Does Better Corporate Governance Improve Financial Reporting Quality? Evidence from a Regression Discontinuity Analysis of Shareholder-Sponsored Governance Proposals

This study examines whether improvements in corporate governance lead to higher quality financial reporting. We use a regression discontinuity method to analyze the effect on financial reporting quality of shareholder-sponsored governance proposals that pass or fail by a small margin of votes in annual meetings. This empirical strategy allows us to overcome the endogeneity problem of governance mechanisms and provide evidence on the causal effect of corporate governance on financial reporting quality. We find that passing proposals related to executive compensation and board of directors leads to an improvement in the quality of financial reporting. We also find some, not strong, evidence that this positive effect on financial reporting is more pronounced for firms with lower quality financial reporting prior to the voting. In contrast, we find no evidence that passing proposals related to antitakeover provisions affects financial reporting quality. Very preliminary draft Please do not cite or quote. Comments welcome.