficiency improvement, on stock returns in Australia. The motivation to investigate these impacts was the increasing importance of the equity-based compensation component in CEO remuneration packages, the numerous financial reporting scandals at high profile companies such as Enron, WorldCom and HIH Insurance, and an urgent call from the government on improvement in productivity.
Among various corporate governance mechanisms, CEO compensation is viewed as an efficient incentive to align the interests of managers with those of shareholders. According to agency theory, effective compensation policies, particularly incentive-based pay, induce managers to make more effort, and to undertake risky and shareholder-wealth-increasing investments to increase their firms ' value. However, in practice, some argue that too close a link between CEO compensation and firm performance may cause CEOs to become either too conservative or too aggressive, which may lead to suboptimal investments and lower firm value.
The second factor examined in this thesis is the quality of financial reporting. According to Healy and Wahlen (1999), two important purposes of financial reporting are that it helps the best-performing firms in the economy to distinguish themselves from poor performers and it facilitates efficient resource allocation and stewardship decisions by stakeholders. Furthermore, better financial reporting would reduce information asymmetry between firms’ managers and outside investors and promote investor confidence, resulting in lower cost of capital and then higher firm value. Therefore,...


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...sk factors such as size, book-to-market, market liquidity, industry concentration, and seasonality effect, which has an important implication for market efficiency. The evidence is also of interest to investors/portfolio managers in terms of asset selection and asset allocation.
Overall, the thesis makes a number of valuable contributions to the literature by providing empirical evidence on the impacts of three corporate governance-related factors on cross-section of stock returns. The findings from the thesis have important implications for firms in designing an optimal contract with their CEOs, for financial reporting users in terms of the information value of reported earnings and market regulators in terms of corporate governance and the accounting standards related to corporate reporting, and for investors in regard to their asset selection and asset allocation.

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