The impact of corporate governance mechanisms on financial reporting transparency

Abstract

Corporate governance has been raised as one of the most important issues among the international business environment since the beginning of the twenty-first century. At first, corporate governance basic principles focused on firm’s strategies and the rights of their shareholders but these principles has been changed into the rights of all stakeholders and society through researchers new viewpoints. Although corporate governance codes and regulations are different in various countries, there is a common unanimity that better compliance of corporate governance improves financial reporting quality and transparency. The aim of this paper is to investigate the impact of corporate governance mechanisms on financial reporting transparency in Tehran Stock Exchange over a seven year period (from 2006 to 2012). Besides we have specially reviewed related researches and topics about corporate governance in various countries which their results were discussed in different parts of the article. In order to examine the hypothesis a sample of 67 companies is used. In this paper we used ownership concentration, institutional ownership, board independence, board size, CEO duality and CEO tenure as the corporate governance mechanisms. We also used earnings management behavior by employing Kasznik model (the absolute value of abnormal accruals) as a measure of financial reporting transparency. To test research hypothesis a multiple regression with estimated generalized least square method is employed. The findings indicate that ownership concentration, institutional ownership, board independence and CEO tenure has positively affected financial reporting transparency through earnings management behavior. On the other hand board size and CEO duality has negatively affected financial reporting transparency through earnings management behavior.

Corporate Governance and Corporate Transparency: A Sri Lankan Case

“…and adjusted R-squared was improved up to 15% (Approx.). The AUDIT and FEMALE both have a significant impact on OT at a 5% significant level (Alkhatib and Marji, 2012;Kohansal et al, 2017;Liu et al, 2016;Torea et al, 2016;Zaheer, 2013). It reveals that 15% of the impact is created by AUDIT and FEMALE as the variables which have been specified by the model and the other 85% of the impact is created by other variables which have not been specified in the model.…”

“…based on the existing studies, it also found that board independence has no significant impact on CT (Liu et al, 2016;Torea et al, 2016). Kohansal et al (2017) revealed that board size has no impact on financial reporting transparency. Torea et al (2016) found that CEO duality has no impact on transparency.…”

“…Al-Khonain and Al-Adeem (2020) found that corporate governance improves reporting quality. However, Kohansal et al (2017) showed a negative and significant correlation between the board of directors size and management duality with reporting transparency. This mixed outcome requires further study to ensure the effect of corporate governance on transparency.…”

“…Zaheer (2013) examined the larger and smaller boards and found that larger boards have a positive effect on transparency comparatively. But Durnev and Kim (2005) information transparency is negatively impacted by board size whereas Kohansal et al (2017) also showed that financial reporting transparency is impacted by board size. Thus it can be developed following hypothesis to be tested.…”

“…Inconsistent, Zaheer (2013) also found the same result. Kohansal et al (2017) revealed that the separation of the CEO and chairman negatively impact financial reporting transparency. But Liu, Valenty and Chen (2016) it will negatively impact transparency only when there is a zero family ownership status.…”