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0Accepted Manuscript
The extent of voluntary disclosure and its determinants in emerging markets: Evidence from Egypt
Mostafa I. Elfeky
PII: S2405-9188(17)30050-8
DOI: 10.1016/j.jfds.2017.09.005
Reference: JFDS 28
To appear in: The Journal of Finance and Data Science
Received Date: 7 September 2017 Accepted Date: 30 September 2017
Please cite this article as: Elfeky MI, The extent of voluntary disclosure and its determinants in emerging markets: Evidence from Egypt, The Journal of Finance and Data Science (2017), doi: 10.1016/ j.jfds.2017.09.005.
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Title: The extent of voluntary disclosure and its determinants in emerging markets: Evidence from Egypt
Abstract
The primary objective of this study is to test a theoretical framework relating eight major corporate governance determinants with the extent of voluntary disclosure provided by listed firms listed on Egyptian Stock Exchange (EGX). These corporate governance determinants are firm size, firm profitability, firm leverage, board size, independent directors, duality in position, block-holder ownership and Auditor Type. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that there is a positive significant correlation between firm size, firm profitability, firm leverage, independent directors in board, and auditor type, and the overall corporate governance voluntary disclosure extent. This result implies that these variables are the main voluntary disclosure drivers in Egypt. However, a negative significant correlation was found between Block-holder ownership and voluntary disclosure, while no significant correlation was found between board size, and Duality in position, and the overall corporate governance voluntary disclosure extent. The empirical proof from this study promotes the perception of the voluntary corporate disclosure environment in Egypt as one of the emerging markets in the Middle East.
Keywords: Corporate governance; firm characteristics; Voluntary disclosure; Egypt. 1. Introduction
In the benefits of the business environment, organizations are required to disclose least levels of information, known as mandatory disclosure; whether not, they will face endorses. Therefore, practically most organizations go along completely with those least levels of the mandatory disclosure (Hassan et al., 2009). However, the present age makes compliance with this mandatory disclosure is not sufficient nor appropriate to meet users' needs of corporate information. This increases the need for additional information on what is required; this additional information is known as voluntary disclosure
Currently businesses face challenge of information that they never met before. Firstly; the current age is the era of information, which information has become a decisive influence. In other words, any part of the information has been a decisive change in the investment decisions of users; thus, the current limited mandatory information is not enough. Secondly, the separation of ownership and management of companies creates what is known as the problem of information asymmetries. Annual reports are usually used to reduce the information gap. Lev, (1989), and Wallace, (1988), however, argues that the financial statements do not provide sufficient information to users, which increases the information gap between information providers (managers) and information providers (stakeholders). In addition, the nature and extent of the information requested in the present time are larger and different than in the past, which means that the variance in the information than was the case in the past. Thus, to alleviate this issue, firms need to disclose more information voluntarily. Thirdly; recent decades have witnessed financial scandals that led to the collapse of the long-term companies. We believe that one of the major reasons for these collapses is the concealment of relevant information and non-disclosure, even though the failed companies had found that they fully comply with the minimum levels of compulsory disclosure. As a result, increased the need for voluntary disclosure.
In the current business era; in order to meet the challenges of information, companies are encouraged by both accounting and regulatory bodies, the pressure from stakeholders, and guidance of the market, to disclose more information than is required. Additionally, the regulatory bodies have started elaboration of regulations providing guidelines for helping companies to provide an effective level of voluntary disclosure. For instance, a business reporting research project released by FASB in 2001, entitled "Insights into Enhancing Voluntary Disclosure", provides guidelines for managers to raise the quantity and quality of voluntary disclosure.
Nevertheless, the legal reform does not necessarily translate into the reform of actual practice, where many researchers have examined corporate governance in developed countries, much less an academic study of developing and emerging countries has been made. This omission is important for a mass of reasons. Firstly, international trade and international investment practices, globalization are creating great pressures toward the development of corporate governance in these countries (Reed, 2002).
Secondly, developing and emerging countries have tended to emulate the practices of developed countries, in spite of evidence, for instance from Rabelo & Vasconcelos, (2002), of the existence of differences between the factors that lead to the need for corporate governance in developing countries and in developed countries.
Thirdly, there are structural differences, such as the dominance of the ownership of government and/or close/family held firms, which make the implementation of Western-style corporate governance both of dubious value and disturbing (Mensah, 2002).
Fourthly, developing and emerging countries are not uniform. Precisely, there are material variation between the emerging markets of Eastern Europe and China, where there are among the markets in the Middle East and North Africa and sub-Saharan Africa (Euromoney, 2007; Fawzy, 2004).
Finally, while there may be a growing convergence between national and international corporate governance laws, there is also great deviation from where practices and content of disclosure between countries (Bhuiyan & Biswas, 2007).
The paper examines the extent of voluntary disclosure of corporate governance in Egypt. It contributes to the detection of literature through the study of governance and disclosure of corporate governance practices in emerging countries, which is featured from most developed nations via four important characteristics (Fawzy, 2004). Firstly, most companies are held closely, secondly, there is the state ownership of privatized companies, thirdly, that the independence of board is weak and, finally, the disclosure is not common practice. While Bremer & Ellias (2007) note that the Egyptian companies started to understand the requirement for corporate governance techniques, they dispute that with Fawzy's four characteristics, weak economic structure, and lack of awareness of the concepts and benefits of corporate governance, preventing the development of corporate governance in Egypt. Therefore, the results of this research may be useful for regulators in developing and emerging countries with similar characteristics as they continue to discuss the requirements for appropriate corporate governance in their own countries.
In the context of Egypt, Samaha & Dahawy (2010 & 2011) found that the mechanisms of corporate governance affect the general annual reports voluntary disclosure issued by Egyptian companies. They found low ownership by directors, low ownership by block-holder, higher independent directors, and the existence of the audit committee are more convenient to monitor the decision taken by manager for further voluntary information. The investigation for the determinants of corporate governance disclosures in annual reports for 2005 of the top thirty Egyptian-listed companies' (EGX 30), Samaha (2010) found that independence of board is intrinsically linked positive corporate governance disclosures.
2. Theories and Literature Review
2.1 Theories explaining the voluntary disclosure variance
Disclosure studies show beamy variations in the nature and extent of voluntary corporate disclosure across companies in the same industry and country. It was found that some companies voluntarily disclose major amounts of information, while some companies do not disclose. Accounting Researchers study possible determinants of disclosure on a large scale and offer many theories to explain the discrepancy in the voluntary disclosure. These theories include legitimacy theory; capital need theory; stakeholder theory; agency theory and signalling theory.
Legitimacy theory debates companies have a social contract with the society, and thus provides greater levels of voluntary disclosure in order to ensure compliance with the regulations and ethics of that society, where mandatory disclosure is not enough (Mokhtar & Mellett 2013; Cheung et al., 2010). Since legal theory is based on the perception of society, management has to disclose information that would change the opinion of external users about their company (Cormier & Gordon, 2001). The annual report has been revealed as a significant source of legitimacy (Dyball, 1998; O'Donovan, 2002). Legitimisation can happen both out of mandatory disclosures -disclosures made in the financial statements due to regulations, where voluntary disclosures made in other sections of the annual report (Magness, 2006; Lightstone & Driscoll, 2008).
Capital needs theory suggests that companies resort to disclose more information voluntarily when these companies need to increase more money either from banks or financial markets (Meek, et al., 1995; Hossain, et al., 1994). The relationship between voluntary disclosure and capital cost was considered to be positive; the higher the disclosure of information, the lower the cost of capital. Where, as Botosan (2006) argue that "another set of research suggests that some types of disclosure may have the opposite effect."
Stakeholders' theory assumes that Companies must meet and satisfy the needs of information and interests of all stakeholders, not just shareholders (Abed, et al., 2014). This theory also expects that large firms are more prospective to provide further voluntary information because most pressure from a large number of stakeholders.
Agency theory assumes that companies resort to disclose extra information voluntarily to decrease the agency costs that arise from contest between managers and shareholders (Alves et al., 2012; Zayoud et al., 2011; Watson et al., 2002; and Lambert, 2001).
Signalling theory proposes that companies that have significant levels of voluntary disclosure intended to decrease asymmetries in information and signal the quality and real value of firms by providing more information to parties who lack information (Morris, 1987; Ross, 1977). We use these theories in the development of the hypotheses of our research.
2.2 Literature Review and Development of Hypothesis
The emerging markets become the focus of international companies, individuals and institutional investors due to high rates of economic growth (Millar et al., 2005). However, they suffer from low protection practices for investors, in particular the confiscation of minority shareholders by managers and control of shareholders (Gonenc & Aybar, 2006). They have a higher asymmetry of information between managers and investors (Gul & Leung, 2004; Chau & Gray, 2010), also have a low disclosure level than those in developed economies (Salter, 1998; Wang et al., 2008; and Tower et al., 2011).
Corporate governance has been identified by Solomon and Solomon (2004) as "The system of checks and balances of internal and external companies to ensure that companies should take responsibility for all stakeholders and to act in socially responsible manner in all areas of its business activities". Also, Sharman and Copnell, (2002) identified corporate governance as "The system and process through which guide and help the entities to enhance performance and sustainable value for shareholders, and it's dealing with the effective management structure and the efficiency and reliability of company reports and effective risk management systems"
Voluntary disclosure indicates that additional information provided by companies along with mandatory information. In order to reduce the asymmetry of information between the leader and the investor, we must have a case in which the first discloses voluntary information to the latter. This would contribute mainly to alleviating the problems of harmful selection and moral hazard. Voluntary disclosure is considered external mechanism to control the leaders, the protection of shareholders, lower agency costs arising from information asymmetry between insiders and foreigners (Wang et al., 2008). Given this critical role of voluntary corporate reporting policy, a major research area is developed to identify factors that could affect the practices of corporate voluntary disclosure in both developed and emerging markets. Although many factors have been identified, the empirical evidence is somewhat mixed.
Juhmani (2013) investigates the correlation between the three variables of ownership structure and voluntary disclosure of a sample of 41 companies listed on the Bahrain stock exchange in 2010. The results indicate a negative correlation between the block-holder ownership and voluntary disclosure, but there was no correlation between governmental or managerial ownership and voluntary disclosure. Additionally, leverage and size were included as controlling variables, and found to be correlated positively with voluntary disclosure.
Alves et al., (2012) explore the relationship between corporate characteristics, and variables of corporate governance and voluntary disclosure using a sample of 102 Spanish and 38 Portuguese firms in the year 2007. They find that size of firm, growth opportunities, organizational performance, compensation of board, and the existence of a large shareholder are the key determinants of voluntary disclosure. Moreover, Bazine and Vural (2011) examine the impact of firm characteristics on the voluntary disclosure of a sample of 149 manufacturing companies
listed on the Stockholm Stock Exchange during the period 2001-2009. They found that the size of the company and the type of industry affect the extent of voluntary disclosure.
Kolsi (2012) discovers that Tunisian audit quality, firm leverage, financial sector and profitability ratio are important variables and determinants of voluntary disclosure, while firm size and structure of ownership have no effect on voluntary disclosure. Htay (2012) finds that Malaysian firms with a high number of directors in board, a high portion of independent non-executive directors on the board, and a low proportion of directors' ownership voluntarily disclose more financial information.
Hossain and Hammami (2009) explore the drivers of voluntary disclosure in Qatar by analyzing yearly reports of 25 firms listed on Doha Securities Market for year 2007. The results mention that firm complexity, size, age, and assets-in-place are materially correlated with the index of voluntary disclosure; however, the profitability variable was found to be immaterially correlated.
Aljifri (2008) examines the extent of the disclosure in the annual reports of the 31 listed companies in the United Arab Emirates (UAE), also identified the fundamental factors that affect the level of corporate performance. The study assumed that four major factors affecting the extent of disclosure in UAE, namely, the sector type (insurance, banks, service, and industrial), size (assets), profitability, and debt-equity ratio. Findings indicated that significant correlations were found among sectors; however, the size, the profitability, and the debt-equity ratio were found to have insignificant correlation with the level of disclosure.
Additionally, Barako (2007) examines the extent to which corporate governance features, structure of ownership, and corporate characteristics affect voluntary disclosure for a sample taken from listed firms in Kenya during the period 1992-2001. The findings indicate a low level of voluntary disclosure; however, there is a piecemeal increase in voluntary disclosure during the period of study. Furthermore, He finds that corporate governance features, structure of ownership, and corporate characteristics (i.e. corporate size and industry) affect voluntary disclosure.
Using the Egypt context, we find only two relevant studies. First, Dahawy (2009) assessed the relationship between corporate characteristics and disclosure level. This study based on the manual examination of the disclosure of the most active traded 41 listed companies for year 2009 on the Cairo and Alexandria Stock Exchange (CASE), using a disclosure checklist issued by the Egyptian Capital Market Authority (CMA). A quantitative analysis is then used to test the relationship between corporate characteristics and disclosure level. Findings indicated that the extent of corporate governance disclosure is (1) lower for companies with duality in position and higher with concentration of ownership as measured by block-holder ownership; and (2) increases with the portion of independent non-executive directors on the board and firm size. Second, Soliman (2013) examines the relationship between the level of voluntary disclosure in annual reports and characteristics of firm for 50 Egyptian companies listed on the Egyptian Stock Exchange of the non-financial sector during the period 2007-2010. Findings indicated that profitability and firm size have positive association with voluntary disclosure level. On the other hand, auditor size and firm's age do not have any significant association with voluntary disclosure level.
Our study presents a number of contributions. First, to the best of our knowledge, we find only two studies that examine the drivers of voluntary disclosure in Egypt. Dahawy (2009) cover only year 2009, while Soliman (2013) covers the years 2007- 2010. However, this study provides a more recent and longer period 2012-2016. Second, we find that Soliman (2013) focus mainly on the influence of corporate governance variables, while Dahawy (2009) primarily examines the influence of corporate characteristics. Our study examines the impact of firm characteristics and corporate governance on voluntary disclosure. Third, the disclosure indices used in the two studies consist of relatively low number of items (25 and 32). However, our study uses a disclosure index consisting of 69 disclosure items. Finally, the two studies analyze relatively small samples (41 & 95) firm-year observations. However, our study analyzes 173 firm-year observations.
3. Hypotheses Development
3.1 Firm Size
Alves et al., (2012) and Abdel-Fattah, (2008), among others, argue that large size of the firm is more likely that they are voluntarily disclose more information. The positive association between firm size and extent of voluntary disclosure may be due to many reasons. First, large firms size are more able to give additional voluntary disclosure than small firms. Second, in the context of stakeholder's theory, firms with large size have more stakeholders pressurising the management to disclose more information than small firms. Third, large firms facing a political costs to a greater extent than small firms; therefore, large firms work to limit political costs through disclosing more information voluntarily (Abdel-Fattah 2008; Camfferman & Cooke, 2002; Watts & Zimmerman, 1990). Furthermore, voluntary disclosures are expected to decrease political costs that are higher for larger companies compared to smaller companies (Marston & Polei, 2004). Based on these arguments, we set our first hypothesis that:
H1: There is a positive relation between firms' size and voluntary disclosure.
3.2 Firm Leverage
Regardless of the inconsistent results on the association between firm leverage and voluntary disclosure, there are various reasons that justify a positive association. First, high level of leverage increase agency costs, which motivate managers to disclose more information for reducing such costs (Alves et al., 2012). Second, Jensen & Meckling (1976) argue that firms that have a high debt ratios are subject to have a high monitoring costs, and subsequently, they disclose extra information. Third, firms with high debt ratios tend to disclose more voluntarily information in order to reassure their lenders and to prolong or provide the debt contract period. Fourth, firms committed to large debt contracts are often required to comply with certain restrictive covenants debt, and to show their compliance have to disclose more information than is required. Consequently, we set our second hypothesis that:
H2: There is a positive relation between leverage and voluntary disclosure.
3.3 Firm Profitability
Most disclosure studies suggest a positive relationship between firm profitability and voluntary disclosure. Furthermore, this proposition has been vindicated in each of the four theories'
perspectives. First, from the political costs theory point of view, Inchausti (1997) argues that the management of highly profit firms discloses more information for justifying these higher profits. Second, signalling theory proposes that high-profit firms will disclose more information in order to benefit from its success through increasing the price and value of their shares (Inchausti, 1997; Foster, 1986). Third, agency theory debates that managers of high-profit firms will disclose detailed information to win individual advantages and to justify the compensation package (Barako, 2007). Fourth, stakeholder's theory indicates that highly profit firms must disclose further information to satisfy whole stakeholders (Abdel-Fattah, 2008). Shortly, attaining high profits is a prime index of the management success. This will provide a motive for management to achieve this success in order to gain numerous benefits through the voluntary disclosure, like justifying compensation, improving its reputation in the business market, and strengthening its position. Based on these arguments, we set our third hypothesis as follows:
H3: There is a positive relation between profitability and voluntary disclosure 3.4 Board size
Board size is the number of executive and non-executive directors on firm's board. Agency theory indicates that large boards can play a pivotal role in monitoring the board and in making long-term decisions. In addition, it suggests that large boards are less likely to controlling by the management (Hussainey, & Wang, 2010). Moreover, large number of boards led to increase the expertise variety in the board including financial reporting expertise (Laksmana, 2008; Yermack, 1996). Previous research also found a negative correlation between board size and earnings management, indicating that the size of the large board leads to higher quality of disclosure. Therefore, firms with large-scale board of directors will likely voluntarily disclose more information in their reports annually and websites.
Conversely, (Cheng & Courtenay, 2006; Goodstein et al., 1994) argue that large board size might have a negative effect of the performance of the board. According to agency theory, large boards are corrupt and bad, while smaller boards are effective and good in terms of promoting performance and disclosure (Jensen & Meckling, 1976). However, several recent researches have associated large boards with greater risk disclosure (Elshandidy and Neri, 2015; Elshandidy et al., 2013; Nitmet al., 2013; Allegrini and Greco, 2013)
Lump of prior studies find a positive correlation between board size and voluntary disclosure (Hussainey and Al-Najjar, 2011; Laksmana, 2008; Barako et al., 2006). Otherwise, some studies did not find any correlation between board size and disclosure (Lakhal, 2005; Willekens et al., 2005; Evans, 2004). In the Egyptian context, Ezat & El-Masry, (2008) find that board size is positively correlated with corporate voluntary disclosure levels. Based on these arguments, we set our forth hypothesis as follows:
H4: There is a positive relation between board size and voluntary disclosure.
3.5 Independent Directors
The large proportion of independent board members confirms the overall size of the Board's independence, which means that the results of the monitoring will be more effective as long as the members of the board are not biased. Consequently, independent directors may encourage management to disclose further information voluntarily (Abdel-Fattah, 2008). Alves et al., (2012) believe in a positive relationship; however, they have been unable to find empirical evidence to support their hypothesis. Nevertheless, Samaha & Dahawy (2010) and Samaha & Dahawy (2011) do find a positive relationship. Furthermore, Lim et al., (2007) find that firms
with a high independent boards will disclose more forward-looking and strategic information. However, Soliman (2013) and Al-Shammari & Al-Sultan, (2010) find no significant relationship. Shortly, this study hypothesises a positive relationship between board independence and the levels of voluntary disclosure. Therefore, we set our fifth hypothesis as follows:
H5: There is a positive relation between the ratio of independent directors and voluntary disclosure.
3.6 Duality in position
Function of duality in position exists when the CEO (Chief executive officer) is also the chairman of the board at the same time. Agency theory expects that role duality creates a single authority for CEO, which would affect controlling effectiveness exercised by the board. Fama (1980) and Fama & Jensen (1983) debate that independent directors could play an important role in controlling performance of managers and reducing their earnings management. Additionally, Gul and Leung (2004) argue that firms with major number of independent directors are predictable to be more active in board monitoring and hence in offering more information to the public. Prior research on the relationship between corporate voluntary disclosure and duality in position is mixed. Some studies find a negative relationship between the two variables (Laksmana, 2008; Lakhal, 2005; Gul & Leung 2004; Eng & Mak, 2003; Haniffa & Cooke, 2002; Forker, 1992). Other studies did not find any significant relationship between the two variables (Cheng & Courtenay, 2006; Ghazali & Weetman, 2006; Arcay & Vazquez, 2005; Ho & Wong, 2001). In the Egyptian context, Ezat & El-Masry (2008) find that duality in position is negatively correlated with corporate voluntary disclosures levels, but the association is not statistically significant at an acceptable level. Based on these arguments, we set our sixth hypothesis as follows:
H6: There is a negative relation between duality in position and voluntary disclosure.
3.7 Block-holder ownership
A block-holder is a shareholder with an exceptionally large amount of shares. Early research indicated the presence of a negative relation between block-holder ownership and disclosure in developed countries such as Finland (Schadewitz & Blevins, 1998), Australia (Mitchell et al., 1995; McKinnon & Dalimunthe, 1993), and Germany (Marston & Polei, 2004). Mixed results were found in developing countries. Therefore, it is likely that the companies that had more dispersed stock ownership will disclose more information to meet the needs of investors. On the other hand, investors with large stocks in a company can access to company information from internal sources. In an Egyptian context, the findings of Samaha & Dahawy (2010 & 2011) suggest a negative effect for block-holder ownership on voluntary corporate disclosures. Based on these arguments, we set our seventh hypothesis as follows:
H7: There is a negative relation between percentages of block-holder ownership and voluntary disclosure.
3.8 Auditor Type
Abdel-Fattah,(2008) states, "It has been hypothesised that companies audited by an international big audit firm will disclose more information voluntarily". Additionally, Abd-Elsalam (1999) argues that large audit firms work hard to safeguard their reputation, and they are more independent than small audit firms; therefore, they ask their clients to follow the mandatory
disclosure rules, in addition to disclosing more information voluntarily. Moreover, the authors consider that since management hires the external auditors, if they hire one of the big-four, this reveals that the management is ready to disclose more information and there is no intention to conceal any information. Further, a firm audited by a big four (Big 4) auditor implies that in the client acceptance phase the auditor has concluded, that the client is ready to disclose more information as the auditor requires. Therefore, we set our eighth hypothesis as follows:
H8: There is a positive relation between the auditor type and voluntary disclosure.
4. Research methodology
4.1 Sample and data
The sample in the current study consists of the Egyptian companies from amongst the top 50 most active-traded companies listed in the Egyptian Stock Exchange over the period 2012-2016. Following the majority of disclosure literature (e.g. Ghazali & Weetman, 2006; Haniffa & Cooke, 2002; Wallace & Naser, 1995) financial companies; e.g. banks, insurance companies, and leasing companies; were excluded from the sample due to the different requirements of disclosure and corporate governance. Hence their annual reports may be not comparable to those of other companies. The sample included the hard copy annual reports for time period 2012 -2016, as well as current CG disclosures on the companies' websites. As a starting point, we examined official company websites in order to get information concerning the annual reports for period 2012 - 2016, internet reporting and any CG stand-alone reports for period 2012 -2016. Firm characteristics data such as leverage, firm size, and profitability are collected from firms' annual reports or websites.
4.2 Model specification and variable measurement
The following ordinary least square (OLS) regression model is employed to examine the study hypotheses:
EXTVDISjt = Po + P1 LogAsstjt + P2 LEVRGjt + P3 ROAjt + fa BOSIZE j + p5 BrdIndpejt + fa DUALTjt + P7 BLKown jt + P8 Big4jt + e
5. Study Results & Discussion
5.1 Descriptive Statistics
Table 2 shows the descriptive analysis of the dependent variable (i.e., extent of voluntary disclosure), first, the table shows that the mean of Overall CG disclosure index is 40.72%, on average of the Overall CG disclosure index items are actually disclosed by the sample firms, with minimum value of 28% and a maximum value of 64%. Thus, there were large variations in voluntary disclosure practices among the sample companies in Egypt. This result is also consistent with the literature that companies in Egypt have great flexibility in their voluntary disclosure choices. In addition, the relative low voluntary disclosure ratio implies that analysts in Egypt may search for information outside of annual reports (e.g., via investor relations department). Second, the table shows the average firm size in terms of total assets is 19.64
billion Egyptian pounds, with minimum value of 13.82 billion and maximum value of firm size of 22.89 billion. Additionally On average profitability (ROA) of 35.3% indicates that majority of firms are profitable. Also, the mean of leverage is 78.29%, which indicates that the sample firms are highly leveraged firms, and suffer debt problems. In addition, a minimum value of -7.41% and a maximum value of 181 % reveal a large dispersion in firms' debt ratios. Third, average board size is approximately 8 members, with minimum 0 members and maximum of 14 members, where the board independence mean is 76.14 %, which implies that about two third of the sample firms' directors are independent. Fourth, about 40.5% of company's CEO serves as a board chairman. Fifth, the mean of block-holder ownership variable is 0.134, which infers that block-holders own about 14%, on average, of the sample firms. In addition, the minimum value of block-holder ownership variables is zero, which indicates that ownership structure of some sample firms does not include block-holder ownership. In contrast, the maximum value of family ownership variable is 1, which indicates that the ownership structure of some sample firms comprises of 100% block-holder ownership. Finally, the mean of Big4 variable is 0.295, which asserts that a Big4 auditor audits 29.50%, on average, of the sample firms.
5.2 Correlation Matrix
Table 3 shows the correlation analysis between the Overall Extent Voluntary Disclosure Index and independent variables. It shows that firms with a higher large number of independent directors on boards and firms with large size are more likely to provide higher levels of corporate governance voluntary disclosures. It shows that the highest correlation between the independent variables is 62%; this is between the board size and independent directors. The next highest correlation between the independent variables is 47.50%; this is between the firm size and the board size. The table also shows that firms with large block holder ownership and role duality are more likely to provide less corporate governance voluntary disclosures. It shows that EXTCGDIS is negatively correlated with block-holder ownership (BLK) (r -0.3715) role duality (DUALT) (r -0.0672), since Bryman Cramer (2012), among others, argue that the correlation between the independent variables is not harmful if it does not exceed 0.80 or 0.90, while others document that a correlation of less than 70% does not represent a correlation risk.
5.3 Multiple Regression Results
Table 4 summarises the results of OLS regression analysis. It is apparent that the F-value is 10.390 (P=0.000), which indicates that the study model is statistically significant. Moreover, the adjusted value of the determination coefficient (Adj.R2) = 0.3052, which implies that the independent variables explain 30.52% of total variation in the Overall Extent Voluntary Disclosure Index. In sum, the model is a statistically effective for explaining the variation in the extent of voluntary disclosure. Another effective means of testing multicollinearity is to compute the Variance Inflation Factor (VIF). The largest VIF factor observed for the full model was 2.06 (BrdIndpe) and the VIFs of all other independent variables were below 2.0. Thus, these results further support the lack of presence of multicollinearity in the research model. The results of the regression analysis can, therefore, be interpreted with a greater degree of confidence. Regarding the independent variables' results, Table 4 shows that the firm size is positively and significantly correlated with the voluntary disclosure (significance level is 1%) which is consistent with the first hypothesis. This result is consistent with the results of Soliman (2013), Abdel-Fattah (2008), Wang et al. (2008), Alsaeed (2006), Nasser et al., (2002), and Meek et al.
(1995). This result asserts that argument of the stakeholders' theory that large firms are more likely to provide more voluntary disclosure since these firms are under greater pressure from a large number of stakeholders following the large firms.
Moreover, the analysis shows that firm profitability is positively correlated with the voluntary disclosure and statistically significant at 5%, which consistent with the second hypothesis. This result asserts the arguments of agency and political costs theories that managers of high-profit firms will disclose more information to gain personal interests, such as creating a good reputation and to justify the compensation package (Barako, 2007; Inchausti, 1997). Further, the result asserts the signalling theory argument that profitable firms disclose more information to raise their price and value of their shares (Inchausti, 1997; Foster, 1986). This result is consistent with Wang et al. (2008) and Samaha and Dahawy (2011), among others, who argue that higher profits induce managers to supply more information to signal quality. Furthermore, the analysis shows that the firm leverage is positively and significantly correlated with voluntary disclosure (significance level is 5%). This contradicts the agency theory argument that leveraged firms are more likely to disclose more information to reduce the increased agency costs created because of high debts (Alves et al. 2012). This also contradicts the authors' expectations that highly leveraged firms are more likely to disclose more information voluntarily in order to reassure their lenders that business is stable, renew the existing debts, and signal that they are able to repay the debts whenever due.
We also find an insignificant negative correlation between board size and voluntary disclosure, which inconsistent with our fourth hypothesis that firms with a high board size are more likely to disclose more information. This result contradicts that of Samaha and Dahawy (2011) who find a positive correlation. This result also is inconsistent with the agency theory argument that board size is an effective corporate governance mechanism that could increase and improve the voluntary disclosure.
Furthermore, we also find a significant positive correlation between independent directors' ratio and voluntary disclosure, which consistent with our fifth hypothesis that firms with high ratio of independent directors are more likely to disclose more information. This result contradicts that of Samaha and Dahawy (2011) who find a positive correlation.
We find that the coefficient estimates on role duality are negative and statistically insignificant for voluntary disclosure. The negative sign on role duality is consistent with prior research (i.e. Lakhal, 2005; Laksmana, 2008; Forker, 1992, Haniffa & Cooke, 2002; Eng & Mak, 2003; Gul & Leung, 2004, Ezat and El-Masry 2008). Which consistent with our sixth hypothesis that firms with low role duality are more likely to disclose more information voluntary. As we find a significant negative association between block-holder and voluntary disclosure, therefore; our seventh hypothesis is accepted. This finding for Egyptian-listed companies is line with Samaha and Dahawy (2010 and 2011) and consistent with prior research in developed (i.e. Marston & Polei, 2004) and developing (i.e. Hossain et al., 1994) countries who also found that the level of voluntary disclosure is significantly related to block-holder ownership. In terms of the quality of auditing environment, we find a positive and significant correlation between auditor type and voluntary disclosure (significance level is 1%). This result is consistent with the eighth hypothesis and the argument of Abdel-Fattah (2008) and Abd-Elsalam (1999) and the current study's hypothesis that firms audited by one of the Big4 auditors tend to disclose more information voluntarily since a Big4 auditor attempts to guard its reputation and supports stakeholder through extra disclosure. However, this result is consistent with that of Soliman (2013), Samaha and Dahawy (2011), and Alsaeed (2006).
6. Conclusion
The relationship among the mechanisms of corporate governance disclosure has been studied over the past few years. However, few studies examine the impact of corporate governance mechanisms on the decisions of firms in corporate governance reporting voluntarily in their annual reports. This paper extends and contributes to recent governance and disclosure literature (i.e. Samaha, 2010) by presenting empirical evidence on the effect of an inclusive set of corporate variables on corporate governance voluntary disclosure for the period 2012-2016 by analyzing the panel data of 173 firm-year observations of most and less actively traded companies in Egypt, as an example of an emerging economy by using both content analysis and OLS regression analysis. Moreover, following Botosan (1997) an Overall Extent Voluntary Disclosure Index consisting of 69 primary voluntary disclosure items was constructed to measure level of disclosure. Our descriptive analysis shows that overall corporate governance voluntary disclosure extent, on average, is 40.70%, which is not commensurate with the size and influence of the Egyptian economy. The results also provide evidence on the positive significant correlation between firm size, firm profitability, firm leverage, independent directors in board, and auditor type, and the overall corporate governance voluntary disclosure extent. This result implies that these variables are the main voluntary disclosure drivers in Egypt. However, a negative significant correlation was found between Block-holder ownership and voluntary disclosure, while no significant correlation was found between board size, and Duality in position, and the overall corporate governance voluntary disclosure extent.
Nevertheless, this study has a number of limitations. First, due to data availability, we limit our analysis to eight potential determinants of disclosure. Second, the firm-year observations examined are only 173 and the study period is only 5 years, which are small, relative to the size and age of the Egyptian Market. Third, the main focus of this study is on the extent of voluntary disclosures. However, such disclosures do not mean that they are credible or reflecting the true state of affairs of the company. Also, more disclosures do not necessarily imply more quality disclosures. Forth, although the study found the expected relationship between corporate governance variables and disclosures, it is not certain whether the results were due to the hypothesized causality. Therefore, the findings should be interpreted with care because of these limitations.
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Appendix A: Checklist of Voluntary Disclosure Items
Category A:- General Company Information:
1. Brief narrative history of the company.
2. General description of business activities.
3. Web-address of the company/email address.
4. Production capacity of the company.
5. Information about the expansion program.
6. Date of establishment.
7. Statement of main customers
Category B:- Corporate Strategy:
8. A statement of management objectives and strategy
9. Procedures taken to achieve the objectives and strategy of the company.
10. Statement of strategy and marketing objectives.
11. The impact of the strategy on the performance of the company
Category C:- Future information:
12. Forecasts of profit.
13. Forecasts of sales.
14. Forecasts of cash flow.
Category D:- Financial Performance:
15. Brief discussion and analysis of a company's financial position.
16. Return on equity.
17. Dividend per share.
18. Dividend Distribution Policy
19. Profitability rate.
20. Return on assets.
21. Percentage of cost of sales to sales.
22. Sales growth rate.
23. Rate of return on sales.
Category E:- Shares Information:
24. Number of shares.
25. The market value of the shares at the end of the year.
26. Market value of shares.
Category F:- Accounting Policy Review:
27. Discussion on accounting policy.
28. Disclosure of accounting standards uses for its accounts.
29. Use of fair value.
30. Discussion on accounting policies used in accounting for intangible assets.
Category G:- Non-financial indicators:
31. Discussion on Current year results with results of past years.
32. Explain change in sales.
33. Discussion on production development.
34. Performance statement.
35. Effect of currency fluctuations.
36. Information on risk management.
Category H:- Human Resources:
37. Number of employees.
38. Average income of employees.
39. Health & safety of employees.
40. Incentives level.
41. Employment of disabled.
42. Employee training.
43. Budget allocated for training.
44. Scholarships.
45. Offering internship program.
46. Women empowerment.
47. Human capital.
Category I:- Community Involvement/participation
48. Donations to community.
49. Contribution to the national sports.
50. Work to reduce unemployment problem.
51. Government Support Projects.
Category J:- Environmental Issues:
52. Environment expenditure.
53. Pollution abatement.
54. Recycling programs.
55. Obtaining ISO Certificate
Category K:- Information on corporate governance
56. Top shareholders' Names
57. Names of Board of Directors
58. Leading positions of members in other companies
59. Educational qualifications of Board members
60. The practical experience of the members of the Board of Directors
61. Number of shares held by directors.
62. Directors' remuneration.
63. Number of Board meetings.
Category L:- Research and development costs
64. Research and development Policy.
65. Number of employees in research and development.
66. Budget for research and development.
67. Research and development projects.
Category M:- Other information
68. Segmental reports.
69. Graphs.
Table 1: Model Variables, Symbols, Definitions, and Description
Abbreviated name Full name Variable Description
Dependent Variable
EXTVDIS Extent Voluntary Disclosure Index Number of items actually and voluntarily disclosed by a given firm divided by the total number of relevant items that should be disclosed (Botosan, 1997)
Independent Variables
LogAsstt Firm Size LogAsst is measured as natural logarithm of book value of total assets for the firm j and period t.
LEVRG it Firm Leverage LEVRG is measured as long-term debts divided by capital equity.
ROA jt Firm Profitability. ROA refers to return on assets, and is measured as the ratio of net income to total assets for the firm j and period t.
BOSIZE it Board size BOSIZE is number of board members
BrdIndpet Independent Directors Brdlndpe is the ratio of (non-executive) independent directors to total board size
DUALT jt Duality in position DUALT is dummy variable; 1 if company's CEO serves as a board chairman, 0 otherwise
BLKown jt Block-holder ownership BLKown is percent of shares owned by the block-holders-shareholders whose ownership >5% of total number of shares issued.
Big4 & it Auditor Type Big4 is dummy variable, 1 if the auditor is one of the Big4, 0 otherwise.
Table 2: Descriptive Statistics of Model Variables
Variable N Minimum Maximum Mean Median Std. Deviation
EXTVDIS 173 0.2837838 0.6351351 0.407234 0.405405 0.0636026
LnTA 173 13.82233 22.89907 19.6486 19.81799 1.531231
ROA 173 -0.4787363 0.9173426 0.035345 0.029795 0.1368485
LEVRG 173 -7.41766 12.15206 0.768109 0.560637 1.911633
BOSIZE 173 0 14 7.699422 8 2.672393
Brdlndpe 173 0 1 0.76139 0.809 0.1948722
DUALT 173 0 1 0.404624 0 0.4922439
BLKown 173 0 1 0.134383 0 0.2496057
BIG4 173 0 1 0.294798 0 0.4572753
This table presents the descriptive analysis for the corporate governance variables and the Voluntary Disclosure Index used in the regression model for the sample. EXTVDIS: Overall Extent Voluntary Disclosure Index (Percent of overall applicable CG disclosure items supplied/satisfied); SIZE: Firm size (Natural logarithm of total assets); ROA: Firm Profitability (Ratio of net income to total assets); LEVRG: Firm Leverage (Long-term debt/ capital equity); BOSIZE: Board size (Number of board members); BrdIndpe: Independent directors (ratio of non-executive directors on the board of directors); DUALT: Duality in position (Dummy variable; 1 if company's CEO serves as a board chairman, 0 otherwise); BLKown: Block-holder ownership (Percent of shares owned by the block-holders-shareholders whose ownership > 5% of total number of shares issued); BIG4: Auditor Type (Dummy variable, 1 if the auditor is one of the Big4, 0 otherwise).
Table 3. Pearson correlation Matrix
EXTCGVIS LnTA ROA LEVRG BOSIZE BrdIndpe DUALT BLKown BIG4
EXTVDIS 1.0000
LnTA 0.3768** 1.0000
ROA 0.2471* 0.1651 1.0000
LEVRG 0.0244 -0.0931 0.1137 1.0000
BOSIZE 0.1780 0.475** 0.1765 0.0562 1.0000
Brdlndpe 0.2895* 0.3682** 0.1376 0.1730 0.6201** 1.0000
DUALT -0.0672 -0.1174 -0.1558 0.1366 -0.0299 0.3084** 1.0000
BLKown -0.3715** -0.2785* -0.0497 0.0354 -0.0290 -0.0582 0.0892 1.0000
BIG4 0.2637* 0.1245 0.1186 0.1077 0.0892 0.1404 0.0660 -0.1093 1.0000
This table presents the descriptive analysis for the corporate governance variables and the Voluntary Disclosure Index used in the regression model for the sample. EXTVDIS: Overall Extent Voluntary Disclosure Index (Percent of overall applicable CG disclosure items supplied/satisfied); SIZE: Firm size (Natural logarithm of total assets); ROA: Firm Profitability (Ratio of net income to total assets); LEVRG: Firm Leverage (Long-term debt/ capital equity); BOSIZE: Board size (Number of board members); BrdIndpe: Independent directors (ratio of non-executive directors on the board of directors); DUALT: Duality in position (Dummy variable; 1 if company's CEO serves as a board chairman, 0 otherwise); BLKown: Block-holder ownership (Percent of shares owned by the block-holders-shareholders whose ownership >5% of total number of shares issued); BIG4: Auditor Type (Dummy variable, 1 if the auditor is one of the Big4, 0 otherwise). Note that :** and * indicate that there is a correlation significant at the 0.01 and at the 0.05 between the respective factors respectively
Table 4. Regression results
Symbol Explanatory Variable Coef. Std. Err. t-value Sig. VIF
cons ^+0.1918042 0.0588738 3.26 0.001***
LnTA Firm Size +0.0090331 0.0032314 2.80 0.006*** 1.48
ROA Firm Profitability +0.0785549 0.031045 2.53 0.012** 1.1
LEVRG Firm Leverage +0.0006088 0.0002957 2.06 0.041** 1.03
BOSIZE Board size -0.0031343 0.0021296 -1.47 0.143 1.98
BrdIndpe Independent Directors +0.0845805 0.0298959 2.83 0.005*** 2.06
DUALT Duality in position -0.0105976 0.0094393 -1.12 0.263 1.31
BLKown Block-holder ownership -0.0662796 0.0171227 -3.87 0.000*** 1.12
BIG4 Auditor Type +0.0240883 0.0090667 2.66 0.009*** 1.05
Model Summary
R-squared 0.3377 * Significant at 10%, ** Significant at 5%, and *** Significant at 1 %.
Adj R-squared 0.3052
F - value 10.390
Sig. 0.000
This table presents the descriptive analysis for the corporate governance variables and the Voluntary Disclosure Index used in the regression model for the sample. EXTVDIS: Overall Extent Voluntary Disclosure Index (Percent of overall applicable CG disclosure items supplied/satisfied); SIZE: Firm size (Natural logarithm of total assets); ROA: Firm Profitability (Ratio of net income to total assets); LEVRG: Firm Leverage (Long-term debt/ capital equity); BOSIZE: Board size (Number of board members); BrdIndpe: Independent directors (ratio of non-executive directors on the board of directors); DUALT: Duality in position (Dummy variable; 1 if company's CEO serves as a board chairman, 0 otherwise); BLKown: Block-holder ownership (Percent of shares owned by the block-holders-shareholders whose ownership > 5% of total number of shares issued); BIG4: Auditor Type (Dummy variable, 1 if the auditor is one of the Big4, 0 otherwise). Note that: "+" indicates that there is a positive correlation and "-"indicates that there is a negative correlation.
Auther:
Mostafa I. Elfeky
Department of Accounting, Dongbei University of Finance and Economic, Dalian, China.
Department of Accounting, Faculty of Commerce, Mansoura University, Mansoura, Egypt
E-mail: m_i_elfeky@mans.edu.eg m i elfeky@yahoo.com
