arcay and vázquez - 2005 - corporate characteristics, governance rules and the extent of voluntary disclosure in spain

Our results show that a firm’s size, along with some mechanisms of corporate governance such as the proportion of independents on the board, the appointment of anaudit committee, and dir

GOVERNANCE RULES AND THE EXTENT OF VOLUNTARY

DISCLOSURE IN SPAIN

M Rosario Babı´o Arcay and

M Flora Muin˜o Va´zquez

ABSTRACT

This study examines the relationships among corporate characteristics,the governance structure of the firm, and its disclosure policy Empiricalevidence supporting this investigation has been gathered from a sample ofSpanish firms listed on the Madrid Stock Exchange This setting is ofinterest because of its low level of investor protection, high ownershipconcentration, and poorly developed capital market Our results show that

a firm’s size, along with some mechanisms of corporate governance such

as the proportion of independents on the board, the appointment of anaudit committee, and directors’ shareholdings and stock option plans, arepositively related to voluntary disclosure We have also observed thatthese governance practices are significantly influenced by cross-listingsand by the ownership structure of the firm

1 INTRODUCTION

Corporate disclosure is of critical importance for the efficient functioning ofcapital markets The Special Committee on Financial Reporting of theAmerican Institute of Certified Public Accountants (AICPA) stated:

Few areas are more central to the national economic interest than the role of business reporting in promoting an effective process of capital allocation ( AICPA, 1994 , p 2).

Although regulators have enforced legislation to ensure that companiesprovide at least a minimum set of information to third parties,1legal re-quirements do not always satisfy stakeholder demands.2Not surprisingly,there is considerable variation among companies in the disclosure of infor-mation that is not legally required

Research on the determinants of voluntary disclosure initially focused oncorporate characteristics.3The basic assumption is that corporate disclosurepolicy is determined by a trade-off between the costs and benefits associatedwith disclosure,4for which corporate characteristics such as company size(Depoers, 2000), listing status (Meek, Roberts & Gray, 1995), and a firm’sperformance (Singhvi & Desai, 1971) may serve as useful proxies On theother hand, recent research suggests that factors other than cost-benefitanalysis may determine a firm’s disclosure policy In particular, corporategovernance mechanisms may exert some control over a manager’s actions(Core, 2001, p 444), and such mechanisms may help to fulfil the informa-tional demands of stakeholders For example, Watts and Zimmerman(1990), drawing on the insights of the theory of the firm, suggest that man-agers make accounting choices that can be considered to be efficient whenthey maximize the value of the firm, or opportunistic if they enhance themanager’s welfare at the expense of other contracting parties Therefore, theargument of efficiency assumes an alignment between organizational andmanagerial goals

The board of directors is regarded as a relevant mechanism in the sight of managerial actions5(Fama & Jensen, 1983) Researchers have ex-amined the role played by certain practices aimed at enhancing themonitoring role of the board on the provision of voluntary information(Chen & Jaggi, 2000;Ho & Wong, 2001;Nagar, Nanda & Wysocki, 2003).Comparisons among these studies provide some interesting insights Forexample, Chen and Jaggi (2000) found that the appointment of non-executive directors was significantly related to disclosure, whereasHo andWong (2001) did not find it to be a significant variable in explaining cor-porate disclosure Moreover, previous research focused on a particular

over-corporate governance mechanism (i.e the board of directors), but as

Bushman and Smith (2001, p 286)stated, a complete understanding of therole played by corporate governance requires an explicit recognition of in-teractions across different mechanisms

In this paper, we seek to extend previous research in three different ways:(1) by exploring the role played by a number of good governance practices

in enhancing corporate disclosure, (2) by examining the role of majorityshareholders in the adoption of practices of good governance, and (3) byanalysing the direct and indirect effects of various corporate characteristics

on voluntary disclosure

First, we analyse the role played by the board of directors in enhancingcorporate disclosure by examining a wide range of practices of good gov-ernance: the appointment of independent directors, the formation of anaudit committee, the separation of the functions of CEO and chairman ofthe board, the participation of board members in the capital of the com-pany, the establishment of stock option plans as a means of directors’ re-muneration, and the size of the board Nonetheless, the individual analysis

of a particular practice of good governance does not allow for a full sessment of its role in promoting transparency, inasmuch as complement-arities and substitutability between them make the whole worthier than themere aggregation of its individual constituents.6In this study, we have em-ployed confirmatory factor analysis to reduce governance practices to asingle factor for the assessment of their global effect on corporate disclosure.Second, our analysis takes into account the role played by majorityshareholders in corporate governance, as well as interactions between theadoption of good governance practices and the ownership structure of thecompany Evidence is gathered from Spain, a country especially suited tothe development of this analysis In contrast with common law countries,the Spanish institutional setting has in common with other European Con-tinental countries a relatively low number of listed companies,7an illiquidcapital market, the existence of a large number of inter-corporate share-holdings and, above all, a high level of concentration in corporate share-holdings8(Leech & Manjo´n, 2002, p 169) Research has shown that unlikecivil-law nations, common-law countries enact rules and legislation to shieldthe informational rights of investors As noted by La Porta, Lopez-deSilanes, Shleifer and Vishny (1998), civil-law countries enforce loose legis-lation because of the determinant role of ownership concentration9 andownership structure determines the governance practices followed by theircompanies.Wymeersch (2002)argues that compliance with the recommen-dations of codes of good governance in European countries is more difficult

as-than in the U.K because of the greater presence of majority shareholders inEurope – investors who do not wish to see their influence reduced by theappointment of independent directors Moreover, non-compliance with rec-ommendations such as the separation of the functions of the CEO and thechairman of the board may not be as negatively assessed in civil-law coun-tries as it is in common-law countries, which have been the focus of morestudies For example, the Spanish code of good governance recognizes thatthe combining of CEO and chairman positions is a common practice inSpain, because it is thought to support leadership both internally and ex-ternally (Olivencia Committee, 1998).

Finally, our analysis of the determinants of voluntary disclosure focuses

on such general company characteristics as size, cross-listing status, and theindustry in which it operates We employed structural equation modeling toanalyse both the direct and indirect effects of these characteristics on cor-porate disclosure In contrast with previous research, which focused on thedirect effect attributed to the balance between benefits and costs linked tothe provision of information, we also recognize the effect that these char-acteristics exert on the firms’ practices of good governance (Denis & Sarin,

1999;Doige, 2004), which in turn would affect corporate disclosure policy.Corporate governance in Spain has relied heavily upon the role played bymajority shareholders who were usually involved in the management of thecompany Nevertheless, during the 1990s, free floating capital started torepresent a significant proportion of equity in some listed companies, givingrise to greater concern about corporate governance and the protection ofinvestors’ interests Hence, Spain provides a suitable environment in which

to test for the existence of interactions among corporate characteristics,good governance rules, and corporate disclosure

The remainder of the paper is structured as follows: Section 2 presents areview of the literature and the development of hypotheses to be tested;Section 3 provides a description of the data and methodology used in thisstudy; Section 4 contains the empirical results of the study; and in Section 5

we discuss the results and conclusions

2 CORPORATE DISCLOSURE AND

FIRM CHARACTERISTICS

Agency costs arising from the separation of ownership and control in ern corporate forms may be reduced by strengthening the monitoring and

mod-overseeing functions of the board of directors.10In large corporations, holders are not involved in the management and control of the corporation,but delegate such responsibilities to the board of directors to ensure goalcongruence between shareholders’ interests and management actions Thecorporate board’s role of overseeing is particularly relevant in protecting theinterests of powerless minority shareholders.11In fact, commissions chargedwith the preparation of the so-called codes of good governance focused theirattention on the composition and functioning of the board of directors.Practices such as the appointment of non-executive directors, the separation

share-of the functions share-of chairman share-of the board and CEO, or the creation share-ofspecialized committees inside the board, such as the audit committee and thecompensation committee, were considered as essential mechanisms to im-prove the monitoring of management.12They reduce the manager’s latitude

to act opportunistically and contribute to the alignment of the internal andexternal interests of the organization (Denis, 2001, p 195)

Independent non-executive directors Codes of good governance include anumber of recommendations, one of them being the appointment of non-executive directors, an inclusion designed to reduce agency conflicts betweenmanagers and shareholders (Gregory & Simmelkjaer, 2002, p 53) Arguably,boards controlled by management may result in practices of collusion, amongthem the expropriation of shareholders’ wealth Under such rationality, theinclusion of outsiders on the board should reduce the likelihood of collusivearrangements, inasmuch as non-executive directors are disciplined by the mar-ket, which assesses and rewards performance (Fama, 1980, pp 2993–2294).The extant literature provides empirical evidence supporting the role ofnon-executive directors in promoting higher transparency and better dis-closure policies.Chen and Jaggi (2000)found a positive association betweenthe proportion of independent directors on the board and the extent of afirm’s disclosure The proportion of outside directors on corporate boardswas also negatively associated with indicators that measured the (poor)quality of the information disclosed, such as the publication of fraudulent ordefective financial statements (Beasley, 1996; Peasnell, Pope, & Young,

2001), as well as measures of earnings management (Peasnell, Pope, &Young, 2000) These results suggest that companies with a higher propor-tion of independents on the board show a greater concern for disclosure.Hence, we hypothesize that:

H1a voluntary disclosure is positively related to the proportion of dependent directors on the board

in-Audit committee The audit committee operates as a monitoring anism to improve the quality of information conveyed to external parties(Pincus, Rusbarsky, & Wong, 1989) and oversees the preparation and com-munication of financial information to third parties to ensure that such datafulfils the requisites of clarity and the completeness of disclosure (SmithReport, 2003, p 12) Empirical evidence indicates that voluntary disclosure

mech-is positively related to the functioning of an audit committee (Ho & Wong,

2001) Furthermore, Dechow, Sloan and Sweeney (1996) and Peasnell,Pope, & Young (2001) observed that audit committees help to reduce thelikelihood of accounting fraud These factors lead us to hypothesize:H1b voluntary disclosure is positively related to the existence of an auditcommittee

Chairman of the board and chief executive officer being the same person.Separating the positions of CEO and chairman of the board arguably helps

to improve the monitoring function of the board.Jensen (1993)argues thatconflicts of interests and difficulties in performing the monitoring functionover management arise when the same individual holds both positions Thisdual-role situation is quite common in some European countries (U.K.,France, Spain, and Italy), but it may require a balance The Olivencia Code

of 1998 states, for example, that these dual roles may support leadershipwithin the organization and towards external parties, but recommends theappointment of independent directors in order to balance the dominance ofthe CEO/chairman of the board A number of studies have identified thecombining of these two positions with poor disclosure practices For ex-ample,Forker (1992)found a significant negative relationship between thecombination of the two roles and the extent of disclosure Furthermore,Hoand Wong (2001)observed a negative relationship, albeit a non-significantone, between corporate disclosure and the presence of a dominant person-ality on the firm’s board Therefore, we are led to hypothesize:

H1c voluntary disclosure is positively related to the separation of thefunctions of CEO and chairman

Board participation in the capital of the company Directors’ shareholdingsconstitute a relevant vehicle for monitoring the management, as it tends torestrain managerial incentives to divert resources that may ultimately jeop-ardize the attainment of shareholder value maximization (Jensen &Meckling, 1976) Furthermore, directors’ shareholdings help to align goalsand financial incentives of board members with those of outside sharehold-ers (Bushman, Chen, Engel, & Smith, 2004, p 177) Shivdasani (1993)

observed that, relative to a control sample, outside directors in firms that aretargets of hostile takeovers have lower ownership stakes.Bhagat, Carey andElson (1999) found a positive correlation between the directors’ stock own-ership and firm’s performance, as well as a positive correlation between di-rector’s personal equity holdings and the likelihood of a disciplinary-typeCEO succession in poorly performing companies On the other hand, theexamination of insider shareholdings has shown the existence of a non-linearrelationship between ownership and a firm’s value – as ownership increases,firm value rises up to a point, and then decreases (McConnell & Servaes,

1990;Short & Keasey, 1999; Faccio & Lasfer, 1999) The authors of thesestudies considered the non-linearity between a firm’s value and ownership to

be a consequence of the entrenchment effect associated with high levels ofmanagerial ownership In cases of low levels of director ownership, therefore,the monitoring role of the board is strengthened, which has a positive effect

on voluntary corporate disclosure Hence, we hypothesize that:

H1d voluntary disclosure is positively related to board participation inthe capital of the company

Stock option plans as directors’ pay Stock option plans serve the purpose

of compensating board members by aligning their interests with the firm’sperformance; increases in share prices lead to greater compensation forboard members (Jensen & Murphy, 1990; Tosi & Gomez-Mejia, 1989)

Gutie´rrez, Llore´ns and Arago´n (2000, p 426) suggest that the linkage ofmanagement compensation to performance results in a transfer of risk tomanagement and acts as a deterrent to opportunistic behaviour In thisrespect, empirical evidence shows that stock option plans for outside direc-tors improves a firm’s value (Fich & Shivdasani, 2004) and increases themonitoring role played by the board (Perry, 2000) Moreover, a number ofstudies examines the relationship between stock options and disclosurepractices Nagar, Nanda and Wysocki (2003, p 287) argue that generalstock-priced-based incentives represent an effective means of encouragingboth good and bad news disclosures; stock price appreciation promotes therelease of good news, whereas withholding bad news may lead to litigationcosts and a decrease in stock price, because investors may interpret non-disclosure as ‘‘worse’’ news (Verrechia, 1983) In this respect, Miller andPiotroski (2000) and Nagar, Nanda and Wysocki (2003)report a positiveassociation between corporate disclosure and the proportion of CEO com-pensation affected by stock price Although these studies refer to the com-pensation of managers rather than the compensation of directors, we expect

to observe the same type of incentives to disclosure when directors benefitfrom stock option plans This leads us to hypothesize:

H1e voluntary disclosure is positively related to the establishment ofstock option plans as directors’ remuneration

Board size In addition to the foregoing mechanisms for aligning agement and shareholder interests, codes of good governance usually rec-ommend limitations to the size of a board.13By restricting the number ofdirectors, it is believed that the exchange of ideas between board memberswill be enhanced, as well as flexibility in the decision-making process.Jensen(1993, p 865)argues that small boards are more effective in monitoring theCEO and are tougher for the CEO or the chairman to manipulate In asimilar vein,Yermack (1996)has shown that firms with smaller boards arevalued more highly by the market than are their counterparts with largerboards; whereas Vafeas (2000) has observed that investors place highervalue on earnings information when provided by firms with smaller boards.Investigations have also examined the quality of disclosure and its relation-ship with board size For example,Peasnell, Pope and Young (2001)found atendency, albeit statistically non-significant, for mean board size to behigher for firms reporting defective financial statements than for those in-cluded in their control sample The strength of these arguments, however,leads us to hypothesize:

man-H1f voluntary disclosure is negatively related to the size of the board.The adoption of any one of the above-mentioned practices of good gov-ernance does not exclude the assumption of others In contrast, the effect ofsome practices may be strengthened when other rules are observed As anexample,Peasnell, Pope and Young (2000)observed that the role played byindependent directors was enhanced by the functioning of a board auditcommittee Moreover, non-compliance with some rules of good governancemay be partially offset by the adoption of others Gul and Leung (2004)

have shown that the presence of highly experienced non-executive directors

on the board tends to moderate the negative effect of combining the sitions of CEO and chairman As a consequence, we expect that the greaterthe degree of compliance with codes of good governance, the greater theimprovement in corporate disclosure Hence, we formulate the followinggeneral hypothesis:

po-H1 voluntary disclosure is positively related to the adoption of rules ofgood governance

The ownership structure of a firm may be a possible determinant of ganizational disclosure (Raffournier, 1995) At one extreme, high levels ofconcentration of capital may be accompanied by the owner’s considerableinvolvement in the firm’s management, which, in turn, may lead to unre-stricted access to information Under these circumstances, the demand forinformation would be very low, or even absent, particularly if the managerowns all the firm’s shares On the other hand, in cases of dispersion ofownership, investors lack first-hand access to information, and this may lead

or-to increased demands for organizational information that can be used or-tomonitor management (Gelb, 2000, p 169) In this respect,McKinnon andDalimunthe (1993, p 37)suggest that voluntary disclosure may be helpful inreducing conflicts between managers and shareholders that arise when afirm’s shares are widely held Furthermore, ownership dispersion may in-fluence the supply of information For example,Craswell and Taylor (1992,

p 299)argue that increases in the separation of ownership and control arelikely to be accompanied by additional disclosures of information to thirdparties By overcoming owners’ perceived asymmetry of information, man-agement expects to reduce the discount implicit in its compensation pack-age Additionally, the ownership structure may have a significant impact onthe adoption of rules of good governance which, in turn, will affect cor-porate disclosure As suggested byWymeersch (2002), compliance with therecommendations of codes of good governance is more difficult when asignificant proportion of a firm’s equity is held by a majority shareholder.Therefore, we are led to hypothesize:

H2 voluntary disclosure is negatively related to the level of ownershipconcentration

Corporate size was commonly used as an explanatory factor for voluntarydisclosure Ball and Foster’s (1982) review shows that firm size has beenregarded as an adequate proxy for the costs and benefits linked to theprovision of information The cost of gathering and preparing detailed in-formation and the risk of creating a competitive disadvantage through dis-closure will be lower for larger companies that prepare the information forinternal use and invest large amounts of resources in fixed assets and in-novation processes This large company advantage, it is argued, acts notonly as an entry barrier towards smaller companies (Depoers, 2000, p 251),but it also enables larger firms to benefit from the salutary effects of betterdisclosure because the provision of information facilitates access to capitalmarkets (Singhvi & Desai, 1971, p 131) Additionally, corporate disclosureleads to the allaying of public criticism or government intervention (Watts &

Zimmerman, 1986) Therefore, the balance between benefits and costs linked

to the provision of information is expected to be more favourable for largethan for small companies

Furthermore, codes of good governance may also lead large companies toprovide more voluntary information than their smaller counterparts do.Research has shown the existence of a positive association between a firm’ssize and the adoption of some practices of good governance, such as theappointment of independent directors or the separation of the functions ofCEO and chairman (Denis & Sarin, 1999; Dehaene, De Vuyst, & Ooghe,

2001) Thus, the size of the company may exert an indirect influence ondisclosure Therefore, we hypothesize:

H3 voluntary disclosure is positively related to the size of the company

A number of studies regard listing status as a determinant of disclosurevariability (Firth, 1979;Cooke, 1991; Meek, Roberts & Gray, 1995) Listedcompanies must comply with stock market regulations that require far moreinformation disclosure than applies to unlisted companies Additionally, listedfirms voluntarily disclose information in order to garner investors’ trust and toobtain better financing conditions (Raffournier, 1995, p 263) Empirical stud-ies have shown that firms that more readily practice voluntary informationdisclosure enjoy such beneficial effects as increased stock prices (Healy, Hutton,

& Palepu, 1999; Lang & Lundholm, 2000), higher analyst following (Lang

& Lundholm, 1996), improvements in stock liquidity (Welker, 1995), and areduction in the cost of capital (Botosan, 1997;Botosan & Plumlee, 2002).Our study focuses on listed companies, but we attempt to examine dif-ferences in disclosure between firms that are only traded domestically andfirms that are both traded domestically and cross-listed internationally

Meek, Roberts and Gray (1995) suggest that listed companies face tional capital market pressures for the provision of information Further-more, such pressures will arguably increase with the efficiency of themarkets in which the firms are traded, as may be the case for firms trading inforeign stock markets as opposed to those trading solely on the MadridStock Exchange.14Therefore, once a firm discloses information voluntarily

addi-to foreign saddi-tock markets, it would incur only a marginal cost increase if italso reported such information in its domestic market Empirical researchhas shown evidence of greater information disclosure for companies that arelisted both domestically and in foreign stock exchanges (Cooke, 1991) In asimilar vein, Khanna, Palepu, and Srinivasan (2004)found a positive as-sociation between disclosure and a U.S listing for a sample of Europeanand Asian-Pacific companies

The positive association between cross-listing and disclosure can be plained not only by the trade off between benefits and costs, but also by theimprovement in corporate governance practices that follow cross-listing.

ex-Wo´jcik, Clark, and Bauer (2004) found, for instance, that European panies that are cross-listed on U.S exchanges have higher corporate gov-ernance ratings than firms without such U.S cross-listing For non-U.S.firms,Doidge (2004)observed that cross-listing on U.S exchanges enhancesthe protection afforded to minority investors and reduces the private ben-efits of control These arguments and evidence lead us to test the followinghypothesis:

com-H4 voluntary disclosure is positively related to listing on foreign stockexchanges

Industry sector may explain disclosure differences among companies.For example, financial entities may be encouraged to provide voluntaryinformation in order to garner client trust In a similar vein, firms operating

in regulated markets are exposed to thorough scrutiny from stakeholders,who may advise them to provide external parties with additional informa-tion about their activities and outcomes Finally, the strategic importance ofsome industries (e.g oil) may attract disproportionate surveillance measures

by governmental agencies and interest groups, and this surveillancemay lead these companies to favour high levels of reporting to thirdparties (Watts & Zimmerman, 1986, p 239) Furthermore, disclosure oforganizational information involves hidden costs, such as those related torevealing crucial information to competitors, which, in turn, may lead tocompetitive disadvantages Research in this area demonstrates that theeffects of such disclosure vary across industries (Meek, Roberts &Gray, 1995)

Additionally, operating in a regulated industry might have an indirecteffect on disclosure through its influence on the governance rules of firms.Companies operating in regulated industries have greater visibility and may

be more easily encouraged to adopt practices of good governance thanwould firms operating in unregulated sectors In fact, the report of thegoverning body of the Madrid Stock Exchange – the Comisio´n Nacional delMercado de Valores – on compliance with the Good Governance Code(CNMV, 2000), shows that the highest levels of compliance correspond tocompanies operating in regulated sectors Thus, we hypothesize that:H5 voluntary disclosure is positively related to operating in regulatedindustries

3 DATA AND METHODOLOGY

3.1 SampleOur sample consists of 117 firms that were indexed in the ActualidadEcono´mica15Index in 1999,16all of which operate in the continuous (elec-tronic) market of the Madrid Stock Exchange We obtained information oncorporate characteristics and governance practices from the CNMV Forfirms that did not submit this information to the CNMV,17 we requestedtheir data directly Overall, we collected data on 91 of the 117 firms listed onthe Actualidad Eco´nomica Index These companies constituted the samplefor our study

As we missed data from some firms included in the Actualidad Econo´micaIndex, we tested for sample bias Arguably, firms that did not submit theirdata to the CNMV could be reluctant to disclose voluntary information.Comparison of mean indexes through the Student t-test for companies in-cluded in our study and those omitted from it revealed significant differ-ences (p ¼ 0:06) The lowest mean corresponded to firms excluded from ourstudy (Table 1), which led us to control for firm size, measured by thenatural logarithm of total assets The results indicate that firms in our studyare significantly larger than those from which we did not gather data(po0.001), which in turn indicates that our findings cannot be extrapolated

to small firms Arguably, there seems to be less concern about the provision

of voluntary information to external parties in small firms than in theirlarger counterparts

3.2 Operationalization of Variables3.2.1 Disclosure Index

Actualidad Econo´mica prepares a disclosure index that consists of 18 cators The index, however, embraces issues that have little to do with

indi-Table 1 Selection Bias

voluntary disclosure: auditor’s opinion (Indicator #2), clarity in the entation of data (Indicator #9), design of the report (Indicator #10), and use

pres-of additional venues to make the annual report visible to the public opinion(Indicator #18) To measure the amount of information provided by thecompany, we set these indicators aside.18Although some of the items refer

to compulsory information (i.e information on shareholders, subsidiaries,remuneration to board members, and analysis of operations), the degree ofdetail captured by the Actualidad Econo´mica Index is much greater than thatrequired by the Spanish legislation Therefore, the resulting index consti-tutes a measure of voluntary disclosure

3.2.2 General Corporate Characteristics

Company size was measured in this study by total assets (ASSETS), as hasbeen done in other studies on voluntary disclosure (Depoers, 2000; Ho &Wong, 2001) We used dichotomous variables to account for the firm’scross-listing status (LISTING) (Khanna, Palepu & Srinivasan, 2004) andindustry (INDUSTRY) (Eng & Mak, 2003), giving variables a value of one(1) if the firm was listed on foreign stock exchanges or operated in a reg-ulated industry, and zero (0) otherwise The Herfindahl index was used as ameasure of stock dispersion (OWNERSHIP) FollowingSanterre and Neun(1986), our use of the Herfindahl index relied on the following formula:

of the shares of the company and it approaches zero (0) when corporatestock is widely dispersed – that is, when there is a large number of share-holders, each owning a small proportion of the firm’s stock

independ-Eng & Mak, 2003) We used dummy variables to account for the existence

of an audit committee (AUDITCOM) (Ho & Wong, 2001), the separation

of the functions of chairman of the board and the CEO or president

(CHAIRM) (Beasley, 1996), and the establishment of stock option plans as

a means of directors’ remuneration (OPTION) (Fich & Shivdasani, 2004).These variables assumed a value of one (1) if the good governance practicewas adopted, and a zero (0) otherwise

Equity held by board members is usually measured through the totalnumber of shares owned by directors, scaled by the total number of out-standing shares (O’ Sullivan, 2000;Coles, McWilliams, & Sen, 2001) Nev-ertheless, in order to measure directors’ ownership that would help tostrengthen the monitoring function of the board, we departed from thiscommon measure by using a dummy variable (BEQUITY), which assumed

a value of one (1) if the directors’ participation in the equity exists but islower than 3%,19 and zero (0) otherwise In this manner, we measured forthe directors’ participation in the firm’s capital in situations in which they donot have control of the firm or a significant influence on its developments.20Finally, the total number of directors is usually employed as a measure ofboard size (Vafeas, 2000;Peasnell, Pope & Young, 2001) Nevertheless, due

to the extremely small board size of some Spanish companies, we used adummy variable (SIZEB), with a value of one (1) if the size of the board fitswithin the recommendations of the Olivencia Code (i.e the number of boardmembers should range from 5 to 15), and zero (0) otherwise

3.3 Methods

We employed univariate and multivariate techniques for data analysis inthis study, using a one-factor ANOVA as well as the Kruskal–Wallis non-parametric test to examine the association between each of the independentvariables and the disclosure index We then applied a technique of struc-tural-equations modelling, path analysis, to test simultaneously for existingrelationships among the variables included in our study (Hoskisson,Johnson & Moesel, 1994;Bisbe & Otley, 2004) Structural equations, whichhave been widely employed in areas such as marketing or psychology, areincreasingly being used in accounting studies (Hunton, Wier, & Stone, 2000;

Baines & Langfield-Smith, 2003; Widener, 2004) In this study, structuralequations are particularly suitable for at least two reasons: (1) A model ofstructural equations allows for the simultaneous analysis of a series of mul-tiple regression equations and is particularly useful when the dependentvariable in one equation becomes an independent variable in subsequentones (2) Path analysis allows for confirmatory factor analysis, facilitatingthe introduction of non-observed concepts (latent constructs), accountingfor the measurement error in the estimation process

4 EMPIRICAL RESULTSTable 2shows the variables included in our study as well as the descriptivestatistics.

Descriptive statistics show that companies in our study are widely tributed regarding the provision of voluntary information There are alsolarge differences in corporate size, measured by total assets, ranging from 30

dis-to 287,155 million Euros, and we employed the natural logarithm dis-to accountfor this difference The Herfindahl index of stock dispersion also exhibitssubstantial cross-sectional variation, ranging from zero (0) in cases of widelydispersed companies, to one (1) for firms in which a single shareholder ownsthe majority of equity We observed a value of 1 for 26 of the 91 companiesincluded in our sample, which in turn indicates a high level of ownershipconcentration in firms listed on the Madrid Stock Exchange Descriptivestatistics also show that compliance with recommendations of the OlivenciaCode for appointing an audit committee and for limiting the size of theboard are common practices in firms included in our sample (i.e 75% have

an audit committee, and the total number of directors in 76% of the firms isbetween 5 and 15) Finally, we observed high variability in the proportion ofindependent directors on the board The mean value for this variable is36%, but 11 companies in our study did not have any independent directors

We conducted a series of one-way ANOVAs21using the index as the pendent variable and each of the governance rules considered in our study as

de-a fde-actor.22The Kruskal–Wallis test and ANOVA results (Table 3) show thatthe mean disclosure index is significantly higher (po0.01) for companies with

a higher proportion of independent directors on the board, providing supportfor Hypothesis 1a The disclosure index is also significantly higher (po0.01)for firms that have appointed an audit committee than for those in which suchcommittee was not formed These results support Hypothesis 1b We foundsignificant differences in disclosure (po0.05) between companies in whichdirectors have a participation in their capital lower than 3% relative to theircounterparts with no director participation or with director participation that

is higher than 3% These results provide support for Hypothesis 1d.Table 3

also shows that the mean disclosure index is significantly higher (po0.01) forthose companies that have established a stock option plan as a means ofdirector remuneration, thereby providing support for Hypothesis 1e.Comparisons of mean disclosure indexes are non-significant betweenfirms that separate the functions of CEO and chairman and their counter-parts that combine both posts Furthermore, the relationship betweenthe index and the independent variable is opposite to the direction

N Mean S.D Minimum Q1 Median Q3 Maximum Skewness Kurtosis

INDEX Company’s aggregate score.

ASSETS Total assets (millions of Euros)

LASSETS Natural logarithm of total assets

OWNERSHIP Herfindahl index of stock dispersion

LOWNERSHIP Natural logarithm of the Herfindahl index of stock dispersion

LISTING Binary variable: 1 if the company is cross-listed, 0 otherwise

INDUSTRY Binary variable: 1 if regulated industry, 0 otherwise

OUTSIDE Proportion of independent directors on the board

BEQUITY Binary variable: 1 if the board participates in the equity of the company and its participation is lower than 3%, 0 otherwise AUDITCOM Binary variable: 1 if audit committee exists, 0 otherwise

OPTION Binary variable: 1 if stock option plan exists, 0 otherwise

CHAIRM Binary variable: 1 if the chairman and the CEO are not the same person, 0 otherwise

SIZEBOARD Binary variable: 1 if 5 p number of the members on the board p 15, 0 otherwise