CORPORATE GOVERNANCE

Corporate governance

Table of Contents

Corporate governance

1.0 Introduction

This study will be applied on the banking sector in Jordan, which is considered as one of the most important sectors for the Jordanian economy; since banks are the most important source of external finance, especially for small and medium enterprises, in addition, banks play a key role in the corporate governance of other financial and non-financial firms. Therefore, the study of the corporate governance in the banking sector in Jordan contributes for the corporate governance on many other sectors in the country. This study aims to explore the relationship between corporate governance and financial reporting, it proposed that improving the financial reporting system will positively affect the corporation's control abilities and consequently create business value (John, Senbet, 1998). Financial reporting system incorporates not only financial statements, but also includes other means of communicating financial and non-financial information such as management forecast and stock exchange documents (Melis, 2004).

On the other hand, there is problem in defining the term of corporate governance due to the lack of consistent usage of the term (Tricker, 2000). However, corporate governance can be defined as the system which deals with the wielding of power over corporate entities (Tricker, 1998), outlining the structures and processes associated with strategic decision-making and control within a corporation (Melis, 2002).

For the purpose of the current study, the type of company that will be considered is the corporation. Corporations are characterized by the separation between ownership and control, or between management and stakeholding (John, Senbet, 1998). Corporations' ownership structure is not necessarily widespread, but may present some degree of concentration (La Porta et al., 1999). In addition, the corporations' control structure may be characterized by the dominant presence of various stakeholders, who act as controlling agents, such as top management, large institutional investors, block-holders, and large creditors.

In the following section, the related literature in the fields of corporate governance and financial reporting will be reviewed. The understanding of the theoretical issues related to corporate governance and financial reporting is important to develop a logical model and to choose the appropriate study variables that have the potential for a beneficial results and recommendations.

Generally, literature review for non-Jordanian literature provides many reasons to assume that a significant relationships corporate governance and financial reporting system are exist.

In order to address the purpose and questions of this study, this literature review will focus on the fields of: corporate governance, financial reporting system, and the relationship between corporate governance and financial reporting system. The following sections discuss the research efforts in these fields respectively.

1.1. Study Problem

It is argued that reliability and quality of accounting profits are enhanced when the handling of opportunistic leaders is monitored by corporate governance (Wild, 1996 Dechow et al. 1996; Klein, 2002). There are three main factors that influence the activities regarding the link between CORPORATE GOVERNANCE and MS: managerial ownership, board composition and audit quality.

Governance regarding the remuneration of directors and managers is to motivate managers to act in the best interest of shareholders and management monitoring reduces agency conflicts...