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The purpose of this paper is to investigate, using data on US manufacturing firms, how and when corporate governance affects managers' decisions to use discretionary accruals and thereby artificially influence company financial reports.

Three‐stage least squares is employed to study the relationship between financial status, corporate governance and financial reporting discretion. The sample spans the years 2001‐2003 during a severe downturn in the US stock market. Financial status is measured with the Altman Z‐score.

A significant difference is found between firms not classified as healthy or failed (i.e. the mid‐range group) and the two extreme categories when examining governance quotient using a well‐known index. A positive relationship is found between discretionary accruals and the governance index. Strong governance appears to reduce the incidence of mid‐range firms engaging in accruals management. The least healthy and the most distressed companies have the weakest relationship with discretionary accruals. By contrast, mid‐range firms are more likely to resort to discretionary accruals.

Non‐executive members of boards of directors are warned to be particularly vigilant about discretionary accruals with firms transitioning between healthy and high‐failure risk.

The relationship between firms' financial health and discretionary accruals reveals an agency problem in credit markets with financially stressed firms. More attention is required on firms whose financial condition is uncertain. Also, it is documented that significant findings of importance to the earnings quality and corporate governance literature by documenting the role of corporate governance on discretionary accruals and financial status.

The purpose of this paper is to identify some key issues for the analysis of corporate governance based on the papers within this special issue including the Guest Editor's perspectives.

The five papers included in this special issue are summarized and their main contribution to the literature is highlighted.

The paper collectively deal with the role and impact of corporate boards on the quality of information provided to capital markets.

The theoretical and empirical research included in the special issue advance the understanding of corporate governance which provides impetus for practitioner and policy change.

The normative concepts of best practice need to be validated by empirical testing in the context of firms and their institutional settings. This suite of papers provides evidence of the effectiveness of corporate governance in improving accounting quality.

The purpose of this paper is to investigate whether investor reactions to accounting narratives are uniform across cultures or if there are predictable systematic culture-based differences, particularly for investors from interdependent cultures, such as in Asia.

This research paper builds on the experiment conducted in Riley et al. (2014) by collecting data from investors from interdependent cultures and comparing their investment judgments to the “baseline” judgments of the investors from Riley et al. (2014).

In comparing independent and interdependent culture investors, a culture by construal interaction is observed. Whereas the independent culture investors in Riley et al. (2014) made less favorable investment judgments of a company with a concretely (vs abstractly) written negative narrative, this effect is attenuated for interdependent culture investors.

This study extends the literature on accounting narratives by providing evidence that investors’ culture and linguistic characteristics of accounting narratives “interact,” suggesting that future studies in this area should account for culture as a variable. As for limitations, the independent and interdependent participant data were predominantly collected from different universities, so the differences observed may be due to institutional, not cultural differences. However, the populations are matched on key demographic measures.

The results have practical implications for investor relations professionals and international standard-setting bodies.

This study is believed to be the first to examine how investors’ culture may affect their reactions to the features of accounting narratives.