Accounting for value and governance

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 4 November 2014



Mangena, M. and Liu, J. (2014), "Accounting for value and governance", Journal of Applied Accounting Research, Vol. 15 No. 3.



Emerald Group Publishing Limited

Accounting for value and governance

Article Type: Guest editorial From: Journal of Applied Accounting Research, Volume 15, Issue 3


The waves of financial scandals and corporate failures in most of the developed countries in the 1980s and early 2000s, and indeed the 2008 global financial crisis, placed the corporate governance of the modern firm under greater and closer scrutiny. Filatotchev and Nakajima (2010) point to the distorted system of incentives and lapses in the personal and professional integrity of managers as having contributed significantly to the global financial crisis, undermining confidence in capital markets and leading to the erosion of stakeholder trust. Against this backdrop, and beginning in the early 1990s, developed and developing countries have published best practice corporate governance recommendations as well as regulatory laws to improve the quality of corporate governance. The governance recommendations and regulations are motivated by the rationale that strong governance supports sustainable value creation in firms via improvement in responsibility and accountability (OECD, 2004; King Report, 2009). Consequently, a considerable amount of research has examined the role of corporate governance in organisations, particularly in the public firm. In this context, studies have examined the impact of corporate governance on organisational value creation outcomes such as firm value (e.g. Yermack, 1996; Coles et al., 2008; Mangena et al., 2012; Liu et al., 2013), disclosure (e.g. Karamanou and Vafeas, 2005; Ajinkya et al., 2005; Mangena and Pike, 2005), and earnings management (e.g. Peasnell et al., 2005). Collectively, these studies show that effective corporate governance arrangements are important for organisational outcomes. Nevertheless, Larcker and Tayan (2011) point to the fact that the impact of corporate governance on value creation is complex and there are gaps in knowledge that further research should continue to address. They argue that careful research is important in providing a framework that enables policy makers to formulate sound corporate governance policy and practitioners to make sound decisions in designing governance systems that enhance value creation.

This Special Issue of the Journal of Applied Accounting Research (JAAR) comprises a collection of six peer-reviewed papers that contribute to the debate relating to corporate governance and value creation outcomes. These contributions are part of a large number of papers that were presented at the 2013 Joint Annual Conference of the British Accounting and Finance Association Northern Area Group and Interdisciplinary Perspectives Special Interest Group held at Nottingham Business School, Nottingham Trent University, UK. In line with the conference theme, “Accounting for value and governance”, the JAAR special issue call for papers invited submissions on a wide range of accounting and finance-related topics. The contributions in this special issue have attempted to address some of the issues raised in the call for papers, with particular focus on the role of corporate ownership and corporate governance quality, the external audit function, voluntary disclosure of information about greenhouse gases, and investments in intellectual capital assets.

Overview of the contributions

The first paper by Mulcahy focuses on whether reporting a loss precipitates a change in corporate governance arrangements to improve quality. The paper argues that to the extent that adverse accounting outcomes are associated with lower quality corporate governance arrangements, firms reporting persistent losses are more likely to improve corporate governance in an attempt to mitigate the consequences of underperformance. Such consequences include potential takeovers or liquidation. Drawing from agency theory and on earlier research examining board changes following a major economic event, the paper specifically examines whether firms make changes in non-executive and independent directors in response to the reporting of a loss and whether these changes are conditioned by the severity of the loss. Using an industry and size matched control sample, and a difference-in-difference analysis, the results indicate that more severe initial loss events as well as subsequent losses precipitate improvements in board quality. The study concludes that the relationship between corporate governance and performance is therefore endogenous as the majority of any improvement in board quality actually anticipates the reporting of the loss.

The second paper by Tauringana and Mangena examines the role of corporate boards in the firm’s narrative reporting practices. Following the ASB (2006) and IASB (2010), the authors make a distinction between complementary and supplementary narrative information, and focus their study on examining supplementary narrative commentary on amounts reported in the primary financial statements. They argue that to the extent that supplementary narrative disclosures are important for understanding the financial performance and position of the firm, the boards will take actions that improve the quality of these disclosures. Their study examines two aspects of narrative reporting: the level of supplementary commentary on amounts reported in the primary financial statements and the propensity to bias commentary towards a specific primary financial statement (which they call supplementary narrative focus). Their findings demonstrate that board structure quality improves the level of commentary and reduces supplementary narrative focus. The authors, therefore, infer that policy makers and firms might improve the quality of information provided to users by improving the quality of corporate governance.

The next paper by Liu and Li explores the factors that determine the company's post-IPO transition into one of the three states: acquisitions due to weak performance, acquisitions due to strong performance, or delisting outright. Motivated by prior literature's failure to capture these post-IPO states and using data of Chinese firms, they find that delisting is predominantly influenced by offering-specific information, by the issuer's financial status leading up to the eventual outcome, by agency costs, and by corporate ownership and governance structure. Acquisitions due to strong or weak performance differ most significantly according to industry features, state ultimate ownership, and the extent of board size. More importantly, they find that the trajectory in the IPO aftermarket is shaped by corporate ownership and control considerations. The authors concluded that corporate evolution in China is jointly shaped by market forces and state control.

The paper by Aziz and Omoteso focuses on an important governance mechanism, the external auditor, whose reputation came under scrutiny following the global financial crisis. The external audit function was heavily criticised for their role in the financial crisis, particularly given the fact that most of large banks that failed during the crisis were all given a clean audit only some months before failing. The authors argue that this leads to loss in confidence in the external audit function and hence the financial statements. Accordingly, the paper investigates factors that are perceived as important for restoring confidence in the external auditor and the financial statements. They use data drawn from practising accountants, auditors, and accounting academics within the UK to provide an understanding of the factors that may improve confidence in the external auditor. Using factor analysis, they group the factors into four including competition, independence, regulatory response and education, and demonstrate that the most important factors are improvement in auditor independence, regulatory response, and enhanced auditor training (education). They conclude that policy makers needed to refocus their attention to addressing the issue of auditor independence whilst professional accountancy bodies, accounting educators, and accounting firms needed to revamp the curriculum and training schemes.

In their paper, Chithambo and Tauringana do not examine corporate governance per se, but address issues relating to sustainability – a topic that has attracted extensive attention from stakeholders around the world and has become an integral part of corporate governance. They investigate the voluntary greenhouse gas disclosures by UK-listed firms and examine whether differences in greenhouse gas disclosures are related to firm-specific characteristics. Their findings demonstrate that voluntary disclosure of greenhouse gases in the UK is low, and focuses on providing more qualitative than quantitative information. They also show that greenhouse gas disclosures differ with firm-specific characteristics and industry.

The last of the papers in the special issue, by Li and Mangena focuses on intellectual capital disclosure, an important dimension of the information set considered critical for the capital market in its valuation of the firm’s shares. Drawing from earlier research, they argue that because the existing financial reporting model arbitrarily amortises or immediately expenses investments in intellectual capital assets such as advertising expenses, research, and development, these assets are not effectively captured in the financial statements. This creates significant information asymmetry problems and therefore enhanced voluntary disclosure is important. In this respect, unlike previous studies, the paper examines the presentation format (i.e. text, numerical, and graph/pictures) of intellectual capital disclosures and the impact of capital market pressures. As we would be expected, they demonstrate that disclosure is greater in text format than in numerical and graph/picture formats, and that the impact of capital market pressures differs with presentation format.


The contributions in this special issue have addressed a number of issues, with particular focus on the role of corporate ownership and corporate governance quality, the external audit function, voluntary disclosure of information about greenhouse gases, and investments in intellectual capital assets in different economic and market settings. On the whole, the findings of the papers in this special issue point to the fact that corporate governance matters for value creation and therefore provide important insights to the literature. The findings reported in these papers have both policy and practical implications in line with the objectives of the JAAR.

Professor Musa Mangena, Nottingham Business School, Nottingham Trent University, Nottingham, UK

Dr Jia Liu, Salford Business School, University of Salford, Salford, UK


Ajinkya, B., Bhojraj, S. and Sengupta, P. (2005), “The association between outside directors, institutional investors and the properties of management earnings forecasts”, Journal of Accounting Research, Vol. 43 No. 3, pp. 343-376

ASB (2006), Reporting Statement (RS) 1 – Operating and Financial Review, Accounting Standards Board, London

Coles, J.L., Daniel, N.D. and Naveen, L. (2008), “Boards: does one size fit all?”, Journal of Financial Economics, Vol. 87 No. 3, pp. 329-356

Filatotchev, I. and Nakajima, C. (2010), “Internal and external corporate governance: an interface between an organization and its environment”, British Journal of Management, Vol. 21 No. 3, pp. 591-606

IASB (2010), IFRS Practice Statement-Management Commentary, A Framework for Presentation, International Accounting Standards Board, London

Karamanou, I. and Vafeas, N. (2005), “The association between corporate boards, audit committees, and management earnings forecasts: an empirical analysis”, Journal of Accounting Research, Vol. 43 No. 3, pp. 453-486

King Report (2009), Report on Corporate Governance for South Africa, Institute of Directors of South Africa, Parklands

Larcker, D.F. and Tayan, B. (2011), Corporate Governance Matters: A Closer Look at Organiszational Choices and Their Consequences, FT Press, Upper Saddle River, NJ

Liu, J., Lister, R. and Pang, D. (2013), “Corporate evolution following initial public offerings in China: a life-course approach”, International Review of Financial Analysis, Vol. 27, April, pp. 1-20

Mangena, M. and Pike, R. (2005), “The effect of audit committee shareholding, financial expertise and size on interim financial disclosures”, Accounting and Business Research, Vol. 35 No. 4, pp. 327-349

Mangena, M., Tauringana, V. and Chamisa, E. (2012), “Corporate boards, ownership structure and firm performance in an environment of severe political and economic crisis”, British Journal of Management, Vol. 23 No. S1, pp. 23-41

OECD (2004), “Principles of corporate governance, organisation for economic co-operation and development”, available at: (accessed 15 September 2014)

Peasnell, K.V., Pope, P.F. and Young, S. (2005), “Board monitoring and earnings management: do outside directors influence abnormal accruals?”, Journal of Business Finance and Accounting, Vol. 32 Nos 7/8, pp. 1311-1346

Yermack, D. (1996), “Higher market valuation of firms with a small board of directors”, Journal of Financial Economics, Vol. 40 No. 2, pp. 185-211

About the Guest Editors

Musa Mangena is a Professor of Accounting at the Nottingham Business School, Nottingham Trent University, UK. His main research interests are concentrated in the areas of corporate governance, corporate disclosure and consequences, and the behavioural and organisational effects of performance measurement systems. He has published his work in top journals such as the British Journal of Management; Journal of Accounting, Auditing and Finance; International Journal of Accounting; Accounting and Business Research; European Accounting Review; British Accounting Review and Journal of International Financial Management and Accounting. He is on the Editorial Board of the Journal of Accounting in Emerging Economies. Professor Musa Mangena is the corresponding author and can be contacted at:

Dr Jia Liu is a Reader in Finance at the Business School, the University of Salford, UK. Her research interests are in the areas of corporate finance and governance, risk management, capital markets, market-based accounting research, and their related public policy implications. Her work has appeared in top journals such as International Review of Financial Analysis, International Journal of Economics of Business, Bulletin of Economic Research, Managerial and Decisions Economic, Applied Economics and China Economic Review. She sits on the Editorial Board of Journal of Risk Management. She is the Chair of the Northern Area Group of the British Accounting and Finance Association.

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