Governance, Disclosure and Share Price


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Good corporate governance means quicker, more frequent disclosures to the stock market. Or does it? The evidence varies by country, and in our research we wanted to check the relationship.

We used cross-country data from 23 OECD countries, firms with financial years ending between 1 January 2003 and 31 December 2008. We looked at company announcement information from more than 2,000 different firms, and share prices relating to 5,800 different firms.

To determine the levels of corporate governance in each company we used Institutional Shareholder Services (ISS) CG data to create an index of ‘good’ CG practice.  This includes an assessment of the function of the board and its committees, stock ownership and compensation of directors, and provisions in the firm’s charter, taking in to account the level of independence of the main board committees (audit, nomination and remuneration) which perform important roles in assisting the main board.

The research asked questions about the association between ‘better’ CG and disclosure (in terms of the number of documents released to the stock exchange), as well as the timeliness of disclosures, and the speed with which value relevant information is incorporated into share prices – important aspects of a firm’s transparency.

To assess the timeliness of prices we focused on the flow of information to the market up to the time of the company’s annual earnings release and we assess the speed with which that information is integrated into share prices. We also then investigated differences across countries with different levels of investor protection and litigation pressure.

Our results suggest better CG is associated with a greater number of disclosures to the stock market (i.e. a complementary relationship between CG and firm disclosure). This is consistent with research carried out for Australia, Canada and Japan. Our analysis of the timeliness of disclosures suggests better-governed firms are more timely on the whole at releasing documents to the stock market. Also in common law countries, better governed firms increase the timeliness of documents relating to bad news items, demonstrating a conservative bias. 

But when it comes to transparency, we find better CG is not associated with more timely price discovery. This would suggest firms with better CG substitute governance processes for greater transparency, proxied by more timely release of information to the share market, or alternatively that market participants take longer to digest the greater amount of information disclosed by better-governed firms.

Additional analysis suggests CG is effective at increasing the timeliness of prices for firms in common law countries where there is a low level of firm disclosure (relative to their industry and country). This perhaps points to the notion of an ‘optimal’ level of disclosure which market participants are able to process effectively.

Our analysis also considers the impact of share ownership. Firms with greater proportions of closely held shares are associated with fewer disclosures, which is consistent with the view that firms controlled by insiders are less willing to release information to outside parties. We also find evidence that closely held shares are associated with more timely good news (in documents and in prices).

Future work we have in progress examines the effect of CG and ownership on analyst following and the properties of analyst forecasts. As the results of this study show, better-governed firms release more information. So the question remains: is this information processed effectively by analysts, and if so, how is it reflected in attributes of their forecasts? The answer may shed further light on our results for the timeliness of price discovery and help explain some unexpected findings.

Dr Wendy Beekes

Dr Wendy Beekes

Guest Post: Dr Wendy Beekes and Dr Qiyu Zhang are Lecturers in the Accounting and Finance department at Lancaster University Management School. Professor Philip Brown is an Emeritus Professor at University of Western Australia and Visiting Professor at Lancaster University Management School.  Dr Wenwen Zhan is a Portfolio Manager at China Merchants Securities. Publisher: Their study is entitled Corporate governance, companies’ disclosure practices, and market transparency: a cross country study. I added the links and graphics, including those wonderful ads. 

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