The role of information and financial reporting in corporate governance: A review of the evidence and the implications for banking firms and the financial services industry

Abstract

We review recent literature on the role of corporate financial reporting and transparency in reducing governance-related agency conflicts between managers, directors, shareholders, and other stakeholders—most notably regulators—and suggest some avenues for future research. Key themes include the endogenous nature of governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the corresponding heterogeneity of the associated governance mechanisms. We also emphasize the role of credible commitment to financial reporting transparency in facilitating informal multi-period contracts among managers, directors, and shareholders. Finally, we discuss the importance of regulatory supervision and oversight as a class of governance mechanisms that are particularly important for banks and financial services firms.