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MAJ
22,6
Ownership structure, board
composition and corporate
voluntary disclosure
604
Evidence from listed companies in China
Xiao Huafang and Yuan Jianguo
Department of Accounting and Finance,
Huazhong University of Science and Technology,
Wuhan, People’s Republic of China
Abstract
Purpose – The paper aims to examine the impact of ownership structure and board composition on
voluntary disclosures of listed companies in China.
Design/methodology/approach – Using an OLS-regression model to test the relationship among
ownership structure, board composition and the level of voluntary disclosure. The sample is based on
559 firm observations in 2002.
Findings – Higher blockholder ownership and foreign listing/shares ownership is associated with
increased disclosure. However, managerial ownership, state ownership, and legal-person ownership
are not related to disclosure. An increase in independent directors increases corporate disclosure and
CEO duality is associated with lower disclosure. The paper also finds that larger firms had greater
disclosure, while firms with growth opportunities are reluctant to disclose information voluntarily.
Research limitations/implications – Firstly, the sample is comprised of companies listed on
Shanghai Stock Exchange in 2002 and only 45.7 percent of representative firms listed in China.
Secondly, the disclosure checklist does not cover all voluntary disclosure in corporations as employed
and supported in several prior studies. Thirdly, the award of checklist items may be subjected to errors.
Practical implications – This paper indicates the relationship among ownership structure, board
composition and corporate voluntary disclosure, and provides evidence for Chinese regulators to
improve corporate governance and optimize ownership structure.
Originality/value – Distinct from prior empirical research based on disclosure behavior in
developed-western markets, this study examines the impact of ownership structure and board
composition on voluntary disclosures of listed companies in the Asian setting of China.
Keywords Disclosure, China, Corporate ownership, Boards of directors
Paper type Research paper
Managerial Auditing Journal
Vol. 22 No. 6, 2007
pp. 604-619
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900710759406
Introduction
Corporate voluntary disclosure and its determinants have been identified as an
important research area and have attracted both analytical and empirical researchers
in accounting since the 1970s. Analytical research includes agency theory (Jensen and
Meckling, 1976), signaling theory (Hughes, 1986) and competition theory (Verrecchia,
1983). Empirical research on the determinants of voluntary disclosure has a long
history, dating back to work by Cerf (1961), with two streams of subsequent studies
documenting the impact of firm characteristics such as size, listing, leverage, profit and
growth, and corporate government including ownership structure and board
composition on disclosure. However, primary research to date has been focused on
the mature capital markets (Meek and Gray, 1989; Gray et al., 1995; Lang and
Lundholm, 1996) and emerging markets in Asian such as Hong Kong (China) and
Singapore (Hossain et al., 1994; Eng and Mak, 2003). Very few studies (Xiao et al., 2004)
have documented corporate voluntary disclosure in mainland China. Accordingly, this
study aims to examine the voluntary disclosure behavior of listed companies in China.
The orientation of disclosures is significantly influenced by the cultural environment in
which companies operate (Gray, 1988; Radebaugh and Gray, 1997). Chinese society is
characterized by relatively high levels of collectivism and power distance, and strong
uncertainty avoidance (Chow et al., 1995). These societal values indicate that Chinese
people would tend to adhere to rules and regulations and disclose less information in their
annual reports voluntarily. Hence, Chinese culture in itself does not promote voluntary
disclosure of corporate information. On the other hand, long-term creditors in strong
uncertainty-avoidance countries such as China may require more information from their
borrowers in order to preserve security (Chau and Gray, 2002). The overview of China’s
particular societal influences provides us with an opportunity to examine empirically how
firm characteristics affect corporate information disclosure in emerging economies.
Ownership in China has unique characteristics. As distinct from listed companies in
more advanced economies, most listed Chinese firms originated as state-owned
enterprises and have three separate classes of ownership shares: state-owned shares,
legal-person shares and individual shares. State-owned shares (or Guoyougu in China)
held by the government are prohibited from being traded publicly. Legal-person shares
owned by separate legal entities also cannot be traded on the Shanghai Stock Exchange
(SSE) or the Shenzhen Stock Exchange (SZSE), although these can be sold to other legal
entities with the approval of government. Shares issued to individuals can be classified
into those restricted to domestic trading by Chinese citizens (A-shares), and those that
can be sold to foreign individuals and entities (B-shares), and those listed on Hong Kong
and foreign stock exchanges (all called H-shares). At the end of 2000, there were a total of
374.628 billion shares trading on both two exchanges, and only 35.62 percent belonged to
individual shareholders, while state shares and legal-person shares constituted 37.35
and 27.03 percent, respectively, (CCX International, 2001). Though studies have
examined the effect of state ownership dominance on corporate performance (Xu and
Wang, 1999; Sun and Tong, 2003), little research exists on the impact of China’s unique
ownership structure on voluntary corporate disclosure.
To examine the effect of China’s Corporate Government reform on disclosure is the
final reason that we are examining voluntary disclosure in China. During the past
decade, the Chinese Government has continued to improve its corporate governance
policies so as to prepare Chinese companies to compete with their foreign counterparts,
especially with China’s entry into the Word Trade Organization (WTO) in late 2001.
The Ministry of Finance and the Chinese Securities and Regulations Commission
(CSRC, 2001, 2002a) released “Guidelines for Introducing Independent Directors to the
Board of Directors of Listed Companies” in 2001and “Code of Corporate Governance for
Listed Companies in China” in 2002. The guidelines mandated every company in China
to install at least two independent directors (IND) on the board by June 30 2002, and to
ensure that a third of the board is occupied by IND by June 30 2003. In addition, IND are
required to comment on the appropriateness of management actions in the company’s
annual reports. Outside of China, however, little is known about the effectiveness of
these reforms in promoting voluntary disclosure.
Impact of
ownership
structure
605
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606
Accordingly, in light of said unique-cultural environment, this study examines whether
ownership structure and board composition are associated with voluntary disclosure of
listed companies in China. Ownership structure is characterized by blockholder
ownership, managerial ownership, state ownership, legal-person ownership and foreign
listing/shares ownership, and board composition is measured by the percentage of IND
and CEO duality (CEOs who jointly serve as board chairs). Voluntary disclosure is proxied
by an aggregated disclosure score (DSCORE) of background information, business
information, financial information and other non-financial information.
The remainder of this paper is organized as follows. Section 2 reviews prior research
on the determinants of corporate disclosure. The hypotheses are developed in Section 3.
Section 4 describes our method, sample and data, and Section 5 presents the analyses
and results. Finally, some conclusions are drawn.
Determinants of corporate disclosure
A considerable international literature has developed which investigates the association
between corporate characteristics and disclosure levels in corporate annual reports.
These studies have developed a disclosure index or score to measure voluntary
disclosure in financial statements. Firth (1979) finds that larger firms are more inclined
to disclose more information because they are prone to public scrutiny. Chow and
Wong-Boren (1987) examine the association between voluntary disclosure and firm size
(FSIZE), proportion of assets, and financial leverage. The study concludes that
voluntary disclosure varies widely within a sample of 52 Mexican firms, and the extent
of disclosure is positively related to FSIZE only. The findings of Cooke (1992) suggest
that size, operation in the manufacturing sector, and listing on foreign stock markets
induce Japanese firms to disclose more information. According to the research of Naser
et al. (2002), FSIZE, debt ratio, profit margin, and audit FSIZE are positively correlated,
while liquidity is negatively correlated to the depth of disclosure
Another determinant of the level of voluntary disclosure is the firm’s ownership
structure. The extent of shareholding by executive directors is associated with agency
theory (Jensen and Meckling, 1976). Shareholdings by non-executive directors (Jensen,
1993) and by outside blockholders (Shleifer and Vishny, 1986) are associated with higher
monitoring incentives. Ruland et al. (1990) find that firms which release earnings
forecasts have a higher proportion of outside ownership than do other firms. Eng and
Mak (2003) argue that lower managerial ownership and significant-government
ownership are associated with increased disclosure. However, they find that blockholder
ownership is not related to disclosure. Based on a study of voluntary disclosure by Hong
Kong and Singapore firms, Chau and Gray (2002) report a positive relationship between
outside ownership and disclosure, consistent with the findings of Hossain et al. (1994).
Additionally, corporate governance, which promotes corporate transparency and
accountability, is predicted to be significantly associated with voluntary disclosure.
Jensen (1993) argues that board composition and board-leadership structure are
associated with board-monitoring incentives. Forker (1992) examines the association
between corporate governance and share option disclosures. Chen and Jaggi (2000) find
that the ratio of independent board directors is positively associated with mandatory
disclosures. Eng and Mak (2003) report an inverse relationship between outside
directors and voluntary disclosure, Gul and Leung (2004) suggest that CEO duality is
associated with lower levels of voluntary corporate disclosures. However, the negative
CEO duality and voluntary disclosure association is weaker for firms with a higher
proportion of independent and experienced directors on the board. We extend the work
of Eng and Mak (2003) by examining corporate governance in terms of ownership
structure including legal-person ownership, and board composition including CEO
duality in China.
Impact of
ownership
structure
Hypotheses
Blockholder ownership
Blockholder ownership is the percentage of shares held by substantial shareholders
(that is, shareholdings of 5 percent or more). Jensen and Meckling (1976) argue that
substantial shareholders are expected to have both greater power and incentives to
monitor management, as their wealth is tied to the firm’s financial performance. Fama
and Jensen (1983) propose that diffusion in ownership raises the potential conflicts
between the principal and the agent. Agency problems can be mitigated by involving
substantial shareholders in monitoring or controlling activities that potentially cause
such problems (Shleifer and Vishny, 1986; Huddart, 1993; Noe, 2002). Therefore,
managers are predicted to disclose more information in annual reports in order to reduce
agency costs entailed in monitoring activities. Hossain et al. (1994) and Chau and Gray
(2002) provide support for this prediction in revealing an association between the
ownership structure and the extent of information voluntarily disclosed by the listed
Malaysian, Hong Kong and Singapore firms, respectively. The hypothesis is thus:
607
H1. Ceteris paribus, there is a positive association between blockholder ownership
and the extent of voluntary disclosure.
Managerial ownership
Managerial ownership is the proportion of ordinary shares held by senior managers,
including directors and supervisors. The extent of managers’ shareholdings can reduce
agency costs as it serves to align the interests of management with those of other
shareholders (Jensen and Meckling, 1976). Agency theory predicts that there is a
positive association between management interests and the level of voluntary
disclosure. Warfield et al. (1995) provide evidence supporting this contention in their
findings that the extent of shareholding by management is positively associated with
the amount of information disclosed about earnings. Hence, our hypothesis is:
H2. Ceteris paribus, there is a positive association between managerial ownership
and the level of voluntary disclosure.
State ownership
The Chinese Government has more than 10 percent of direct or indirect voting rights in
43.8 percent of firms, and more than 50 percent in 31.4 percent of firms (Tian, 2001).
These state-owned shares are not publicly tradable and the state shareholders may
focus on wealth distribution and maintaining social order (Xu and Wang, 1999). That
is, enhancing shareholder value may not be the primary objective of state ownership
enterprises (SOEs). In addition, the government would also be able to obtain
information from other sources and be more likely to gain easier access to different
channels of financing than non-state firms (Eng and Mak, 2003). Both factors should
weaken the pressures for voluntary disclosures directed at the public. Hence, there may
MAJ
22,6
be less disclosure in corporations with a higher proportion of state-ownership
corporation, as stated in the following hypothesis:
H3. Ceteris paribus, there is a negative association between state ownership and
the level of voluntary disclosure.
608
Legal-person ownership
With respect to legal-person ownership, the holders of these shares have more
resources and expertise to monitor listed firms than do individual investors.
Additionally, compared with state shareholders, legal-person shareholders have great
incentive to monitor firms because they are more concerned with profits than fulfilling
political and social goals (Xiao et al., 2004). It is expected that the extent of voluntary
disclosure increases with their proportion of legal-person ownership, as stated in the
following hypothesis:
H4. Ceteris paribus, there is a positive association between legal-person ownership
and the level of voluntary disclosure.
Foreign listing/shares ownership
In general, due to space and language barriers, foreign shareholders likely face a higher
level of information asymmetry. This is particularly true of listed Chinese companies,
given the difficulty in accessing hard copy corporate reports (Xiao et al., 2004). In order
to compete effectively in the capital market, firms with foreign listing/shares would
voluntarily disclose more information. In contrast to firms with only A-shares, Chinese
companies issuing B-or H-shares are required to also follow International Accounting
Standards (IAS) or the accounting standards of the foreign countries where their shares
are listed. If they disclose information to overseas investors, whether mandatory or
voluntary, they are required to disclose the same to domestic shareholders. In addition,
reports to B- and H-shareholders must be audited by international auditors, which
would increase voluntary disclosure (DeAngelo, 1981). Cooke (1998) reports that
firms which are listed on several stock exchanges make more information disclosures.
Hence, the following hypothesis is proposed:
H5. Ceteris paribus, there is a positive association between foreign listing/share
ownership and the level of voluntary disclosure.
Independent directors
As representatives of shareholders, IND are perceived as tools for monitoring
management behavior (Rosenstein and Wyatt, 1990). Benefiting from established
reputations as monitoring experts, IND have incentives to increase the quantity and
quality of disclosure (Fama and Jensen, 1983). Beasley (1996) argues and provides
evidence that the proportion of IND is positively related to the board’s ability to influence
disclosure decisions. Chen and Jaggi (2000) find empirical evidence of a positive
relationship between the proportion of IND and disclosure (including mandatory
disclosure). Thus, the hypothesis relating outside directors to voluntary disclosure is as
follows:
H6. Ceteris paribus, there is a positive association between the proportion of
outside directors and the level of voluntary disclosure.
CEO duality
Fama and Jensen (1983) point out that CEO duality signals the absence of separation
of decision control and decision management. The result of CEO duality is the
concentration of decision-making power, which could constrain board independence
and reduce its ability to execute its oversight and governance roles (Finkelstein and
D’Aveni, 1994; Gul and Leung, 2004), and prove detrimental to disclosure levels
and quality, especially voluntary disclosure (Ho and Wong, 2001).This issue is
considered important enough for the CSRC in 2001 to recommend that large companies
should separate the roles of CEO and chairman. The above reasoning suggests that
firms with CEO duality are more likely to be associated with lower levels of voluntary
disclosures. The hypothesis is thus:
H7. Ceteris paribus, there is a negative association between CEO duality and the
level of voluntary disclosure.
Other control variables
To test the main hypotheses, we selected several factors that had been identified by the
extant literature as relevant to voluntary disclosure as control variables in
multiple-regression models. FSIZE was included because larger firms are subject to
more public and regulatory scrutiny (Watts and Zimmerman, 1986) and thus are likely
to voluntarily disclose more information to muster public support for reducing political
costs and to raise capital (Chow and Wong-Boren, 1987; Lang and Lundholm, 1993).
We also included leverage (DEBT) because firms with high-debt levels are expected to
incur higher monitoring costs. Thus, managers of high-debt firms seek to reduce these
costs by disclosing more information in annual reports (Ahmed and Courtis, 1999). We
proxy leverage with the ratio of total liability to total assets because Chinese-listed
firms usually roll over short-term loans as a means of obtaining long-term financing
(Xiao et al., 2004). High-growth firms have greater information asymmetry and agency
costs (Smith and Watts, 1992; Gaver and Gaver, 1993) and thus have incentives to
narrow this information gap by more voluntary disclosure. We use the proportion of
intangible assets to proxy growth. Finally, the high-quality of audit (BIG4) is also
adopted as a control variable (Inchausti, 1997)
Research method
Sample
The sample for this paper is drawn from firms listed on the SSE of China at the end of
2002. Firms in the financial sector (banks, insurance, and other financial firms) are
excluded, as they are subject to different disclosure requirements in China. ST/PT
firms are also excluded because their financial conditions are abnormal. In addition, the
CSRC mandates special-venture disclosure for the real-estate industry, so these firms
are neglected. Apart from one firm without an annual report, we obtained a total of
559 firm observations for hypotheses testing. We cover 11 industry sectors, with
345 firms in manufacturing; 51 firms in retail/trade; 32 firms in both conglomerate and
transport and storage; 26 firms in utilities; 24 firms in communication; 16 firms in the
services sector; 14 firms in agriculture, forestry, animal husbandry and fisheries;
7 firms in construction; 6 firms in mining; and 5 firms in media and culture.
Impact of
ownership
structure
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The measurement of voluntary disclosure
In this paper, we adopt the level of voluntary disclosure of our sample firms as a
measure of their voluntary disclosures in annual reports for three reasons. First, annual
report disclosure levels are positively correlated with the amount of disclosure
provided via other media (Lang and Lundholm, 1993). Second, disclosures in annual
reports are regarded by financial analysts and investors as the most important source
of information for Chinese firms. Finally, corporate disclosure of management
forecasts (i.e. earnings forecasts) is rare in China.
Chinese publicly listed companies are required to prepare annual reports in
accordance with China’s GAAP and (CSRC, 2002b) “The No. 2 rule of content and
format about information disclosure in companies issuing securities to the public:
The content and format of the annual report (Revised in 2002),” which are issued by
Ministry of Finance and CSRC, respectively. Following Botosan (1997) and Meek et al.
(1995), we develop an index to measure the extent of voluntary disclosure by
companies in the 2002 annual reports. The items in our disclosure list are modified
from Botosan (1997) to take into account the disclosure environment in China. The
final-disclosure list containing 30 items is reported in the Appendix. It contains
background information, business information, financial information and non-financial
information. The background information includes corporate goals, strategy and
competition. Business information includes items such as changes in sales, changes in
costs of goods, and profit forecast. Financial information includes gearing ratio,
liquidity ratio, inventory turnover, and turnover of receivables. Non-financial
information includes staff training, ISO issues, and corporate culture. For each
item in the disclosure index, a company receives a score of “1” if it voluntarily discloses
information on the item and a “0” otherwise (Botosan, 1997; Meek et al., 1995). DSCORE
is the sum of scores awarded for each item in the disclosure index. This voluntary
disclosure index was complied based on the unweighted scoring approach of the
disclosure items, which has been employed and supported in several prior studies
(Ahmed and Nicholls, 1994; Cooke, 1991; Meek et al., 1995).
Definition and measurement of variables
Table I summarizes the definition and measurement of variables used in this paper. All
of the data were collected from Center of China Economic Research Services (CCER).
Regression mode
A linear-multiple regression analysis was used to test the association between the
dependent variable of voluntary disclosure and the independent variables of
ownership structure and board composition. The following model is estimated:
SCOREi ¼ b0 þ b1 BLOCKi þ b2 MOWNi þ b3 SOEi þ b4 LEGALi þ b5 FSHi
þ b6 IDRi þ b7 DUALi þ b8 FSIZEi þ b9 DEBTi þ b10 INTANi
þ b11 BIG4i þ 1i
where, DSCORE – voluntary disclosure score; BLOCK – proportion of equity ownership
by substantial shareholders (with equity of 5 percent or more); MOWN – proportion of
equity ownership by senior managers, including directors and supervisors; SOE –
proportion of equity ownership by the state; LEGAL – proportion of equity ownership by
Variable
Definition
Dependent variable
DSCORE Voluntary disclosure score
Independent variables
BLOCK
Blockholder ownership
MOWN
Managerial ownership
SOE
LEGAL
State ownership
Legal-person ownership
FSH
Foreign listing/shares ownership
INR
DUAL
Independent director
CEO duality
Control variables
FSIZE
Firm size
DEBT
Leverage ratio
INTAN
Intangible assets ratio
BIG4
Auditor reputation
Measurement
Total number of points awarded for voluntary
disclosure of strategic, business, financial and
non-financial information
Proportion of ordinary shares owned by substantial
shareholders(with equity of 5 percent or more)
Proportion of ordinary shares owned by top
managers(including directors and supervisors
Proportion of ordinary shares owned by the state
Proportion of ordinary shares owned by the legal
person
1 if the firm had issued
H-share or B-share, 0 otherwise
Proportion of independent directors on the board
1 if the CEO is also chairman of the board, 0
otherwise
The firm’s total assets at fiscal year end of 2002
Total liabilities divided by total assets
Total intangible assets divided by total assets
1 if auditor is big-four firm, 0 otherwise
legal person; FSH – dummy variable for foreign listing/shares ownership, 1 if the firm had
issued H-share or B-share, 0 otherwise; IDR – proportion of IND on the board of directors;
DUAL – dummy variable for CEO duality, 1 if the CEO is also chairman of the
board, 0 otherwise; FSIZE – logarithm of firm’s total assets at fiscal year end of 2002;
DEBT – total liabilities divided by total assets; INTAN – total intangible assets divided
by total assets; BIG4 – dummy variable for auditor reputation, 1 if the firm is audited by
Big 4 auditor, 0 otherwise.
Empirical results
Descriptive statistics and univariate analysis
Table II contains descriptive statistics for the dependent and independent variables. The
average voluntary DSCORE for our sample of firms for 2002 is 4.92 (range from 0 to 21),
suggesting a low-voluntary disclosure environment in China. The mean of BLOCK is
about 0.56 revealing that the ownership in China is considerably concentrated. The
mean of SOE and LEGAL is about 0.38 and 0.23, respectively, and the total-illiquidity
share is about 61 percent. Across the 559 companies, the mean percentage of managerial
ownership is about 0.48 percent, greatly lower than the average ownership of 14 percent
of 158 Hong Kong companies in 1995 (Eng and Mak, 2003). The average percentage of
IDR is 0.24 and does not reach the requirement of the CSRC (at least 1/3 IND on the
board). In the test sample, slightly more than 11 percent of companies have CEO duality,
indicating that the phenomenon of CEO duality has improved gradually.
Table III reveals a number of significant correlation among the dependent and
independent variables. The analysis shows that voluntary DSCORE is positively
correlated with BLOCK, MOWN, SOE, FSH and IDR, and negatively associated with
Impact of
ownership
structure
611
Table I.
Definition and
measurement of variables
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612
Table II.
Descriptive statistics for
study variables
Variables
SCORE
BLOCK
MOWN
SOE
LEGAL
FSH
IDR
DUAL
FSIZE
DEBT
INTAN
BIG4
Minimum
Maximum
Mean
Std. deviation
0
0
0
0
0
0
0
0
8.35
0.02
0
0
21
0.96
0.75
0.89
0.86
1
0.56
1
11.57
0.85
0.29
1
4.92
0.56
0.0048
0.38
0.23
0.08
0.24
0.11
9.20
0.42
0.03
0.01
2.91
0.15
0.04
0.27
0.25
0.27
0.08
0.32
0.39
0.16
0.04
0.11
Notes: This table presents descriptive statistics for the total sample of 559 firm observations in 2002.
Variables are defined in Table I
LEGAL and DUAL. The disclosure levels are also positively correlated to FSIZE,
DEBT and BIG4. The positive correlations between DSCORE and these firm
characteristics are consistent with the results of prior studies, as discussed in Ahmed
and Courtis (1999).
Multivariate hypothesis test
The use of this statistical tool is based on the assumption of no significant
multicollinearity between the explanatory variables. The maximum Pearson correlation
among explanatory variables is 0.458, between SOE and BLOCK. Applying the cutoff of
correlation coefficient values of 0.8 or higher for multicollinearity to be considered as
troublesome according to Judge et al. (1980), the problem of multicollinearity is minimal.
In addition, the maximum variance inflation factor (VIF) is 1.351, which is lower than
ten, a number that is used as a rule of thumb as an indicator of multicollinearity problems
(Belsely, 1991). 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.
Table IV displays the result of the OLS regression model used to test H1-H7.
The F-value of Chinese companies in 2002 is 5.364 (significant at 0.01) for the level
of voluntary disclosure. The adjusted coefficient of determination (R 2) for the level of
voluntary disclosure is 7.9 percent, suggesting that there are other related variables
ignored in our model.
The result show that two aspects of ownership – blockholder ownership and
foreign listing/shares ownership – are significant at the 0.05 level related to voluntary
disclosure. Voluntary disclosure increases with greater blockholder ownership
(b1 ¼ 2.951, t ¼ 3.21), and with listing on foreign stock exchanges or issuing shares to
foreigners (b5 ¼ 1.014, t ¼ 2.146), which support H1 and H5.
The other three aspects of ownership – managerial ownership, state ownership, and
legal-person ownership – are not significant at the 0.05 level related to voluntary
disclosure. Thus, H2-H4 are not supported. These results of zero association is
different from the results in Eng and Mak (2003), as they found a negative relationship
between managerial ownership and disclosure and a positive association between state
BLOCK
MOWN
0.049
0.458 * *
20.142 * *
1
20.025
0.039
20.033
20.088 *
0.191 * *
20.010
20.047
0.067
SOE
2 0.014
2 0.049
2 0.020
2 0.025
1
2 0.026
0.024
2 0.013
2 0.016
0.069
0.019
0.001
LEGAL
IDR
0.153 * *
0.103 * *
0.042
0.052
20.033
0.018
0.039
20.033
20.026
0.024
1
0.056
0.056
1
20.003
0.053
0.371 * *
0.051
0.092 *
0.012
20.003
0.010
0.203 * *
0.080 *
FSH
2 0.082 *
2 0.039
2 0.038
2 0.093 *
2 0.021
0.000
0.054
1
2 0.019
0.018
2 0.037
2 0.040
DUAL
0.195 * *
0.167 * *
20.093 *
0.191 * *
20.016
0.371 * *
0.051
20.010
1
0.241 * *
20.051
0.199 * *
FSIZE
0.045
2 0.157 * *
2 0.102 * *
2 0.010
0.069
0.092 *
0.012
0.045
0.241 * *
1
2 0.019
2 0.066
DEBT
BIG4
0.059
0.129 * *
2 0.003
0.067
0.001
0.203 * *
0.080 *
2 0.040
0.199 * *
2 0.066
2 0.004
1
INTAN
20.125 * *
20.077 *
20.011
20.047
0.019
20.003
0.010
0.011
20.051
20.019
1
20.004
Notes: This table reports Pearson correlations. The sample is based on 559 firm observations in 2002. Variables are defined in Table I. *Correlation is
significant at the 0.05 level (one-tailed). * *Correlation is significant at the 0.01 level (one-tailed)
SCORE
1
0.163 * *
0.043
BLOCK
0.163 * *
1
2 0.036
MOWN
0.043
20.036
1
SOE
0.049
0.458 * * 2 0.142 * *
LEGAL 2 0.014
20.049
2 0.020
FSH
0.153 * *
0.042
2 0.033
IDR
0.103 * *
0.052
0.018
DUAL 2 0.100 * 20.048
2 0.038
FSIZE
0.195 * *
0.167 * * 2 0.093 *
DEBT
0.045
20.157 * * 2 0.102 * *
INTAN 2 0.125 * * 20.077 * 2 0.011
BIG4
0.059
0.129 * * 2 0.003
SCORE
Impact of
ownership
structure
613
Table III.
Correlation coefficients
between the variables
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614
Table IV.
Multiple regression
results
Independent
variables
(Constant)
BLOCK
MOWN
SOE
LEGAL
FSH
IDR
DUAL
FSIZE
DEBT
INTAN
BIG4
Unstandardized
coefficients
B
Std. error
2 6.276
2.951
3.856
2 0.556
2 0.078
1.014
3.124
2 0.906
0.977
0.628
2 6.818
2 0.314
3.084
0.919
2.993
0.504
0.477
0.472
1.471
0.373
0.346
0.784
2.666
1.108
Standardized
coefficients
Beta
T
Sig.
Collinearity statistics
VIF
0.152
0.053
2 0.052
2 0.007
0.095
0.087
2 0.099
0.132
0.035
2 0.104
2 0.012
2 2.035
3.210
1.288
2 1.104
2 0.163
2.146
2.124
2 2.426
2.821
0.801
2 2.557
2 0.284
0.042
0.001
0.198
0.270
0.870
0.032
0.034
0.016
0.005
0.424
0.011
0.777
1.351
1.038
1.327
1.009
1.188
1.019
1.016
1.325
1.138
1.009
1.092
Notes: This table reports multiple regression results of the relationship between ownership structure,
board composition and other specific characteristics with the level of voluntary disclosures. Variables
are defined in Table I. R 2 ¼ 0.097. Adjusted R 2 ¼ 0.079. F-significance ¼ 0.000. Durbin-Watson
test ¼ 2.021. Number of significant coefficients ¼ 6. N ¼ 559
ownership and disclosure. The first reason for the lack of relationship between
managerial ownership and voluntary disclosure is that the proportion of managerial
ownership is too low (the mean of managerial ownership is only 0.48 percent in this
paper) to give rise to effective promptings to senior managers. Secondly,
Chinese-managerial ownership in listed firms has two conspicuous characteristics
that distinguish it from managerial ownership in the West: it is encouragement not for
good behavior but by qualifications of employees in the firms; in addition, this kind of
encouragement is historical and aimed at the past. Thus, this kind of encouragement
cannot bring effective promptings. The negative relationship is insignificant in state
ownership and voluntary disclosure. A possible explanation of this result is that China
now encourages companies to raise corporate transparency, and state-ownership firms
have began to pay attention to voluntary disclosure. The insignificant coefficient for
LEGAL is consistent with the findings in Xiao et al. (2004) which state that
legal-person ownership significantly affects internet-based mandatory disclosures, but
not internet-based voluntary disclosures. They argue that greater shareholdings by a
legal person do not induce disclosures beyond those mandated by regulatory agencies.
For the board composition, the result shows that the percentage of IND on board
and CEO duality are significant at the 0.05 level related to voluntary disclosure.
Voluntary disclosure increases with a greater percentage of IND on the board
(b6 ¼ 3.124, t ¼ 2.124), which supports H6 and is consistent with the findings in Chen
and Jaggi (2000), who found comprehensive financial disclosures (mandatory and
voluntary) to be positively correlated with the proportion of IND on corporate boards.
In addition, voluntary disclosure decreases with CEO duality (b7 ¼ 2 0.906,
t ¼ 2 2.426), which supports H7 and reflects Forker’s (1992) findings of a
significant-negative relationship between a dominant personality and quality
(extent) of disclosure.
Of the control variables, larger firms (t ¼ 2.821) tend to exhibit more voluntary
disclosure. This result supports numerous previous empirical studies on the
association between firm-specific characteristics and voluntary disclosure. We also
find that firms with higher percentage of intangible assets (t ¼ 2 2.557) are reluctant to
disclose more information, which is contrary to the study of Gaver and Gaver (1993).
Perhaps, the lax enforcement to Intellectual Property Protection Law in China prevents
such firms from protecting their interests. In order to protect their core competitiveness
and intangible assets, firms with growth opportunities tend to forestall disclosure.
However, we find no significant relationship between disclosure and audit reputation.
A possible explanation of this result is that while auditors in BIG 4 likely ensure that
companies have compiled with mandatory-disclosure requirements, they still do not
actively encourage companies to disclose information beyond that what is mandatory.
The leverage ratio is not associated with voluntary disclosure, which is consistent with
the findings of Chow and Wong-Boren (1987) and Wallace et al. (1994). This may be
explained by the fact that creditors may share private information with their debtors.
Conclusions
In this study, we examine the impact of ownership structure and board composition on
corporate voluntary disclosure. We extend previous studies on the determinants of
corporate disclosure in three ways. First, unlike the primary research that to date have
focused on mature capital markets and Asian emerging markets such as those in
Hong Kong (China) and Singapore, we examine corporate governance and corporate
voluntary disclosure in China. Second, we look at the impact of five attributes of ownership
structure on disclosure: blockholder ownership, managerial ownership, state ownership;
legal-person ownership, and foreign listing/shares ownership. Third, we examine the
impact of board composition on corporate disclosure. Board composition is measured by
the proportion of IND and CEO duality. We also control for the impact of FSIZE, leverage,
growth opportunities and auditor reputation on corporate voluntary disclosure.
To measure disclosure, we use an aggregated DSCORE that measures voluntary
disclosure of background information, business information, non-financial and
financial information. Based on a sample of 599 Chinese-listed firms, we find that
higher blockholder ownership and significant foreign listing/shares ownership is
associated with increased-voluntary disclosure. Managerial ownership, state
ownership and legal-person ownership are not related to disclosure. An increase in
IND improves voluntary disclosure and CEO duality reduces disclosure. Finally, we
find that larger firms have greater disclosure, while firms with growth opportunities
are reluctant to disclose information.
Our results have implications regarding policy. First, state ownership and legal-person
ownership are insignificant relative to voluntary disclosure, but blockholder ownership
and foreign listing/shares ownership is positively associated with voluntary disclosure.
Thus, Chinese regulators should commit to facilitating multi-ownership and optimize
ownership structure, while expanding the number and size of companies listed abroad
gradually. In this way, an effective corporate-governance mechanism will materialize to
improve the level of voluntary disclosures in China. Second, when introducing the stock
compensation plans of senior managers in the West, Chinese regulators should establish
guidelines for companies to establish performance-appraisal systems and its
corresponding-incentive mechanisms. Using a performance-appraisal index to
Impact of
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structure
615
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616
implement the ownership-incentive mechanism, the stock compensation of senior
managers would be associated with the performance of the company. This kind of
mechanism can enhance the enthusiasm of senior managers and improve the level of
internal governance and voluntary disclosure. Third, Chinese regulators should
strengthen the network of IND and induce listed companies to raise the proportion of
IND and encourage the separation of Chairman of the board of directors and CEO roles.
This study has some limitations. Firstly, the sample is comprised of companies listed
on SSE and 45.7 percent of representative firms listed in China. Therefore, the results may
not be applied to all listed companies, especially as they were only for 2002. Secondly, the
disclosure checklist does not cover all voluntary disclosures in corporations as employed
and supported in several prior studies. Thirdly, the award of checklist items may be
subjected to errors. However, measures were put into place to ensure that the annual
reports were fully understood before they were used. Despite these limitations, the paper
does provide useful insights. Future research could conduct a longitudinal study to
examine factors that contribute to the change of corporate-voluntary disclosure over time.
In addition, using a larger sample or extending the current research by comparing samples
in China to those of other South-East Asian countries is an avenue for future research.
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Appendix. Items of voluntary disclosure index (DSCORE)
1. Background information
1.1 A statement of corporate goals is provided.
1.2 General statement of corporate strategy is provided.
1.3 Actions to be taken in future year discussed.
1.4 Competitive environment discussed.
1.5 Trade status discussed.
2. Business Information
2.1 Change in sales
2.2 Change in cost of goods sold
2.3 Change in gross profits
2.4 Change in administration expenses
2.5 Change in operating expenses
2.6 Change in financial expenses
2.7 Change in inventory
2.8 Change in accounts receivable
2.9 R&D expenditures
2.10 Comparison of previous plan to actual achievement
2.11 Operating plan next year
2.12 Future profits forecasted
2.13 Order backlog
3. Financial information
3.1 Liquidity ratio
3.2 Gearing ratio
3.3 Inventory turnover
3.4 Turnover of receivables
4. Non-financial information
4.1 Staff training
4.2 ISO or other quality awards
4.3 Other awards
4.4 Social commonweal
4.5 Brand
4.6 Names of the top five suppliers/customers
4.7 Enterprise culture
4.8 Environment protection
Corresponding author
Xiao Huafang can be contacted at: [email protected]
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