Voluntary disclosure and corporate governance

Voluntary revelation and in inembodied governanceIntroductionTheforces that give rise in demand of randomness manifestation in modern gravid market stems from the information asymmetry and dresser conflicts breathing between the instruction and the stockholders. in that locationfore, the solution to agency conflicts lies in the ownership structure and the function of carte of directors.(Jensen and Meckling 1976) make that the Ownership structure is assessed by the proportion of sh bes held by draw offrs and blockholders.So managerial ownership which is (the proportion of shargons held by the chief executive officer and executive directors) and blockholder ownership which is (the proportion of ordinary shares held by substantial shareholders) are two subscribe governance mechanisms that hangant control agency problem. In addition, Fama 1980 argues that the gameboard of directors is the central internal control mechanism for monitor managers. Financial reporting and manifestation are measurable re witnessers for management to communicate mansions performance and success of efficient slap-up market (ECM).Fama (1991) defined ECM as a market in which new information is accurately and quickly reflected in share prices.The incentive to voluntarily reveal information still low interest to both analytical and the empiric seekers.Analytical research concerned and verified issues as how competition affects manifestation, (Darrough and Stoughton 1990). Empirical researchers documented the influence of level char exerciseeristics like size, leverage, inclination and managerial ownership on revelation.Firms provide divine revelation by financial statements, management discussion and analysis, foot nones, furthermore some firms involved in in bequeathing translate such as internet sites, press releases, conference calls, management forecasts.Corporate disclosure is proxied by an aggregate findr match of annual report, including background information, summary of diachronic results, non financial statistics, projected information and management decision and analyses. (Botosan 1997)and (Endg and Mak 2003).Voluntary disclosure is metric by the amount and detail of non mandatory information that is contained in the management decision and analyses in the annual report.Research problemCorporate governance mechanism that is well practiced could benefit shareholder financially by utilisation more control in the companies management. Moreover, the corporate governance characteristic offer be seen as proxies for independents and the alignment of interest between management and the shareholder in minimizing the agency conflict.M any researches have been through among different countries to find out which factors could contribute to more disclosure by companies in their financial annual reports.Accordingly this research examines the come to of ownership structure, the profitability and board composition on corporate discl osure, in other words examining the relationship between corporate governance and unpaid worker disclosure, beca utilization the disclosure of information helps to reduce the terms of agency problems when on that point is an information asymmetry between management and shareholders .The efficiency gab has been narrowed in the worlds major economies but in that location remain important gabs in what we know. In particular, we lack a sufficient understanding of the complicated ways in which the various corporate governance mechanisms interact with each other and with other characteristics of firms and economies. Research QuestionsIs there any relationship betweenlevel of profitability and the finale of military volunteer disclosure?Is there any relationship between managerial ownership and the close of involuntary disclosure?Is there any relationship betweenthe family member sitting on the board and the boundary of voluntary disclosure?Research ObjectivesThe main objective of this contemplate is to examine whichamong the variables contribute to voluntary disclosure and which attributes drive management toward increase disclosure levels. Specifically, the objectives of this get hold of are listed belowTo examine whether level of profitability affect the purpose of voluntary disclosure of companies in Jordan.To examine whether managerial ownership structure affects the extent of voluntary disclosure of companies in Jordan.To examine whether the family member sitting on the board affect the extent of voluntary disclosure of companies in Jordan.Significance of take awayThere are many parties will get benefits from this orbit, corporations, regulators, policy makers, the analytical, andempirical researches.This research will improve their understanding on which corporate governance factors affect the existing of voluntary disclosure and will increase their information about this area via providing additional evidence on corporate governance and disclosu re.CHAPTER 2LITERATURE check into Since separation of ownership and control is the predominant form of corporate governance, previous studies have investigated the relationship between the corporate governance mechanisms and firms disclosure bearings. Many different theoretical perspectives and research methods have been employed by a wide range of research questions covering different countries and time periods. For example studies have been d wholeness by Chow and Wong-Boren (1987) Penmann (1988), Cooke (1991), Hossain et al. (1994) and Balachandran (2004).2.1 Corporate governance The prior study mentions that the corporate governance refers to the way companies are directed and controlled. A primary concern is the likelihood of a deviation in the objectives of corporate managers from those of shareholders due to the agency costs involved in monitoring managerial behavior (Berle and Means 1932). A nonher study also mentions that the quality of corporate disclosures is associated with corporate governance characteristics. According to Bujaki and McConomy (2002), corporate governance has been described as the process and structure utilize to direct and manage business and affairs of the corporation with the objective of enhancing shareholder nourish. Corporate governance has also been defined by the Finance Committee Report (1999) as the manner in which firms top officers are being monitored and discipline accordingly with the objective ofenhancing shareholders value. It is also claimed that Corporate governance is the process and structure used to direct and manage the business and affairs of the union towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value. Dey (1994) stated that proper corporate governance system can help ensure an effective division of authority among shareholders, the board of directors, and the management. According to recent reports by modby (2001), in vestors are change magnitudely basing their investment decisions on companies corporate governance records and are willing to pay more for shares of well-governed companies compared to those of poorly governed companies. This premium for well-governed companies is explained by the role of corporate governance in a companys overall risk management strategy. 2.2 The agency theoryJensen Meckling (1976) in the agency theory provides a framework linking disclosure behavior to corporate governance. Corporate governance mechanisms are introduced to control the agency problem and ensure that managers act in the interests of shareholders. Theoretically, the impact of internal governance mechanisms on corporate disclosures whitethorn be complementary or substitutive. If it is complementary, agency theory predicts that a greater extent of disclosures is expected since the adoption of more governance mechanisms will tone the internal control of companies. Further, agency theory provides a fra mework for analyzing financial reporting incentive between managers and owners. Signaling theory explains why firms have an incentive to report voluntarily to the bang-up market however if there were no mandatory reporting requirements,and voluntary disclosure is necessary in order to grapple successfully in the market for risk not bad(p),the ability of the firm to berate capital will be improved if the firm has a good disposition with respect to financial reporting.2.3 Voluntary disclosure Penmann (1988) stated that financial disclosure could be divided into mandatory and voluntary disclosures. Mandatory disclosure is defined as any financial head disclosed in companies annual reports that are prescribed by accounting standards and or the stock exchange regulations. However, voluntary disclosure is defined as any financial item or data disclosed in annual reports of companies that are not prescribed by the companies act and or accounting standards, and, in addition, for publ ic-listed companies, the stock exchange regulations. Further, Meek, Roberts Gray (1995) defined voluntary disclosures as disclosures in excess of requirements, representing free choices on the part of company managements to provide accounting and other information that deemed relevant to the decision require of users of annual reports.Many studies have been carried out to explain voluntary information disclosure such as Chow and Wong-Boren (1987) Cooke (1991) Hossain et al. (1994) and so forth in their attempt to determine different levels of disclosures and the association between firms characteristics such as firms size and industry type and the levels of disclosure.In addition, good reporting is expected to reject firms cost of capital because there is less uncertainty in firms that reporting extensively and reliably. Therefore, there is less investments risk and lower required rate of return. According to Welker (1995), managers are not likely to withhold information for the ir own benefits under an intensive-monitoring environment, because this could lead to service in disclosure comprehensiveness and quality of financial statements. On the other hand, if the relationship is substitutive, companies will not provide more disclosures for more governance mechanisms since one corporate governance mechanism may substitute one another. If information asymmetry in a firm can be reduced because of the existing internal monitoring packages, the need for having additional governance devices is considered smaller. These apparently conflicting viewpoints on the impact of corporate governance have not been primitively resolved, in spite of this theoretical ambiguity. Companies that perform well have a strong incentive to report their operating results. Competitive pressures would also force companies to report even though they did not have good results. Silence of a failure to report would be reinterpreted it as bad news. Companies with bad news would be move t o report their results in order to avoid being suspected of having poor result. Such a situation would also force bad news firms to disclose results in order to maintain credibility in the capital market. 2.4 The reasons for voluntary disclosure Management of companies provides voluntary items in their annual reports because they perceived those items as important to be disclosed. Management wants to give information to users through annual reports in such a way that they are capable of roleplaying various needs of users for decision-making.There are various user groups of annual reports and each group has different perception regarding the voluntary items. One group may perceive item A as more important than item B. These differing perceptions among groups might be caused by different information needs to fulfill their specific purposes. Through annual reports, users can obtain more firms information relating to their decision-making. Although there are many sources of informatio n regarding business entity, an annual report is considered the most important and valued source of information Vergoosen (1993).With regard to reasons why companies disclose voluntary items, theory suggests that many of the reasons why managements disclose items voluntarily to users are centered on the need to raise capital at the lowest possible cost (Cooke 1989). The following explanations may support reasons why companies disclose information voluntarily Additional disclosures may help to attract new shareholders thereby helping to maintain a healthy demand for shares. Additional disclosure by providing more information relating to the present and future(a) condition of firms wealth in order to build an image that may generate goodwill for future benefits (Iqbal et al 1997) Increased information may assist in reducing informational risk, which could lower the cost of capital. For the purpose of raising capital on the market, companies may increase their voluntary disclosure in annual reports. Consequently, listed companies are more likely to have a higher level of disclosure than unlisted companies Multiple listed companies often have an interest in foreign capital markets since foreign operations are often financed by capital (Choi Mueller 1992). Disclosure level might be increased to adapt to local customs to meet the requirements of banks and other suppliers of capital. Listed and multiple listed companies might increase their social responsibility disclosure to demonstrate that they act responsibly (Watts Zimerman 1979). Companies may have attained their spot on the securities markets and are able to attract new shareholders for raising fund because they act responsibly (Cooke 1989) Under the capital markets transactions hypothesis, managers who plan on making capital market transactions (i.e., issuing public debt or equity) have incentives to provide voluntary disclosures to reduce information asymmetry between the managers and investors (Healy and Palepu 1995). According to the litigation cost hypothesis, the threat of litigation can encourage firms to increase voluntary disclosure (Skinner 1994).Table 1 Summary of previous studies examiningFirm characteristics and the level of voluntary disclosureYear of studyAuthorCountry Variables usedResult1987Chow and Wong BorenMexicoFirm size, financial leverage, and assets in place.The extent of voluntary disclosure is significantly related to firm size but not to firm leverage and assets in place.1991CookeJapanCompany size, seam market tilt, and industry types.Size was the single most important variable in explaining variation in voluntary disclosure. Stock market listing was also found to be a significant predictor, and manufacturing firms were found to disclose more information that other types. 1994Hossain et al.MalaysiaFirm size, ownership structure, foreign listing status, leverage, assets in place, and size of audit firm.Firm size, ownership structure, foreign listing s tatus is statistically related to the level of information voluntarily disclosed by publicly traded companies. In contrast, leverage, assets in place and size of audit firm do not appear to be important factors in explaining voluntary disclosure by firms.2001Ho, WongHong Kongindependent directors, voluntary audit committee, dominant personalities, family members on the board, voluntary disclosure The results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure.2004BalachandranMalaysiaVoluntary disclosure, chief operating officer duality and the proportion of independent directors on the board and on audit committeesHe found that CEO duality is associated with lower levels of voluntary corporate disclosures. It was also found a positive relationship between the proportion of independent non-executiv e directors on both the board and the audit committee to the extent of voluntary corporate disclosure.CHAPTER 3HYPOTHESIS DEVELOPMENT3.0 Introduction Upon existing academic literature several determinants explain why a firm may provide more information voluntarily than mandatory. Different theories such as agency theory, signaling theory, political cost theory, capital needs theory and so forth have also been used to explain those voluntary disclosuresThis chapter covers the theoretical framework, the hypotheses, the exercise specification and measurements of variables, disclosure magnate organic evolution and finally this chapter presents the model of the study.3.1 Variables and framework 3.1.1 Profitability(Foster 1986) suggests that profitable, will managed firms have incentives do distinguish themselves from less profitable firms in order to raise capital on the best available terms by providing voluntary disclosures. Managers are motivated to disclose more detailed informati on to support the continuities of their positions and remuneration. Therefore, more profitable firms can be expected to disclose more voluntary information. (Haniffa and cooke 2002) find a positive and significant association between the firms profitability and the extent of voluntary discloser. This message that when there is increase in the profitability the voluntary discloser of this firm will increase. Therefore, it is hypothesized thatH1 there is a relationship between companys profitability and the extant of the voluntary disclosure 3.1.2 Managerial ownership ( Jensen and Meckling 1976) mention that agency theory argues that in a diffused ownership environment, firms will disclose more information to reduce agency costs and information asymmetry. In a more concentrated ownership situation, the impact on voluntary disclosure is more complicated. The argument can be made in either direction indicate that since managers pursue their own interest, higher management shareholding would imply a larger sharing of the loss, and ultimately, a lower possibility that management would lower corporate value. Managerial ownership is the percentage of ordinary shares held by the CEO and executive directors, and includes their deemed interests. When managerial ownership falls, outside shareholders will increase monitoring of managers behavior (Jensen and Meckling 1976). To reduce monitoring costs by outside shareholders, the manager will provide voluntary disclosure. Thus, voluntary disclosure is a substitute for monitoring.In addition, a study by (McKinnon and Dalimunthe 1993) found a significant association between ownership structure in diversified Australian companies and voluntary segment disclosure. (Hossain et al 1994) found that the level of disclosure of Malaysian companies is inversely related to the percentage of shares held by the ten most important shareholders. Further, empirical evidence shows that managerial ownership is negatively related to disclosure (Ruland, Tung and George 1990). Hence it is expected that voluntary disclosure increases with decreases in managerial ownership. Therefore it is hypothesized that H2 There is a relationship between managerial ownership and the extent of voluntary disclosures.3.1.3 Family member on the board When members of the board own a large issuance of shares and at the same time they are relatives from one family or a heel of families, this may affect the financial disclosure practice of the firm. (Haniffa and Cooke 2002) in their study describe that the percentage of family ownership in any firm may influence the disclosure practice of the firm. It has been suggested that in countries where certain families have equity holdings there should be a little physical separation between those who own and those who manage the capital.(Ho and Wong 2001) mention that, the family control phenomenon is still in existence nowadays. However, it is still not clear to what extent the unique corporate own ership structure would impact the effectiveness of other monitoring devices such as audit committee, independent non-executive directors and CEO duality in determining a firms financial disclosure. Further, they stress that in a family-controlled firm, members of the controlling family would directly participate in the daily management of the firm by appointing themselves as executives and board directors. It is also assumed that every family member owns and votes its shares collectively. In theory, there are potential conflicts between the controlling and non controlling shareholders of a firm due to the formers propensity to extract private benefits through their involvement in the firm and other insider dealings.(Nicholls and Ahmed 1994) argued that capital owners do not have to assert completely on voluntary disclosure to the public to monitor their investments because they have greater access to internal information rather than the general public and stakeholders. This closin g and findings are based on the idea that since members on the board have more information than external users this will negatively affect the extent of voluntary disclosure. This means that when the family ownership is large the voluntary disclosure of this firm will be less.It is assumed that companies with a family member sitting on the board are more likely to have lower level of voluntary disclosure than otherwise. Therefore, it is hypothesized thatH3 There is relationship between the family member sitting on the board and the extent of voluntary disclosure.3.1.4 Control VariablesFrom a review of the prior literature on voluntary disclosure, it was decided to include three control variables in the regression model for testing the main hypotheses. The control variables are firm size, leverage, and assets in place. Firstly, Firm size (SIZE) as a view of the association with higher levels of disclosure and firms size, (Firth 1978) who examined the impact of firm size, stock market listing, and auditors presence on voluntary corporate disclosure found that firms size and stock market listing were positively associated with voluntary disclosure. (McNally et al 1982) found that the companys size has significant relationship with the level of voluntary disclosure items. (Hossain et al 1994) found that firm size and Ownership structure of foreign-listing status are statistically related to the level of information voluntarily disclosed by publicly traded companies.Secondly, Assets in place (AIP) In relation to assets in place, (Hossain and Mitraa 2004) in their study examine the assets-in-place in determining the level of voluntary disclosure of data on foreign operations made by US transnational companies. The results indicate that assets-in-place influence the level of voluntary disclosure of data of US multinational companies. In contrast, (Chow and Wong-Boren 1987) examined the effect of proportion of assets in place on the voluntary disclosure. The results h ave not demonstrated any convincing evidence of any relationships.Thirdly, Leverage (LEVERAGE) the definition of leverage is the degree to which an investor or business is utilizing borrowed money. For companies, leverage is measured by the debt-to-equity ratio, which is calculated by dividing total debt by shareholders equity. The more total debt there is, the greater the financial leverage and the greater the risk of the company travel on its face. For investors, leverage means buying on margin or using derivatives such as options, to enhance return on value without increasing investment. Leveraged investing can be extremely risky because you can lose not only your money but the money you borrowed as well. Voluntary disclosure of information concerning debt fund may allow shareholders and bondholders to make better predictions about the growth, risk and return prospects of companies. Therefore, firms with higher leverage tend to disclose more information than the lower ones. (Cad bury 1995) in his study found that there was a positive association between leverage and the extent of voluntary segment disclosure among New Zealand firms.3.1.5 Framework Considering all factors of the independents and dependent variables, the model of the study is depicted the following figure.3.2 Measurement Dependant variableDefinitionMeasurementDSCOREDiscloser scoreTotal number of points awarded for voluntary discloser, strategic, non-financial and financial information (coding one 1 if the company disclose and Zero 0 otherwise)Independent variablesDefinitionMeasurementROAProfitabilityReturn on AssetsMOWNManagerial ownershipThe proportion of ordinary shares held by the CEO and executive directors ( dividing the directors shares on total shared issued and fully paid)FMBFamily member in the boardCoding one (1) if there is family ownership and zero (0) otherwiseControl variablesSizeFirm sizeThis variable is measured by the log (base ten) of total assetsLEVleverageThe ratio of tota l debt of total equity value of the firmAIPAsset in placeThe ratio of net book value of rigid assets to total assets3.3 Disclosure Index There is no agreed theory on the number and selection of items that should be included in a disclosure index. (Cooke and Wallace 1989) argued that the measurement of accounting disclosure is a procedure that has some inherent limitations and subjectivity. To reduce the subjectivity, the literature suggests that the following steps should be taken into consideration when constructing the index (see for example in Hossain et al. 1994). * Review the previous literature to draw a list of voluntary disclosure items.* Check that these items are not required by regulations and eliminate or omit any mandatory items.* Refine the list and get the views of academics and professionals on the items.Disclosure level can be measured in a number of different ways. The commonly used approach has been adopted using a discretionary item scores 1 if it is disclosed, and 0 if it is not disclosed. This method of scoring is known as the un-weighted approach based on the assumption that each item of disclosure is equally important. An un-weighted approach has been used in several prior studies like (Wallace 1988) and (Cooke 1989) in their study employ un-weighted disclosure index. (Gul and Leung 2004) reported that the final disclosure list contained 44 discretionary items such as background information, financial performance information and non-financial performance information. The background information includes matters that cover corporate goals, competition, products and markets. On the other hand, performance information includes items such as changes in sales, gross profits and RD expenditures. Furthermore, Non-financial information includes number of employees, and staff training and products segment analysis. For each item in the disclosure index, the company receives a score of 1 if it voluntarily discloses information on the item and 0 if otherwise. Furthermore, In (Balachandran 2004) study, he measures the disclosure score index that comprises the consideration of 66 discretionary items. He mentions that the study used approximately 60% of the discretionary items as used in the previously detailed studies. Further, (HO and WONG 2001), in their study measured also the reported disclosure by using a relative disclosure index. It was derived by first compiling a comprehensive list of voluntary disclosure items that companies may provide in their annual reports in Hong Kong. The index consists of total 20 items of most important that disclosed in annual report.However, in the present study, the extent of voluntary disclosure was measured by using a disclosure index which contains of items that disclosed in the annual report.For each item in the disclosure index, a company receives a score of 1 if it is voluntarily disclosed information on the items and 0 for otherwise.3.4 Data CollectionThis research will use second ary data obtained from the annual reports of all the Jordanian companies.3.5 Sample SelectionThe sample for this thesis is all Jordanian companies which are listed on Amman Stock Exchange therefore the sample includes ninety three companies and covers the period 2002-2007.3.6 Data Analysis3.6.1 The Descriptive StatisticsThis descriptive study produced the mean, minimum, maximum and standard deviation for each variable for Jordanian companies during 2002-2007.3.6.2 The Correlation of variables This study shows how one variable is related to another. The results of this analysis represent the nature, direction and significant of the correlation of the variables used in this study and the correlation between variables is analyzed by using