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Determinants and value relevance

of corporate disclosure
Evidence from the emerging capital
market of Ghana
Godfred A. Bokpin
Department of Finance, University of Ghana Business School,
University of Ghana, Accra, Ghana
Abstract
Purpose – The purpose of this paper is to document the determinants and value relevance of
corporate disclosure and transparency on the Ghana Stock Exchange (GSE).
Design/methodology/approach – The paper employs the Fama and French model by relating firm
value to firmlevel characteristics, with a sample of 27 firms on the GSE over a six-year period (2003-2008)
Findings – The author found positive though statistically insignificant relationship between corporate
disclosure and firm value represented by market to book value ratio and negative for stock price.
Consistent with the political cost, signalling, agency and economic theories of corporate disclosure, the
author found firm size, financial leverage, audit quality, age and profitability to be significant firm level
characteristics determining corporate disclosure in Ghana. Though the adoption of IFRS is significant, it
has marginally improved disclosure, though perhaps it is observed more in breach than in compliance and
practical steps must be taken to improve disclosure practice on the GSE.
Originality/value – The main value of the paper lies in providing further evidence of the value
relevance and determinants of corporate disclosure using emerging data.
Keywords Ghana, Disclosure, Stock exchanges, Capital markets, Corporate disclosure,
Transparency, Firm value
Paper type Research paper
1. Introduction
The purpose of accounting is to generate financial information useful in decision making.
The financial reporting disclosure decision is then one way that corporations
communicate information to various users of the accounting information whether
financial or non-financial, quantitative or otherwise concerning a company’s financial
position and performance. Corporate disclosure is then key to the strategic link between
accounting and business decision making. According to Borgia (2005), “Disclosure to the
shareholders and to the market has long been a key mechanismin corporation and capital
market law. Milestones in corporation lawwere the Gladstonian reforms of 1844 and 1845.
One hundred years later the US American securities regulation of 1933 and 1934 gave to
the world the blueprint for using disclosure in securities regulation”. But recent
accounting scandals in the USA and other parts of the world, including globalisation and
integration of capital markets and the need to access capital requires that firms disclose
more information and adopt high-quality governance standards. The determinants and
value relevance of disclosure is well grounded in theory including the agency and political
costs theories ( Jensen and Meckling, 1976; Watts and Zimmerman, 1978, 1990), signalling
theory (Ross, 1977; Morris, 1987), institutional theory (Meyer and Rowan, 1977; DiMaggio
and Powell, 1983; Oliver, 1997), legitimacy theory (Carpenter and Feroz, 1992, 2001;
Guthrie and Parker, 1990; Mezias, 1990), proprietary costs theory (Dye, 1985; Darrough
and Stoughton, 1990; Verrecchia, 1983; Wagenhofer, 1990), contingency theory (Doupnik
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0967-5426.htm
Journal of Applied Accounting
Research
Vol. 14 No. 2, 2013
pp. 127-146
rEmerald Group Publishing Limited
0967-5426
DOI 10.1108/09675421311291883
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Determinants
of corporate
disclosure
and Salter, 1995; Fechner and Kilgore, 1994; Gray, 1988), and the positive accounting
theory (Watts and Zimmerman, 1978).
But, empirical evidence on the link between corporate disclosure and firm value is
decidedly mixed. Leuz and Verrecchia (2000) assert that whilst economic theory of
corporate disclosure is compelling the empirical result is mixed. According to Bushee
and Leuz (2005), the literature on the economic consequences of mandatory disclosure is
limited and somewhat ambivalent in its conclusions (see also Healy and Palepu, 2001).
Survey of empirical evidence also suggests that prior studies investigated the impact of
increased disclosure on firm value through lower cost of equity, market liquidity,
and lower cost of debt. Example: corporate disclosure reduces cost of equity capital
(see Botosan and Plumlee, 2002; Hail, 2002), increases stock liquidity (Healy et al., 1999;
Leuz and Verrecchia, 2000), lowers the cost of debt (see Sengupta, 1998), decreases bid-
ask spreads (Welker, 1995). We posit consistent with Hassan et al. (2009) that there is
little direct empirical evidence with regard to the relationship between voluntary
disclosure (corporate disclosure as a whole) and firm value in general and for emerging
markets in particular. Besides, empirical evidence has been mixed with possible reasons
being the use of data from developed capital market such as the USA (Leuz and
Verrecchia, 2000) or lack of theoretical relevance to developing countries (Lopes
and Rodriques, 2007) or existence of complex interplay of different factors determining
the relationship between disclosure and firm value (Hassan et al., 2009). The subject of
corporate disclosure has not received nearly as much important empirical attention in
developing emerging capital market as the case has been in developed capital market
(see Hassan et al., 2009 for Egypt; Owusu-Ansah, 1998 for Zimbabwe; Barako, 2007 for
Kenya; Mangena and Chamisa, 2008 for South Africa; Tsamenyi et al., 2007 for Ghana).
This is a non-trivial oversight given the institutional and legal reforms in the last couple
of decades led by World Bank, IMF, and IFC to improve the level of governance on the
continent and the pre-eminence of the Ghana Stock Exchange (GSE) as an investment
destination for investors both foreign and domestic. This is underpinned by the fact that
the GSE was adjudged the “Most Innovative African Stock Exchange for 2010” at the
Africa investor (Ai) prestigious annual Index Series Awards held at the New York Stock
Exchange (NYSE), the commencement of real-time data of the GSE by Thomson Reuters
and the worldwide availability of GSE data on Bloomberg.
Whilst the economic consequences of increased disclosure remain largely unsettled,
corporate disclosure in itself does not develop in a vacuum according to Choi and
Levich (1990) but is determined by both external and internal factors. Whatever theory
on corporate disclosure that is considered – all imply firm characteristics to be
important drivers for disclosure (Ahmed and Courtis, 1999). Firm characteristics are
also of great importance from an empirical point of view, where empirical research
typically controls for endogenous determinants of disclosure policy that are not
necessarily part of the underlying theory (Core, 2001). Lopes and Rodriques (2007)
contend that theories of corporate disclosure determinants originated in developed
capital markets and may not fully explain accounting and disclosure practices in
Portugal, where the degree of family ownership is significant and financing policies are
bank oriented. Mensah (2002) suggests that due to the characteristics of the economic
and political systems of African economies, such as state ownership of companies,
interlocking relationships with government and the financial sector, weak legal and
judiciary systems, absent or underdeveloped institutions, and limited human resource
capabilities, they are ill-equipped to implement the type of corporate governance found
in the developed market economies. This paper argues consistent with Mangena and
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Chamisa (2008) that due to country differences, it is desirable and warranted that various
determinants of corporate disclosure should be separately examined in each country. This
would enable the evidence on the regularity of the determinants of corporate disclosure to
be generalised across countries, which would in turn buttress the theories that are
proffered and refute any suggestion that the existing evidence is a consequence of the
idiosyncrasies in the institutional, cultural, and regulatory environments in developed
Anglo-Saxon countries (see Mangena and Chamisa, 2008). The paper therefore builds on
the work of Tsamenyi et al. (2007) which examines the level of corporate disclosure on the
GSE over a two-year period. Tsamenyi et al. (2007) using 36 items in all to measure
corporate governance and disclosure in Ghana conclude that the level of corporate
disclosure is low. The paper argues that further studies is needed using a broad-based
approach of disclosure index which compares the level of disclosure on the GSE at the
international level and to also test the relevance of the existing theories of corporate
disclosure on the GSE in line with Lopes and Rodriques (2007). Bokpin and Isshaq
(2009) examined the level of disclosure (using the S&P disclosure index) on the GSE
but related it to the impact on foreign equity participation whilst Tsamenyi et al. (2007)
looked at ownership structure, dispersion of shareholding, firm size, and leverage as the
determinants of disclosure practices. But in order to relate existing theories to developing
countries and confirm empirical regularity with developing data, the paper posits a revisit
of the determinants of disclosure is needed by incorporating other factors such as extent
of internationalisation, age, auditor type, profitability, etc. consistent with theory and
empirics. Employing a panel regression for 27 firms over a six-year period under the
framework of seemingly unrelated regression technique for firm value and random effect
technique for disclosure determinants, we document a positive but statistically
insignificant relationship between corporate disclosure and firm value measured by
market to book value ratio on one hand and statistically insignificant negative relationship
between disclosure and stock prices on another hand. For the determinants of corporate
disclosure and relevance of disclosure theories, we affirmed the political cost, economic,
signalling and agency theories by documenting a statistically significant relationship
between firmsize (political cost theory), financial leverage (signalling theory), audit quality
(agency theory), profitability (signalling theory), age and corporate disclosure practices.
But we could not establish a significant effect for risk and extent of internationalisation
on corporate disclosure level in Ghana. Finally, we found corporate disclosure level to
be very low even after the adoption of the IAS. Consistent with Frost et al. (2002), the
study provides potentially useful evidence to international standard setters and stock
exchanges. International organisations such as the International Organization of Securities
Commissions (IOSCO) and the Organization of Economic Cooperation and Development
(OECD) are seeking to harmonise and improve disclosure standards under the assumption
that such initiatives will reduce the regulatory barriers to cross-border capital raising
efforts, and improve investor protection and market quality (Frost et al., 2002).
2. GSE and disclosure framework
Ghana is emerging as an investment destination in West Africa with the establishment
of the capital market and other financial arrangement since the wide ranging financial
reforms initiated in the 1980s led by the World bank/IMF. The GSE was adjudged the
“Most Innovative African Stock Exchange for 2010” at the Ai prestigious annual
Index Series Awards held at the NYSE on Friday, 17 September 2010 (www.gse.com.gh
accessed 10 December, 2010). Thomson Reuters announced on July 2010 that it has
commenced feeds of real-time data from the GSE thus increasing equity trading
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opportunities for its local and global clients (www.gse.com.gh accessed 10 December,
2010). Attesting to its presence, the GSE data are now available worldwide on
Bloomberg. The All-Share Index, by the close of 2003, topped performance of stock
markets in the world with yield of 154.7 or 142.7 per cent in dollar terms (Ghana Stock
Exchange (GSE), 2005). After such a performance, the market share index has
continued to fluctuate with an occasional rise or dip. In 1993, the GSE was the
sixth best index performing emerging stock market, with a capital appreciation of 116
per cent. In 1994 it was the best index performing stock market among all the emerging
markets gaining 124 .3 per cent in its index level. All listings are included in the main
index, the GSE All-Share Index. The number of listed companies increased to 13 in
1991; 19 in 1995 and to 32 in 2007 (Ghana Stock Exchange (GSE), 2007). The increase in
the number of listings has also reflected in market capitalisation which increased from
a little over US$2.6 million 2004 to about $11.5 billion. The stock market recorded its
highest turnover of equities in volume in 1997, with 125.63 million shares, from a
volume of 1.8 million shares by the end of 1991. Foreign equity participation has
increased over the last couple of years averaging 32 per cent (see Bokpin and Isshaq,
2009). The stock exchange was established in July 1989 as a private company limited
by guarantee under the Companies Code of 1963. It was given recognition as an
authorised stock exchange under the Stock Exchange Act of 1971 (Act 384) in October
1990 and commenced trading on the 12 November 1990 though it was officially
inaugurated on 11 January 1991. The stock exchange was, however, changed to a
public company limited by guarantee in 1994. Market turnover during the first eight
months of 2010 was 93.8 million shares valued at GHb60.6 million. This compares
with 55.4 million shares valued at GHb49.6 million traded during the same period in
2009. Market capitalisation was similarly up by 17.0 per cent to GHb18,655.7 million as
at 30 August 2010. Given, the prominence of the GSE, the disclosure practices and the
regulatory framework ought to be clearly outlined.
Corporate disclosure and governance framework are enshrined principally in the
Companies Code of 1963 (Act 179). The Securities Industry Law, 1993 (PNDCL 333) as
amended by the Securities Industry (Amendment) Act 2000 (Act 590), also provides
among other things for governance of all stock exchanges, investment advisors,
securities dealers, and collective investment schemes licensed under by the Securities
and Exchange Commission (SEC) and the membership and listing regulations of the
GSE (Ghana Stock Exchange (GSE), 1990). It is supported by the Ghana National
Accounting Standards and the codes of professional conduct imposed by the Institute
of Chartered Accountants (Ghana) on its members. The responsibility for good
corporate governance at the firm level is placed on the board of directors (BOD). Under
the Companies Code of 1963 (Act 179), the business of a company is managed by the
BOD except as otherwise provided in the company’s regulations. The companies code
enjoins directors to, at least once annually (at intervals of not more than 15 months),
have prepared and send to each member and debenture holder of the company a profit
and loss account and balance sheet, cash flow statement, notes to the account and
directors’ and auditors’ report. These documents will be presented to shareholders at
the Annual General Meeting. The GSE listing regulations require more frequent
disclosure fromlisted companies. Listed companies must provide the GSE a half-yearly
report as soon as figures are available (no later than three months after the end of the
first half-yearly period in the financial year) and a preliminary financial statement as
soon as figures are available (no later than three months after year end). The GSE
listing regulations provide the timeframe within which annual reports should be
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circulated and also require investors to be provided with information such as members of
the board and key executives and their remuneration, material foreseeable risk factors,
major share ownership and voting rights, and the financial and operating results of the
company. The Company’s Code requires the disclosure by directors of material interests
in transactions or contracts affecting the company. No explicit liability for the accuracy of
financial statements is imposed on the board by the companies’ code. This presupposes
that the ultimate responsibility for the preparation of the financial statements rest with
the board and cannot be delegated to the auditors. The law requires that before the
commencement of business the company should have auditors. Under the companies’
code, the auditors of a company stand in a fiduciary relationship to the members of the
company as a whole and should act in a way faithful, diligent, careful, and ordinarily
skilful auditors would act in the circumstances. Auditors are required, among other
things, to report to shareholders their opinion as to the adequacy of information obtained
on the company and whether the company’s accounting books have been kept properly.
3. Literature review and hypothesis development
There are direct and indirect costs associated with increased corporate disclosure such as
are the costs of preparing, certifying, disseminating corporate information (information
production and dissemination), and the use of the information by other parties, such as
competitors, employees, politicians and regulators and litigation costs if the company is
sued as a result of information disclosed. Botosan (2000) argues that these costs of
disclosure may dominate a company’s disclosure policy, so any decision to provide more
information to the public should be based on a careful cost-benefit analysis. The trade-off
between costs and benefits of particular disclosures ultimately determines whether they
are beneficial to the firm; i.e. whether they increase firm value. Wagenhofer (2004) argues
that the effects of disclosure depend on three factors; uncertainty, multiperson settings
with conflicts of interest, and information asymmetry. Depending on the assumptions
made about these factors, it is possible to predict a negative relationship between
increased disclosure and firm value. But empirical evidence suggests that the benefit of
increased disclosure far outweighed the costs. Most empirical studies relate disclosure to
firm value through a number of mediums such as reduction in cost of capital (Botosan
and Plumlee, 2002), the reduction of information asymmetry (Healy and Palepu, 2001;
Schrand and Verrecchia, 2004), improve liquidity (Verrecchia, 2001). Lambert (2001)
documents that more transparency and better corporate governance increases firm
value by improving managers’ decisions or by reducing the amount that managers
appropriate for themselves. Healy and Palepu (2001) relate that disclosure generally
improves transparency and thus reduces information problems (see also Schrand and
Verrecchia, 2004). To them, disclosure of relevant information allows investors to closely
monitor firms’ operations and thus effectively evaluate whether managers have utilised
the resources in the best interests of shareholders. Linking corporate disclosure to stock
prices, Mitton (2002) shows that stock prices improved during the East Asian financial
crisis due to stronger corporate governance in the aspect of disclosure policy. Healy et al.
(1999) also find that firms that expand disclosure experience significant contemporaneous
increases in stock prices that are unrelated to current earnings performance. Gelb and
Zarowin (2000) find that firms with high disclosure ratings have high stock price
associations with contemporaneous and future earnings relative to firms with low
disclosure ratings. Bens and Monahan (2004) report that strong disclosure practices
contribute to the excess value of diversification by enhancing corporate monitoring
mechanisms and reducing contracting costs. Hassan et al. (2009) show using emerging
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African data that, after controlling for factors such as asset size and profitability,
mandatory disclosure has a highly significant but negative relationship with firmvalue in
the case of mandatory disclosure but found statistically insignificant relationship between
voluntary disclosure and firm value. They emphasise the complex interplay of factors
determining disclosure effects perhaps consistent with Wagenhofer (2004) who argues
that the effects of disclosure depend on three factors; uncertainty, multiperson settings
with conflicts of interest, and information asymmetry:
H1. Consistent with theory and empirics, we hypothesise that Ceteris paribus, there
is a positive relationship between corporate disclosure and firm value when the
net benefit of the disclosure is positive.
Firm capital structure has been identified both theoretically and empirically as
determinant of corporate disclosure practices. The inclusion of debt (bondholders) in a
firm’s capital exacerbates the agency conflict according to Jensen and Meckling (1976).
Higher debt or financial leverage suggests higher agency costs and information
asymmetry. Consistent with the agency theory, Dichev and Skinner (2002) contends
disclosure of debt covenants and other restrictions, such as on interest coverage and
liquidity ratios, that accompany firms’ loans reduces the information asymmetry
between firms and their lenders. Firms are inclined to provide information about debt
covenants and how these affect their financial position in order to gain investors’
confidence (Holthausen, 1990). In this direction, a positive relationship between capital
structure and corporate disclosure is adduced. The literature is also replete with the
argument of a negative relationship. The argument is based on whether the financial
system is bank based or market based. In bank-based financial systems, companies
have high leverage ratios because capital markets are not seen as a primary source of
capital, and information about companies is more private (see (Abd-Elsalam and
Weetman, 2003) and therefore given the special relationship between companies and
banks little information would be made public in their annual reports and financial
statements. The literature is divided between a positive relationship (Bradbury, 1992;
Dichev and Skinner (2002) and negative relationship (Holthausen, 1990), based on the
fact that the GSE is not well developed (Isshaq and Bokpin, 2009) and firms rely largely
on banks for financing (Aboagye, 1996):
H2. We hypothesis a negative relationship between financial leverage and
corporate disclosure practices holding all other factors constant.
Firm size whether measured by total assets or total sales or total revenue or market
value or market capitalisation has been supported theoretically and empirically as a
determinant of corporate disclosure. Large firms whether due to their more dispersed
shareholding or higher information asymmetry (Tsamenyi et al., 2007) or due to possible
economies of scale in the production and storage of information (Stigler, 1961), tend to
allocate relatively greater amount of resources to the production and dissemination of
information. Owusu-Ansah (1998) relate that generally, large companies tend to be
multiproduct business entities; operating over wider geographical areas with several
divisional units and that central managements of such companies will require internal
information system which will enable them to make operational and strategic decisions
concerning the divisions, and to ensure that the divisions are performing adequately in
pursuit of overall corporate objectives. Furthermore, large firms face higher demand
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for information from customers, suppliers, analysts, and the general public (Cooke,
1989) that causes an increased pressure to disclose information. Thus, in line with
economic and political cost theories (Watts and Zimmerman, 1990) and empirical
literature (Lopes and Rodriques, 2007), we hypothesise that:
H3. Larger companies are expected to have higher levels of disclosure than smaller
companies.
The more internationalised a company is the more it has to show its shareholders
especially in other countries, it is worth investing in or keeping their investment in the
company. Firms with shareholding across different geographical boundaries will
disclose more information to meet the expectations of investors’ or disclose more
information to the market to signal managerial competence, decrease the asymmetry of
information which often exists between managers and other individuals, to optimise
financing costs and to increase corporate value. Singhvi (1968) found that companies,
in which foreigners owned a majority of stocks, present higher quality disclosure than
locally Indian owned companies. Also Haniffa and Cooke (2002) found a significant
positive relationship between the proportion of foreign ownership and the level of
voluntary disclosure by listed companies in Malaysia:
H4. A positive relationship is expected between extent of internationalisation and
corporate disclosure.
Auditors play an important role in information credibility of firms (Healy and
Palepu, 2001) and the value of an external audit depends on how users perceive auditors’
report in corporate annual report (DeAngelo, 1981). Auditor independence is important
in maintaining credibility. Chalmers and Godfrey (2004) state that, to maintain their
reputation and avoid reputation costs, high-profile auditing companies are more likely to
demand high levels of disclosure. Fama and Jensen (1983) maintain that large independent
audit firms have many clients, their economic dependency on a particular client is minimal
and such audit firms have greater incentives to maintain independence from their clients.
Thus, large and independent audit firms have greater motivation to demand greater
disclosure and compliance from their clients. Jensen and Meckling (1976) in their far
reaching theory postulate that auditing is a way of reducing agency costs and that
companies that have high agency costs tend to contract high-quality auditing companies
(Lopes and Rodriques, 2007). We hypothesise consistent with theory ( Jensen and Meckling,
1976) and empirics (Lopes and Rodriques, 2007) that:
H5. The degree of disclosure is predicted to be higher in companies audited by the
Big 4 auditors than in companies with non-Big 4 auditors.
Profitability is central to the discussion of corporate disclosure. More profitable firms
will be able to support the cost of information production and dissemination and
therefore will be in a position to disclose more information. Inchausti (1997) disclose
that profitability is capable of influencing the extent to which companies disclose
mandatory information items in their annual reports (see also Cerf, 1961). Consistent
with the signalling theory that management when in possession of “good news” due to
better performance are more likely to disclose more detailed information to the stock
market than that provided by “bad news” companies to avoid undervaluation of their
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shares. Owusu-Ansah (1998) in an empirical study found a statistically significant
positive relationship between profitability and corporate mandatory disclosure.
Consistent with theory and empirics, we hypothesis that:
H6. Disclosure practices are expected to be higher for highly profitable firms than
low profitable firms.
Firms’ age is standard measure of reputation in the corporate finance literature especially
in relation to capital structure. As firm ages, it establishes itself as a continuing business
and a measure of the stage of development as well and therefore it would be in a better
position to disclose more information. Older, well-established companies are likely to
disclose much more information in their annual reports than younger companies because
they will not suffer any competitive disadvantage as compared to younger firms and the
cost and the ease of gathering, processing, and disseminating the required information
may be a contributory factor (Owusu-Ansah, 1998). Established firms with information
system already existing for mass production and circulation are at advantage in that the
incremental cost of supplying non-proprietary data to the public is likely to be minimal
compared to newly established firms. Thus, we hypothesis that:
H7. Older firms are expected to disclose more information than younger firms.
4. Model specification and data
The paper investigates the basic question of what impact does corporate disclosure
have on firm value and to what extent does corporate disclosure determinants theories
apply to Ghana. We tackle these questions bearing in mind the findings of Hassan et al.
(2009) for the Egyptian market and Tsamenyi et al. (2007) for the Ghanaian market. But
unlike Hassan et al. (2009) and Tsamenyi et al. (2007), we adopt a disclosure index that
allows us to infer the GSE disclosure index at international level, thus aiding
international comparison. This paper also differs from the above authors by adopting a
longitudinal approach by pooling time series with cross-sectional observations. Whilst
Tsamenyi et al. (2007) used 36 items over a two-year period (2001-2002), this paper
contends that an extension of the period will provide a more robust test and to also test
the extent to which the adoption of the IFRS in 2007 has improved the level of
corporate disclosure and transparency among companies listed on the GSE. We also
argue in tandem with Pinkowitz et al. (2006) that, to investigate the impact of corporate
disclosure on firm value requires a regression model relating firm value to firm-level
characteristics. According to Pinkowitz et al. (2006), Fama and French (1998) valuation
regression, though is ad hoc in that it does not specify a functional form resulting
directly from a theoretical model, it is well suited for relating firm value to firm-level
characteristics because it explains well cross-section variation in firm values. Thus,
consistent with Fama and French (1998), we estimate the basic regression model:
FV
it
¼ a þwTDS
it
þlTA
it
þdFLEV
it
þZPRF
it
þgDIVY
it
þWTOBINS
0
Q þe
it
ð1Þ
Consistent with Hassan et al. (2009), firm value (FV) is the natural logarithm of
the ratio of market value of equity to book value of equity at the financial year end.
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The paper additionally tests the impact of corporate disclosure on share prices, a marked
departure from Hassan et al. (2009). As is in the second model, total asset (TA) is split
between liquid assets and non-liquid assets (see Fama and French, 1998). Financial
leverage (FLEV) is the ratio of total liabilities (short-termdebt and long-termdebt) to total
assets at the financial year end. Firm profitability (PRF) is measured by return on equity.
Dividend yield (DIVY) is the percentage dividend returned annually to shareholders. We
also control for the impact of investment opportunity set and risk in both models:
FV
it
¼ a þwTDS
it
þlTA
it
þfLA
it
þdFLEV
it
þZPRF
it
þgDIVY
it
þWTBINS
0
Q þcRISK þe
it
ð2Þ
We approach our second objective bearing in mind the results of Tsamenyi et al. (2007) in
the case of ownership structure, dispersion of shareholding, and leverage as important
determinants of corporate disclosure on the GSE. Our model excludes these factors
except for leverage due to the use Fama and French (1998) valuation model and test for
the theoretical relevance of financial leverage, firm size, extent of internationalisation,
profitability, auditor type, and age as important determinants of corporate disclosure on
the GSE. Following similar approach of Lopes and Rodriques (2007) for the Portuguese
study, we estimate the specific model:
TDS
it
¼/ SIZE
it
þWINTL
it
þuAUDITYPE
it
þ$PRF
it
þzAGE
it
þbFLEV þsRISK
it
þe
it
Firm size (SIZE) is measured by total sales for each firm over the period. Extent of
internationalisation (INTL) is measured as the extent of foreign participation in the
firm. We used the percentage of foreign share ownership instead of foreign sales
divided by total sales as is in the case of Lopes and Rodriques (2007). Auditor type
(AUDITYPE) is a dummy variable that takes the value 1 if the company is audited by
one of the Big 4, and 0 if otherwise. Following the collapse of Arthur Andersen in 2002,
the Big 5 became Big 4, namely: PricewaterhouseCoopers, Deloitte Touche Tohmatsu,
Ernst and Young and KPMG. Firm profitability (PRF) is measured by return on assets
which is a more powerful measure of performance as compared to return on equity.
Return on assets is used here as a measure of overall earnings power of the company.
Age is determined from the company’s date of incorporation regardless of the date of
commencement of business. Risk is included to test whether firms’ earnings
uncertainty will influence their disclosure policy. Risk, a measure of volatility of
income is the three-year standard deviation of return on assets. Consistent with the
signalling theory management will be inclined to disclose good information to the
market that attest to their performance and perhaps disclose less if performance is
poor or firms’ future earnings is saddled with several uncertainties.
Corporate disclosure index has many and varied measurement. The disclosure score
takes a dichotomous, adjusted for non-applicable items (see Raffournier, 1995) and the
index is un-weighted, though Chow and Wong-Boren (1987) have suggested that
weighted and un-weighted disclosure indexes are interchangeable because their effects
are equivalent. We follow the line of un-weighted in the literature (see Cooke, 1989) as
against weighted disclosure index in the literature. The trinary procedure of Aksu and
Kosedag (2006) was followed and Standard and Poor’s transparency and disclosure
items were adapted. The disclosure index has three components namely; financial
disclosures, corporate governance disclosures, and voluntary disclosures.
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The disclosure score of a firm is obtained following the equation below (Aksu and
Kosedag, 2006):
TDS ¼
X
j
X
k
S
jk
TOTS
where j is the attribute category subscript, j ¼1, 2, 3; k is the attribute subscript,
k ¼1y109; S
jk
is the number of info items disclosed (answered as “1”) by the firm in
each category, and TOTS ¼the total maximum possible “1” answers for each firm.
The seemingly unrelated regression was employed in the analysis of firm value.
Given that, the difference between the two models (see equation (2)) is the dependent
variable being the average of the six months of the share price after the year end
(practically companies release their annual reports after 31 December and this
period would allowed for that information to be reflected in the share price) and the
ratio of market to book value of firms. Estimating jointly the two models using
the seemingly unrelated regression approach will yield a more efficient result
than employing the normal fixed effect and random effects. But in the case of
determinants of corporate disclosure, the Hausman specification test was performed
to ascertain the appropriateness of the fixed effects and random effects regression.
The Hausman’s specification test which is a test of orthogonality is used to
determine the extent of correlation between the unobserved fixed effect and any of
the regressors and the appropriateness of the estimation technique. See Table III for
the results of the Hausman’s specification test.
4.1 Discussion of regression results
4.1.1 Descriptive summary statistics. Average disclosure is minimal at 0.4876 and
varies over the sample period registering a minimum score of 0.3222 and a maximum
of 0.6888. The level of corporate disclosure comprising financial disclosure,
governance, and voluntary disclosure is low among Ghanaian listed firms. Non-
liquid assets registers average mean of 0.3866 and also varies within the period and
between firms. Average overall age of firms is 38.39 years indicating most companies
are relatively young. Majority of the listed firms are audited by the Big 4 accounting
firms namely; PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst and Young,
and KPMG. We realised that foreign affiliation impact the choice of auditors. Firms
with foreign parent companies choose one of the Big 4 accounting firms either for
harmonisation of audit practice or due to the fact that the parent companies are audited
by these accounting firms. The few companies audited by the non-Big 4 accounting
firms are predominantly home grown companies with relative size perhaps the reason
for choosing these accounting firms was affordability and convenience. Financial
leverage registers overall mean of 0.9015 indicating some firms are highly leverage, not
surprising though as financial firms and other firms in certain industries such as
mining which by nature of their industries are heavily indebted are included in the
sample (Table I).
Return on equity registers overall mean of 0.2326 with some firms posting negative
returns to shareholders. Average market to book value ratio is 2.0989 but varies
systematically both within firms and between firms. Average foreign share or foreign
equity participation records 31.9182 per cent with log of firm size registering 10.0155.
Shareholders’ earn the overall mean dividend yield of 0.0455 over the study period even
though this value varies over the period and between the firms as shown by the
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standard deviation. Average liquidity registers 5.8070 with average share price being
20,116.38 (even though the cedi was redenominated in 2007 by equating 10,000 cedis to
one Ghana cedi, the study did not take that into consideration). Investment opportunity
set measured by Tobin’s Q registers overall mean of 0.1738 with average profitability
(ROA) recording 0.0667 whilst overall mean for risk registers 0.1376.
It is expected that the adoption of IFRS in 2007 would impact positively the level of
corporate disclosure in Ghana. As in Table II below, the level of corporate disclosure
picked up marginally after 2007 following the adoption of the IFRS. Selecting an equal
number of firms for the two periods (pre-IFRS and post-IFRS) for suitable comparison,
we find that the adoption of IFRS has improved marginally the corporate disclosure
practices of Ghanaian listed firms. The overall mean score of pre-IFRS is 0.4936
whilst that of post-IFRS is slightly above at 0.4992 with a slight higher variation in
pre-adoption as compared to post-adoption as shown in the standard deviation.
The minimum overall score is low at 0.3370 compared to 0.3483 for post-adoption
Variable Observation Mean SD Minimum Maximum
Disclosure 158 0.4876 0.0961 0.3222 0.6888
Fixed assets 158 0.3866 0.2355 0.0000 0.85505
Age 158 38.3860 14.7884 10 83
Auditype 158 0.7531 0.4325 0.0000 1.0000
Financial leverage 158 0.9015 0.9361 0.0062 7.4469
ROE 158 0.2326 0.2504 À0.51 1.0433
MTBV 158 2.0989 2.9878 0.1708 20.84556
Foreign share 158 31.9182 34.3944 0.1708 90.2400
Firm size 158 10.0155 3.7074 0.0000 20.8455
Dividend yield 158 0.0455 0.0917 0.0000 14.0770
Liquidity 158 5.8070 1.1798 1.20063 8.2985
Price 158 20,116.38 66,990.89 0.0000 300,000
Tobin’s Q 158 0.1738 0.1960 0.0008 0.9502
ROA 158 0.0667 0.0783 À0.1676 0.2964
Risk 158 0.1376 0.1580 0.0000 0.9467
Source: Author’s compilation (2011)
Table I.
Descriptive statistics
Variable Observation Mean SD Minimum Maximum
Pre-IFRS 26 0.4936 0.0974 0.3370 0.6833
Post-IFRS 26 0.4992 0.0961 0.3483 0.6888
Industry type Disclosure score
Food and beverage 0.4732
Mining 0.1103
Manufacturing 0.4843
Agro-processing 0.4826
Banking and finance 0.5242
Distribution 0.4651
Printing 0.3402
ICT 0.3720
Publishing 0.3293
Source: Author’s compilation (2011)
Table II.
IAS, industry
classification and
disclosure score
137
Determinants
of corporate
disclosure
again with firms disclosing their highest in the post-adoption at 0.6888 compared to
0.6833 in pre-adoption. Again, the paper sort to ascertain whether industry and
product factor conditions impact corporate disclosure practices in Ghana. We follow
the popular industry classification by the GSE and calculated the average of the years
adjusted by the number of firms in each industry. Firms in the banking and finance
industry (0.5242) lead in the level of disclosure followed by firms in the manufacturing
industry (0.4843). Perhaps firms in the banking and finance industry are better
positioned to afford the cost of information production and dissemination as compared
to firms in other industries or perhaps the additional regulatory requirements from
BOG puts them ahead of their counterparts on the GSE especially the directive from
the BOG that banks are to comply with the IFRS by 2008. Firms in the mining are in
the least with 0.1103. The paper argues that industry dynamism and demand induce
firms to disclosure more information.
With the exception of the banking and finance industry, the rest of the industries
disclose less than half of the disclosure checklist.
Relating corporate disclosure to firm value is complex as the means of transmission
could change the direction of the relationship. Relating mandatory disclosure to firm
value using market to book value ratio, Hassan et al. (2009) reported a statistically
significant negative relationship between mandatory disclosure and firm value
suggesting a complex interplay of factors determining disclosure effects. Combining
mandatory and voluntary disclosure, we report a positive but statistical insignificant
relationship between corporate disclosure and firm value. Perhaps, the different
measures of corporate disclosure could be an additional factor determining disclosure
Dependent variable
Variable Firm value (MTBV) Firm value (share price) Disclosure
Disclosure 0.2474 (0.11) À0.7424 (1.35)
Ratio of fixed assets À0.3759 (0.37) À6,776.74 (2.68)**
Financial leverage 0.3976 (1.65)* À6,260.515 (1.05) À0.0039 (1.76)*
Return on equity 0.5989 (0.69) À29,543.67 (1.38)
Firm size 0.2838 (4.68)*** 1,286.895 (0.86) 0.4444 (3.58)***
Liquidity À0.2750 (1.42) À18,664.07 (3.91)***
Dividend yield 2.0729 (0.91) À106,526.6 (1.90)*
Tobin’s Q 2.6818 (2.29)** 44,253.25 (1.63)*
Risk 0.5115 (0.37) À18,255.22 (0.53) 0.005 (0.26)
Age 0.0031 (3.38)***
Auditype 0.0484 (2.00)**
Internationalisation À0.0000 (0.08)
Profitability (ROA) 0.0578 (1.60)*
Constants 5.3429 (2.91)** 190,500 (4.21)*** 0.3256 (8.43)***
Parms 9 9
RMSE 2.5154 62,102.24
R
2
0.1972 0.1509
w
2
36.35 26.30
p 0.0000 0.0018
Prob. 4w
2
(Hausman test) 0.6044
Wald w
2
(7) 28.09
Prob. 4w
2
(regression) 0.0002
Note: *,**,***Significant at 10, 5 and 1 per cent levels
Table III.
Regression results of firm
value and disclosure
determinants
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effects. The paper further argues that the choice of dependent variable for firm value
could be another factor. Regressing firm value represented by share price on the
disclosure index reveals a negative though statistically insignificant relationship. We
could not confirm the findings of Mitton (2002) who shows that stock prices
improved during the East Asian financial crisis due to stronger corporate governance
in the aspect of disclosure policy. Additionally, we refute Healy et al. (1999) findings
that firms that expand disclosure experience significant contemporaneous increases
in stock prices that are unrelated to current earnings performance. Perhaps, the level
of the development of the GSE could be a mediating factor or level of efficiency or
consistent with Osei (1998) who questioned whether companies divulge enough
information for investors compared with those of the industrialised nations and
whether traders devote enough time and resources to gather investment information
and to what extent can local investors analyse investment information.
On the determinants of corporate disclosure, both the fixed effects and random effects
were estimated after which the Hausman specification test was conducted. The Hausman
specification test suggests we reject the null hypothesis that the differences in coefficients
are not systematic. The test statistics is insignificant suggesting that we accept the null
hypothesis that differences in coefficients are not systematic and that the errors do not
correlate with the explanatory variables. The random effect model is therefore preferred to
the fixed effects. The paper documents a statistically significant negative relationship
between financial leverage and corporate disclosure level on the GSE. Given the relative
development of the stock market in Ghana and the fact that the stock market development
has not led to the substitution of equity for debt (Bokpin and Isshaq, 2008), the result is not
surprising and we confirm our hypothesis of a negative relationship between financial
leverage and corporate disclosure. Though, we refute the agency theory which predicts
higher information asymmetry and agency costs if financial leverage is high and higher
information disclosure will reduce this, we affirm the signalling theory in the Ghanaian
case. Though, Tarca et al. (2005) distinguishing public debt from private debt in redefining
financial leverage contend that companies with relatively more outside debt (defining
outside or public debt as the amount of long-term debt that is sourced from the public
capital market) are more likely to use IAS and make more public disclosure of information,
this is not the case in Ghana as the companies hardly issue public debt with the exception
of HFC. The direction of the results is impacted more by the reliance of firms on financial
institutions (bank-based financial system as against market-based financial system) than
the prepositions of agency theory.
Both theory and empirics suggest size impacts positively the disclosure level of
companies. Consistent with theory and empirics we report a statistically significant at
conventional levels a positive relationship between firm size and corporate disclosure
level. The paper affirms the political cost theory (Watts and Zimmerman, 1990) that
political costs are higher in larger companies, and so larger companies are more likely
to show higher levels of disclosure since it improves confidence and reduces political
costs. In line with the economic theory also, large companies due to possible economies
of scale in the production and storage of information, tend to allocate relatively greater
amount of resources to the production of information (see Stigler, 1961). Large firms
also have a more diverse ownership, and as a result, higher agency cost that they try
to reduce by higher voluntary disclosure levels (Meek et al., 1995). Verrecchia
(1983) further contends that proprietary costs related to competitive disadvantages of
additional disclosure are smaller as company size increases. Empirically, Lopes and
Rodriques (2007) document a positive relationship between firm size and disclosure
139
Determinants
of corporate
disclosure
level. Owusu-Ansah (1998) also found a positive relationship between company size
and mandatory corporate disclosure (see also Wallace et al., 1994; Inchausti, 1997;
Barako, 2007). Our result confirms the research hypothesis and affirms the relevance of
disclosure theories and empirical evidence in Ghana and argues that both theories and
empirics from developed capital markets are easily transferable to developing
countries such as Ghana.
Company age is positive and statistically significant determinants of corporate
disclosure. Age whether used as a measure of reputation or stage of development
is significant determinant of corporate disclosure. The preposition that older,
well-established companies are likely to disclose much more information in their
annual reports than younger companies because they will not suffer any competitive
disadvantage as compared to younger firms and the cost and the ease of gathering,
processing, and disseminating the required information may be a contributory
factor is affirmed in Ghana. Older firms would be eager to disclose more information
about their reputation, market penetration, long presence and experience than new
or younger companies hence the positive relationship is observed in line with our
research hypothesis. Consistent with the signal theory, when management is in
possession of such information as market presence, reputation, and experience they
would readily disclose such information in their annual reports and financial
statements. Empirically, we confirm the findings of Owusu-Ansah (1998) who
reported a positive and statistically significant relationship between company age
and mandatory disclosure.
Corporate disclosure literature is replete with the impact of audit quality. The hall
mark of audit is independence and reputation. Auditors must not only be independent
but must be seen as independent and therefore Chalmers and Godfrey (2004) argue
that, to maintain their reputation and avoid reputation costs, high-profile auditing
companies are more likely to demand high levels of disclosure. This presupposes a
positive relationship between audit quality and corporate disclosure and would be one
of the ways of reducing agency costs according to Jensen and Meckling (1976). Our
robust regression reveals a statistically significant positive relationship between audit
quality (audit type) and corporate disclosure. Theoretically, we confirm the agency
theory ( Jensen and Meckling, 1976; Watts and Zimmerman, 1983) whilst empirically
we follow the findings of Lopes and Rodriques (2007). A company discloses more
information in its annual reports and financial statements when audited by one of the
“Big 4” than when audited by any other accounting firm. Malone et al. (1993) supported
this argument by contending that small audit firms are more sensitive to loss of clients
and as such may not be prepared to demand greater disclosure.
More profitable firms would be in a position to afford increased disclosure than less
profitable firms. Karim (1996) document a positive relationship between profitability
and corporate disclosure (see also Owusu-Ansah, 1998). The signalling theory predicts
that management when in possession of “good news” due to better performance are
more likely to disclose more detailed information to the stock market than that
provided by “bad news” companies to avoid undervaluation of their shares. Thus, we
accept the hypothesis that profitable firms disclose more information than non-
profitable firms. Consistent with the signalling theory and empirical evidence we
report a positive and statistically significant relationship between profitability and
corporate disclosure. More profitable firms would be in a position to afford the cost of
information production and dissemination than less profitable firms. Juxtaposing this
result in the context of industry dynamics makes sense as firms in the banking and
140
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finance industry (reputed as the most lucrative industry) disclose more information
than any other industry on the GSE as discussed earlier.
Risk is positive but statistically insignificant determinant of corporate disclosure
in Ghana. Firms’ business risk, the risk inherent in their operating activities induces
managers to reveal this information in their annual reports and financial statements
even though the strength of the relationship is not statistically significant at
conventional levels. We also found a weak relationship between internationalisation
and corporate disclosure. Internationalisation weakly impacts corporate disclosure
negatively. The extent of foreign equity participation does impact positive corporate
disclosure policy of companies listed on the GSE.
5. Conclusions and implications
Though, corporate disclosure has been part of securities market regulation since the early
1900s, the recent corporate accounting scandals in the USA and other parts of the world
which also saw the collapse of Arthur Anderson (one of the Big 5 accounting firms) has
heightened the call for greater disclosure by companies. Regulators, industry practitioners,
accounting standard setters, and academicians have responded to this phenomenon with
interventions such as swift regulations (Sarbanes-Oxley Act of 2002 in the USA),
theorising and empirical studies especially from the developed capital markets. Though,
Africa and Ghana for that matter cannot be isolated from the spillover of these scandals,
theory (Lopes and Rodriques, 2007), and empirics (Leuz and Verrecchia, 2000) have
concentrated on developed capital market. The paper sought to answer whether corporate
disclosure has any relevance to firm value in Ghana or is a consequence of interplay of
factors that determine disclosure effects as Hassan et al. (2009) opined. Additionally, the
paper follow the lines of Lopes and Rodriques (2007) in testing the relevance of disclosure
theories in developing countries which would in turn buttress the theories that are
proffered and refute any suggestion that the existing evidence is a consequence of the
idiosyncrasies in the institutional, cultural, and regulatory environments in developed
Anglo-Saxon countries consistent with Mangena and Chamisa (2008). Pooling time series
with cross-sectional data over six-year period for 27 firms listed on the GSE whilst
adapting S&P disclosure and transparency index, the paper sought to answer the above
questions. Additionally, the disclosure policy of companies listed on the GSE ought to be
examined comprehensively than before (see Tsamenyi et al., 2007) given the global
presence of the GSE with Thomson Reuters and Bloomberg providing feeds of real-time
data on the GSE. Investors all over the world would seek information and disclosure
practices to reduce information asymmetry on the GSE in addition to governance reforms
and firm-level characteristics that would meet the expectations of investors.
Though corporate disclosure positively impact firm value, the relationship is not
statistically significant, emphasising interplay of multiple factors determining
disclosure effects. Perhaps, the interplay of cost of information disclosure and
benefit could be another factor impacting effect of disclosure policy in Ghana.
Depending on the balance, the effect could be positive as in our case or negative as in
Hassan et al. (2009) for voluntary disclosure. We could not affirm existing evidence of a
positive relationship between corporate disclosure and stock prices as we found a
negative though statistically insignificant relationship between corporate disclosure
and stock prices. Perhaps, the stage of development of the market and the level of
efficiency could be the mediating factors determining the impact of corporate
disclosure on stock prices. On the determinants of disclosure practices, the paper
affirmed that theories of disclosure practices are not the results of idiosyncrasies in the
141
Determinants
of corporate
disclosure
institutional, cultural, and regulatory environments in developed Anglo-Saxon countries
such as the USA but such theories can be generalised in developing countries such as
Ghana. Though, we could not confirm the relevance of the agency predictions in the
case of the impact of financial leverage given that we found a negative relationship
between financial leverage and corporate disclosure practices, the signally theory is
upheld in our study. Though, not surprising given the stage of development of the
stock market in Ghana and the fact that it has not led to the substitution of equity
for debt and the greater reliance of firms on bank financing, the direction of
the relationship is expected to change as the stock exchange fully develops both in
quantity (effectiveness-volume of shares traded) and quality (efficiency). Consistent
with the political cost and economic theories, the paper found a statistically significant
and positive relationship between firm size and corporate disclosure level. Large firms
disclose more information than smaller firms consistent with theory and empirics
(see also Lopes and Rodriques, 2007). Age is a significant determinant of corporate
disclosure in Ghana. Older firms have the capacity and are better positioned not to
suffer from competitive disadvantage from disclosing more information to the public
relative to younger firms. Theoretically, we confirm the agency theory of Jensen and
Meckling (1976) and the empirical findings of Lopes and Rodriques (2007) in the case of
the impact of audit quality on corporate disclosure. We found a statistically significant
positive relationship between audit quality (if a firm is audited by one of the “Big 4”)
and corporate disclosure level in Ghana. Profitability is a positive and statistically
significant determinant of corporate disclosure in Ghana. Consistent with signalling
theory, managers of profitable firms are motivated to disclose more information to
appease shareholders, to enhance company image leading to marketability of shares,
and above all to justify their compensation (see Zubaidah and Koh, 1999). Empirically,
we followed the findings of Owusu-Ansah, 1998; Karim, 1996) of a positive relationship
between profitability and corporate disclosure level. We also found risk and extent of
internationalisation to be insignificant determinants of corporate level in Ghana.
Several policy and managerial implications emerge as a result of this study. We argue
that though corporate governance is taking root in Africa and Ghana for that matter
after several reforms in the continent following World bank/IMF-led economic reforms,
it cannot be said that corporate governance is independent of corporate disclosure.
Any policy of corporate governance must be pursued along disclosure practices as
well. The integrity of corporate disclosure sustains investor confidence in trading
securities at fair prices, and hence should be at the heart of any policy of making the
GSE a well-functioning capital markets. Though the adoption of the IFRS has been
hailed as significant, compliance remains very low. IAS has marginally improved the
level of disclosure practices contrary to expectations. Practical efforts must be made
towards compliance with IFRS based on annual reports published by companies and
implement actions towards non-complying companies (see Lopes and Rodriques, 2007).
Annual ranking of companies based on good corporate governance and disclosure
practices could be adopted to stimulate healthy competition among firms which in turn
will also increase the awareness of information disclosure and its impact on investors’
decisions among local investors.
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Corresponding author
Godfred A. Bokpin can be contacted at: gabokpin@ug.edu.gh
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