The Impact of Corporate Governance and Ownership Structure on Voluntary Disclosure in Annual Reports among Listed Jordanian Companies

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Procedia - Social and Behavioral Sciences 129 ( 2014 ) 341 – 348 Available online at

1877-0428 © 2014 The Authors. Published by Elsevier Ltd. Open access under CC BY-NC-ND license. Selection and peer-review under responsibility of Universiti Malaysia Kelantan

doi: 10.1016/j.sbspro.2014.03.686



International Conference on Innovation, Management and Technology Research,

Malaysia, 22

23 September, 2013

The Impact of Corporate Governance and Ownership

Structure on Voluntary Disclosure in Annual Reports

among Listed Jordanian Companies

Amer Alhazaimeh, Ravindran Palaniappan, Mahmoud Almsafir


aGraduate Basiness School,College of Graduate Studies , Tenaga National University, Jalan IKRAM-UNITEN,43000 Kajang,



In the new economy, companies try to convey to their stakeholders that they are a good investment and Attempt highlight the good value of the company via disclosure of pertinent information in the annual reports. This paper investigates the relationship between corporate governance and ownership structure on voluntary disclosure, with a particular focus on variables affecting in voluntary disclosure of listed companies in the Amman Stock Exchange (ASE). Using a dynamic panel system GMM estimation for the period 2002-2011, this study of 72 Jordanian finds that the listed companies at ASE during 2002-2011 had shown a significant degree of voluntary disclosure in line with greater corporate governance awareness and implementation in Jordan. In particular, this paper found board activity, foreign ownership, non –executive directors and block holder ownership to be significant in influencing voluntary disclosure. Finally, this paper found that the voluntary disclosure in the annual reports does potentially affect the market capitalization.

© 2013 Published by Elsevier Ltd. Selection and peer-review under responsibility of Universiti Malaysia Kelantan, Malaysia

Keywords: Corporate governance, ownership, voluntary disclosure, dynamic panel data

1. Introduction

Accounting disclosure is very important to all stakeholders; it provides them with the necessary information to reduce uncertainty and helps them to make suitable economic and financial decisions. The annual financial reports published by companies are considered one of the most important sources of information to outsiders (Betosan 1997). Annual reports are used as a communication tool to

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© 2014 The Authors. Published by Elsevier Ltd. Open access under CC BY-NC-ND license. Selection and peer-review under responsibility of Universiti Malaysia Kelantan


communicate both quantitative and qualitative corporate information with stakeholders or with other interested parties (Barko, Hancock & Izan, 2006).

These financial reports include information that may help in recognizing the financial position of the company, reflect the operation, structural and financial picture of the corporations to the stakeholders;, sometime the information’s provided may not be useful enough to meet the needs of some beneficiaries like investors, creditors, customers and the public, and anybody who is interested in the success of corporations. Disclosure within financial reports can be classified into two parts: mandatory and voluntary (non- mandatory) disclosure. Mandatory disclosure which is as any financial item disclosed within companies annual reports that are prescribed by accounting standards and / or the stock exchange regulations (Penmann, 1988). Voluntary disclosure means making public the financial and non-financial information regarding a firm’s operations without any legal requirement (Botosan, 1997; Naser & Nuseibeh, 2003; Alsaeed, 2006). Nasir, N. (2004) understanding why companies voluntarily disclose information is useful for both producers and users of accounting information, as well as for accounting policy (Buzbee, 1975; Meek, Gray & Roberts, 1995).

Therefore, evidently today, various stock exchanges around the world require companies to prepare financial reports, with the objective to providing important stakeholders with timely and high quality financial information to help them make informed financing and investing decisions. In this context, Jordan has begun to implement the same financial procedure. Globalization has become the key word in the new world economy. Technology, communication and intense flow of information and trading across borders all make the world a small village; Jordan realizes that it needs to consider and adopt positive changes in order to be at par with other nations. Indeed, Jordan was one of the few countries in the Middle East to realize the importance of coping with the new trends of change occurring in the world. It is the first Arab country to join the Board of Directors of the International Accounting Standards Committee (IASC) in 1988, and has over the last 20 years since 1990 been practicing the International Accounting Standards (Naser, Al-Khatib, & Karbhari, 2002).

The rest of the paper is structured as follows: Section 2 provides the literature review on corporate governance and ownership. Section 3 describes research methodology, Section 4 presents the empirical results, and finally Section 5 provides a summary and some conclusions.

2. Literature Review

Corporate governance has been in the spotlight for the past decade. Numerous scandals, such as thoseinvolving Enron, Tyco, Imclone Systems, WorldCom, exposed failures in corporate governance that shook the capital markets in developed countries. Restoration of public confidence or trust becomes the main agenda for today's business leaders (Heidi & Marlene, 2003). Disclosing more information on the company's capital structure and control can be an important way to achieve that goal (Rogers, 2006).

Beasley, et, al. (2000) emphasis the crucial role of full disclosure in avoiding financial reporting fraud. Guan, et al.(2007) find that to protect investors' rights and enhance information transparency, the regulatory authorities of securities markets and information intermediaries have exerted great effort to advocate corporate governance, thus lessening the occurrence of adverse selection and agency problems as a result of the information asymmetry. Corporate governance has been studied as a mechanism which affects corporate disclosure. Transparency, openness, disclosure and trust, which form the integral part of corporate governance, can exert pressures to improve financial performance (Rogers, 2006).


According to Archambault & Archambault, (2003), the level of accounting disclosure differs from one country to another and from one company to another in the same country. This is controlled by the different standards and regulations governing the disclosure of accounting to be followed and the degree of flexibility of their applicability. One important consequence of these differences is that it may negatively affect the quality of investment decisions based on information contained in the financial report. Improving the high level of disclosure information is positively thought to affect the investors’


Fama & Jensen (1983) and Jensen & Meckling, (1976) theorize that corporate governance mechanisms that are well practiced could benefit shareholders financially by exercising more control on the company’s management. Moreover, the corporate governance characteristics can be seen as proxies for independence and the alignment of interests between management and the shareholders in minimizing the agency conflict.

Ownership structure is also considered one of the factors that affect the quality of the financial reporting process. According to Eng and Mak (2003), the structure of ownership determines the level of monitoring, and thereby the level of disclosure.

Many scholarly articles have been written and devoted more attention recently to the impact of corporate governance characteristics on voluntary disclosure among listed corporations in both developed and developing countries. They also draw attention to weak corporate governance in developing, emerging and transnational economies (Bremer & Elias, 2007). Due to the fact that no previous studies were keen to examine the impact of corporate governance characteristics, ownership structure and the extent of voluntary disclosure in Middle Eastern countries in general and Jordan in particular, this study hopes to bridge the gap Unlike the United States, the United Kingdom and Europe. This research is considered important for this region, because companies in this region have less incentive for transparent and frequent disclosure than their Anglo-American and European counterparts.

3. Research Methodology

3.1 Data

This study focuses on financial reports provided by companies listed on the Amman Stock Exchange (ASE) as per required by the Directives for Listing Securities on ASE for the period (2001-2010) regulations. This study will be applied on 73 non- financial companies listed in Amman stock exchange. On the other hand, the financial sector is not included because it has special regulations pertaining to financial reporting, issued from Jordan Central Bank and the Insurance Commission.

The selection of the period (2002 to 2011) was made due to the following reasons. First, the year 2002 was chosen according to Securities Law No.76 of 2002 was issued to support the voluntary disclosure. Second, the year 2011 was also chosen because the 2011 annual reports are considered as the latest source of information available at the time of the study for the entire sample. Data was gathered from the annual reports of selected companies and the data also obtained through the Bloomberg databases, for the period 2002-2011, and other data from other resources like Jordan Securities Commission and Amman Stock Exchange.


3.2 Variables Definitions

Table 1 report briefly discusses the specific definitions of the variables used in this paper.


Voluntary disclosure (VDI) The disclosure index is used to measure the extent of voluntary

disclosure (Cooke, (1989); Meek et al, (1995); Ghazali &Weetman, (2006); Haniffa & Cooke,(2002)and Nassir,(2004); Al-Shammari, (2008).

Audit committee (ACOM) Audit committee data will be coded (1) to indicate existence of

audit committee and (0) to indicate non-existence (Ho & Wong, 2001, Dezoort, 1997 and Wolnizer, 1995).

Board compensation (BCOM) Board compensation is measured by the log of the total amount

of compensation given to the board of directors for each company.

Board activity (BACT) Board activity is measured as the number of meetings of the

board of directors per year (Anderson (2005).

Board size (BSIZE) Board size is derived by counting the total number of directors

on the board (Bushman, Chen, Engel, & Smith, 2004).

Non –executive directors (NEXED) Percentage of non –executive directors will be measured by

dividing the number of non-executive directors with total number of directors on the board (Franks, Mayer, & Renneboog,

2001). Chen & Jaggi (2000) and Haniffa & Cooke (2002).

Large audit firm (LAUD) Large audit firm will be measured by (1) if company has audited

from big 4 audit firms and (0) if otherwise (Jensen & Meckling, 1976; Watts & Zimmerman, 1986).

Foreign ownership


Foreign ownership will be measured by log of percentage of shares owned by foreigners to total number of shares issued, following (Haniffa and Cooke, 2002; Wang et al, 2008).

Government ownership (GOW) Government ownership will be measure by percentage of shares

owned by government to total number of shares issued, following (Cheng and Courtenay, 2006; Eng and Mak, 2003; Wang et al, 2008).

Block holder ownership (BLK) Block holder ownership measured by calculating the proportion

of shares held by institutional investors; this proportion must equal or exceed 5% of total shares. Eng and Mak (2003).

Number of shareholders

(NSHA) Number of shareholders measured by counting the total number

of the shareholders for each company (Al Muhannadi, 2004; Gharaebeh & Naber, 1987; Malone, Fries, & Jones, 1993; Singhvi & Desai, 1971).

3.3 Dynamic Panel GMM

Generalized Method of Moments (GMM) is a dynamic panel approach which takes account of the impact of past voluntary disclosures on the current one. It employs a sample with a short time-period but a large number of firms. System GMM was developed by Arellano and Bover (1995) and Blundell and Bond (1998) to improve the efficiency of first difference GMM developed by Arellano and Bond (1991). It consists of two equations of level and first difference that each one adopts Instrumental Variables (IV) to remove the correlation between explanatory variables and residuals. Generally speaking, GMM approach has salient advantages in dealing with short-sample periods, heteroskedasticity, autocorrelation, and heterogeneity, endogenous and predetermined explanatory variables. Hence, it improves the efficiency of the estimates dramatically. The success of the GMM estimator in producing unbiased, consistent and efficient results is highly dependent on the adoption of the appropriate instruments. Therefore, there are three diagnostic tests; namely Hansen/Sargan test of over identifying restrictions, AR (2), and the difference in Hansen test.


First, the Hansen/Sargan test of over-identifying restrictions examines the overall validity of the instruments by analyzing the sample analogue of the moments conditions used in the estimation process. If the moment condition holds, then the instrument is valid and the model has been correctly specified. Second, AR (2) conducts a test on residuals to show whether there is no serial correlation among the transformed error terms. Third, to test the validity of extra moment’s conditions on the system GMM, the difference in Hansen test is used. This test measures the difference between the Hansen statistic generated from the system GMM and the difference GMM. Failure to reject the three null hypotheses gives support to the estimated model

4. Results

Table 2 reports the estimated results of the determinants of voluntary disclosure using two-step system GMM. The results indicate voluntary disclosure has a trend over time by which past voluntary disclosure significantly influences the current one. Nevertheless, some factors concurrently affect disclosures, such as board compensation, foreign ownership, government ownership, and block holder ownership. For instance, block holder ownership negatively and significantly reduces voluntary disclosures. Specifically, an increase in the block holder ownership leads to a contemporaneously decline in the voluntary disclosure by 0.04228 point. Higher board compensation and foreign ownership urge firms to disclose their information voluntarily. The results imply insignificant coefficients for some factors, such as audit committee, board activity, and non –executive directors in spite of our expectation of significant contribution to the voluntary disclosure. It can be due to the fact that they are still far from their efficient points which require policy makers and managers to adopt strategies to facilitate the process of disclosure.

The results of the both specification tests that are AR (2) for testing the serial correlation and the Hansen test for testing the validity of instrument adopted are also valid. As shown in Table 2, the p-values for the AR (2) and Hansen tests are higher than 0.10, that is, statistically insignificant at the ten percent significance level. This implies that the empirical model has been correctly specified because there is no serial correlation (autocorrelation) in the transformed residuals, and the instruments (moments conditions) used in the models are valid. The additional moment conditions such as difference in Hansen tests are also statistically insignificant but not reported in order to save space.

Table 2: The Determinants of Voluntary Disclosure: Two-Step System GMM

Coefficients Standard Error P-Value

Voluntary index 0.22461*** 0.01455 0

Audit committee 0.59656 0.98710 0.546

Board compensation 0.00003** 0.00001 0.032

Board activity 0.21840 0.17590 0.214

Board size 0.02137 0.16490 0.897

Non –executive directors 0.73462 1.18703 0.536

Number of employee 0.00022 0.00039 0.568 Foreign ownership 0.05998*** 0.01301 0 Government ownership 0.05019*** 0.00893 0 Number of shareholders 0.00003 0.00004 0.493 Block holder -0.04228*** 0.01476 0.004 Economic Freedom 1.65412 0.13970 0 Number of instruments 56 Number of observations 598 Number of groups 72 AR(2)-p value 0.350

Hansen/Sargan test –p value 0.563

*, **, *** denote 10%, 5% and 1% significant levels, respectively. Year dummies and constant are not included in order to save space. All p-values of the difference in Hansen tests of exogeneity of instruments subsets have also been rejected at least at 10 percent significant level.


5. Conclusion

The role of voluntary disclosure has been studied extensively in advanced countries; however little attention has been given to investigating this issue in a small-open economy. Therefore, to fill this gap in the previous literature, this study focuses on the relationship between corporate governance and ownership structure on voluntary disclosure in annual reports among listed Jordanian companies using a dynamic panel data framework.

This paper aims to shed light on the determinants of the extent of voluntary disclosure in the Jordanian listed firms for the period (2002-2011). Findings reveal that Jordanian companies adopt voluntary disclosure on different types of information. This paper additionally examined the effect of corporate governance and ownership structure on the extent of voluntary disclosure. The results indicate voluntary disclosure has a trend over time by which past voluntary disclosure significantly influences the current one. Nevertheless, some factors concurrently affect disclosures, such as board compensation, foreign ownership, government ownership, and block holder ownership. For instance, block holder ownership negatively and significantly reduces voluntary disclosures. The study also reveals that larger companies disclose more information than smaller companies in Jordan.


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Table 1 report briefly discusses the specific definitions of the variables used in  this paper

Table 1

report briefly discusses the specific definitions of the variables used in this paper p.4
Table 2 reports the estimated results of the determinants  of voluntary  disclosure  using two-step  system GMM

Table 2

reports the estimated results of the determinants of voluntary disclosure using two-step system GMM p.5