The empirical research examining the association between typical measures of corporate governance and various accounting and economic outcomes has not produced a consistent set of results. We believe that these mixed results are partially attributable to the difficulty in generating reliable and valid measures for the complex construct that is termed “corporate governance.” Using a sample of 2,106 firms and 39 structural measures of corporate governance (e.g., board characteristics, stock ownership, institutional ownership, activist stock ownership, existence of debtholders, mix of executive compensation, and anti-takeover variables), our exploratory principal component analysis suggests that there are 14 dimensions to corporate governance. We find that these indices have a mixed association with abnormal accruals, little relation to accounting restatements, but some ability to explain future operating performance and future excess stock returns.

Following Sloan (1996), numerous studies document that the accrual component of earnings is less persistent than the cash flow component of earnings. Disagreement exists, however, as to the explanation for this result. One stream of literature follows Sloan's lead in arguing that this result is attributable to accounting distortions (Xie 2001; Dechow and Dichev 2002; Richardson et al. 2005). A second stream of literature argues that this result is attributable to a more general growth effect and that growth-related factors such as diminishing returns to new investment explain the lower persistence of accruals (e.g., Fairfield et al. 2003a; Cooper et al. 2005). We provide new evidence indicating that temporary accounting distortions are a significant contributing factor to the lower persistence of the accrual component of earnings. Our evidence indicates that the lower persistence of accruals extends to accruals that are unrelated to sales growth and that extreme accruals are systematically associated with alleged cases of earnings manipulation.