Corporate Governance and the Informativeness of Unexpected Earnings

The sample in this study includes Taiwan TSE & OTC Listed Companies from accounting year 2002 to 2006. We use five corporate governance variables: voting rights of the ultimate owner, the deviation of cash flow rights from voting rights, the percentage of independent members of the board of directors and supervisors, related-party transactions, and the pledge ratio from members of the board of directors and supervisors, to examine the relationship between corporate governance and the informativeness of unexpected earnings. The results suggest that when unexpected earnings are positive, companies with better corporate governance generally tend to exhibit higher abnormal returns. Conversely, when unexpected earnings are negative, companies with better corporate governance tend to exhibit poorer abnormal returns. This reveals that investors trust the accounting results from companies with better corporate governance more, resulting in a stronger reaction to unexpected earnings announcements. Thus, the informativeness of unexpected earnings is higher for companies with better corporate governance.