Publication Type
Working Paper
Publication Date
2014
Abstract
Financial reports should provide useful information to both shareholders and creditors, according to U.S. accounting principles. However, directors of corporations have fiduciary duties only toward equity holders, and those fiduciary duties normally do not extend to the interests of creditors. We examine whether this slant in corporate governance biases financial reports in favor of equity investors, and in particular leads to a downward bias in reported debt that can hurt creditors. We focus on firms’ decision to issue structured debt securities that are classified as equity in financial reports and can circumvent debt covenants. We find that when the local legal regime requires directors to consider creditors’ interests, firms are less likely to use such structured transactions, particularly if the board of directors of the firm is independent. Our results suggest that when corporate governance is designed to protect only equity holders, firms’ financial reports serve equity holders’ interests at the expense of other stakeholders
Discipline
Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance
Research Areas
Corporate Governance, Auditing and Risk Management
Citation
Segal, Dan; Segal, Benjamin; and Levi, Shai.
Does corporate governance make financial reports better, or just better for equity investors?. (2014).
Available at: https://ink.library.smu.edu.sg/soa_research/1305
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Included in
Accounting Commons, Business Law, Public Responsibility, and Ethics Commons, Corporate Finance Commons