FINANCIAL REPORTING CHOICES, GOVERNANCE STRUCTURES, AND STRATEGIC ASSETS: A TRANSACTION COST PERSPECTIVE

Parthiban David, Ravi Dharwadkar, Augustine Duru

Research output: Contribution to journalArticlepeer-review

Abstract

We integrate the governance and measurement branches in transaction cost economics to highlight how differences in performance measurement choices influence the governance of strategic assets, thereby affecting transaction costs. We develop our theory in the context of corporate governance in firms. Financiers of debt and equity employ market and hierarchical governance to safeguard generic and specific assets, respectively. Financial reporting choices constitute credible commitments to generate performance reports that are used by financiers in exercising governance. We explain why conservatism (more timely information about potential losses) bolsters the market governance of debt to reduce transaction costs for generic assets, while smoothing (informative reports about future earnings) strengthens the hierarchical governance of equity to reduce transaction costs for specific assets. We outline a research agenda incorporating the implications of performance measurement from financial reporting choices for the governance of strategic investments.

Original languageEnglish (US)
Pages (from-to)579-599
Number of pages21
JournalAcademy of Management Review
Volume47
Issue number4
DOIs
StatePublished - Oct 2022

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

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