The topic of c。中orate governance has gained prominence worldwide after the 1997 Asian financial crisis and the outbreak of a series of financial scandals and accounting frauds such as the Enron and WorldCom cases in the United States. The foundation of corporate governance lies in information transparency Accurate and transparent accounting information he1ps companies effectively allocate their resources and efficient1y manage their operations to achieve business goals. Divergent from the practices of International Accounting Standards, companies in Taiwan used to treat employee bonus as an earning distribution item, which underestimates the costs and overstates the earnings of the companies. In order to improve information transparency, the SFB mandated public1y issued companies to disc10se information about employee bonus and executive compensation commencing January of 2003. The pu中oses of offering employee compensation are to reduce agency problems between managers and shareholders, encourage employees to work hard, and improve firm performance A good compensation plan should be c1ose1y linked to firm performance. To prevent managers from pursuing se1 f-interests 叫出 e expense of shareholder interests, some governance mechanisms are needed to establish a performance-contingent compensation plan
Substitution effect exists among various corporate governance mechanisms When one corporate governance mechanism fails to perform its monitoring function, the other mechanism will rise to serve the pu叩ose. For instance, accounting information and ownership structure can substitute for each other in corporate governance. Our empirical resu1ts show that (1) when compensation information is not disc10sed and accounting reports provide insufficient information, ownership structure provides major shareholders and foreign investment institutions incentives to perform cost1y monitoring activity. After information disc10sure is made mandato旬， timely and public information improves the governance efficiency of accounting information, thus reducing the importance of major shareholders and foreign investment institutions in monitoring the performance-compensation relationship. (2) Consistent with the
Chiao Da Alanagement Re\刊111Jól. 30No. 1,2010 115
entrenchment hypothesis, managerial ownership exerts a negative effect on the perfonnance-compensation relationship. This negative effect does not decrease after infonnation disclosure of employee compensation is made mandatory. In conclusion, our empirical evidence shows that information disclosure mandated by the SFB enhances infonnation transparency and improves corporate governance.
In August 2006, the Financial Supervisory Commission announced that companies must recognize employee bonus and executive compensation as expenses in their financial reports effective as of 2008. Do expense recognition and mandatory disclosure have differential effects on c。中orate governance?
According to regulators of accounting standards, market participants value the substance of information rather than the presentation of infonnation. In other words, infonnation being recognized or disclosed in the statement provides the same infonnativeness for investors. Aboody (1996) studies the valuation relevance of stock-based employee compensation that is disclosed but not recognized in detennining net income under Statement of Financial Accounting Standards (SFAS) No. 123. He finds that stock-based compensation has a negative relation with share price, consistent with the view that investors see compensation as an expense of the finn
Some researchers find that market participators view disclosed information less reliable than recognized financial statement items. This standpoint weighs recognized financial information greater value relevance (Bernard and Schipper, 1994; Cotter and Zimmer, 2003). Future research can investigate whether infonnation disclosure and recognition of employee compensation have differential effects on corporation governance
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