Financial reporting quality and the quiet Life by Mihir N. Mehta.

Abstract

Bertrand and Mullainathan (2003) find that managers shielded from the threat of takeovers exert less effort to maximize firm value, consistent with a 'quiet life' hypothesis. I study whether the governance role of financial reporting can mitigate adverse effects arising from managerial preferences for a quiet life. I hypothesize and find evidence that after changes in the mid 1990's to Delaware's takeover protection regime, Delaware firms with higher financial reporting quality (FRQ) have better operating performance and higher capital investment intensity. Furthermore, the above relation between FRQ and performance is stronger for firms operating in less competitive industries, and firms with staggered boards. Overall, the results suggest that financial reporting can help mitigate adverse effects associated with managerial preferences for a quiet life.