Governance Performance and Functions of Accounting Information in the Corporate Governance

We discuss economics-based research focused primarily on the governance role of financial accounting information. We present a framework that isolates three channels through which financial accounting information can affect the investments, productivity, and value-added of firms. The first channel involves the use of financial accounting information by managers and investors in identifying promising investment opportunities. The second channel is the use of financial accounting information in corporate control mechanisms that discipline managers to direct resources toward projects identified as good and away from projects identified as bad. The third channel is the use of financial accounting information to reduce information asymmetries among investors. We discuss the governance value of accounting information in particular governance mechanisms. We discuss the use of accounting information in particular governance mechanisms. Topics include the prevalence of financial accounting numbers for contracting with managers, trends in the use of accounting numbers for contracting with managers