huafang2007

Ownership structure, board
composition and corporate
voluntary disclosure
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
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 current issue and full text archive of this journal is available at
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Managerial Auditing Journal
Vol. 22 No. 6, 2007
pp. 604-619
qEmerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900710759406

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.
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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
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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.
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:
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
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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.
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.
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