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Economic Consequences of Corporate Governance Disclosure: Evidence from the 2006 SEC Regulation on Related-Party Transactions

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT This paper examines economic consequences of a 2006 Securities and Exchange Commission regulation that mandated public firms to disclose their governance policies on related-party transactions (RPTs). Employing hand-collected RPT data for S&P 1500 firms, we find that the initiation of RPT governance disclosure significantly reduces the occurrence of RPTs, and that the reduction in RPTs is negatively associated with the implied cost of capital (ICC) and positively related to Tobin's Q. These effects are more pronounced for low-monitored firms and for firms with RPTs that are more likely to be opportunistic. We further find that firms with a formal written policy, a designated committee to review and approve RPTs, or more extensive disclosure on RPT governance benefit in terms of lower ICC.

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References

1983Separation of Ownership and Control 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1996Higher market valuation of companies with a small board of directors 2003Corporate Governance and Equity Prices 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1997Disclosure level and the cost of equity capital.1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud

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