Enhancing Firm Sustainability Through Governance

Enhancing Firm Sustainability Through Governance

The Relational Corporate Governance Approach

Corporations, Globalisation and the Law series

Francesco de Zwart

This important book presents a fresh perspective on corporate governance and how the relationship between governance mechanisms, processes and variables should be understood through a new unifying theory: the relational corporate governance approach. The approach acts as a tool for analysing the governance health of individual companies and suggests the actions required to remedy sub-optimal governance arrangements. A wide selection of articles, empirical studies and literature have been translated into an original theory which complements existing law and economics models of the firm.

Chapter 9: Empirical studies Key Field No 4 (Part 3): Board and audit committee factors and earnings manipulation

Francesco de Zwart

Subjects: business and management, corporate governance, international business, law - academic, corporate law and governance


This chapter presents Part 3 of the detailed review of law, economic and econometric studies from the US, UK, Europe and Australia that comprises the Empirical Studies Key Field No 4. In this chapter, another measure of, or proxy for, ‘good’ governance is examined – the probability of earnings manipulation or ‘management’. Increases in earnings management represent increases in agency costs of outside shareholders and therefore a fall in firm sustainability. Again drawing upon these empirical studies and the Shareholder Primacy Interrelationship Scheme presented in Figure 2.6, this chapter presents a ‘relational effect path’ for a range of individual board and audit committee governance variables. This relational effect path describes the number and identity of the governance factors affected by a governance variable and the direction of effect. The nature and operation of many of these variables was encountered in Chapters 7 and 8. But, in this chapter, the relational approach examines the effect of these variables on the earnings management measure.

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