1、As a Substitute of Alternative Governance Mechanisms Sergio Beretta Accounting Department Boccioni University According to agency theory, various governance mechanisms reduce the agency problem between investors and management (Jensen and Heckling, 1976; Gillan, 2006). Traditionally, governance mech
2、anisms have been identified as internal or external. Internal mechanisms include the board of directors, its role, structure and composition (Fama, 1980; Fama and Jensen, 1983), managerial share ownership (Jensen and Meckling, 1976) and incentives, the supervisory role played by large shareholders (
3、Demsetz and Lehn, 1985), the internal control system (Bushman and Smith, 2001), bylaw and charter provisions (anti-takeover measures) and the use of debt financing (Jensen, 1993). External control is exerted by the market for corporate control (Grossman and Hart, 1980), the managerial labor market (
4、Fama, 1980) and the product market (Hart, 1983). After the various financial scandals that have shaken investors worldwide, corporate governance best practices have stressed in particular the key role played by the internal control system (ICS) in the governance of the firm. Internal control systems
5、 contribute to the protection of investors interests both by promoting and giving assurance on the reliability of financial reporting, and by addressing the boards attention on the timely identification, evaluation and management of risks that may compromise the attainment of corporate goals. These
6、functions have been widely recognized by the most diffused frameworks for the design of ICS that have stated the centrality of internal control systems in providing reasonable assurance to investors regarding the achievement of objectives concerning the effectiveness and efficiency of operations, th
7、e reliability of financial reporting and the compliance with laws and regulations (COSO, 1992; 2004). Notwithstanding their relevance, investors cannot directly observe ICSs and therefore cannot get information on their design and functioning because they are internal mechanisms, 第 1 页 共 17 页 activi
8、ties and processes put in place within the organization (Deumes and Knechel, 2008). As investors take into account the costs they sustain to monitor management when pricing their claims (Jensen and Meckling 1976), management have incentives to communicate information on the characteristics of the IC
9、S in order to inform investors on the effectiveness of ICS when other monitoring mechanisms (the ownership structure of the firm and the board of directors) are weak, and thereby providing them with the convenient level of monitoring (Leftwich et al., 1981). The possible existence of substitution am
10、ong different mechanisms has been debated in corporate governance literature (Rediker and Seth, 1995; Fernandez and Arrondo, 2005) based on Williamsons (1983) substitute hypothesis, which argues that the marginal role of a particular control mechanism depends upon its relative importance in the gove
11、rnance system of the firm. In this paper, we contend that disclosure on the characteristics of ICS is a relevant alternative governance mechanism in the monitoring package selected by the management. According to Leftwich et al. (1981) managers select a monitoring package and the composition of the
12、chosen package depend on the costs and benefits of the various monitoring devices (p. 59). In particular, we focus particular on the relationship between ICS disclosure and two other mechanisms of the monitoring package ( the ownership structure of the firm and the board of directors) that according
13、 to literature (Jensen and Meckling, 1976; Fernandez and Arrondo,2005; Gillan, 2006) play a relevant role in monitoring managements behavior. We posit that incentives for reporting on the characteristics of ICS depend on the supervisory role played by the firms ownership structure and board of direc
14、tors. We therefore examine the contents and extent of ICS disclosure of 160 European firms listed in four different stock exchanges (London, Paris, Frankfurt and Milan) on a three-year period (2003 2005). By using this international sample, we are able to the depict some features of different instit
15、utional environments. We find evidence that disclosure on ICS is a substitute for the monitoring role played by other governance mechanisms as ownership concentration, institutional ownership, the proportion of independent directors sitting on the board and the proportion of accounting expert member
16、s on the audit committee. 第 2 页 共 17 页 We add to previous literature on the governance role played by disclosure on ICS by adopting a complete disclosure framework that allows us to consider in detail the content and extent of information the management discretionarily communicates on the ICS of the firm. While corporate governance best practices ask for the disclosure on the char
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