Corporate governance determinants of voluntary disclosure and its effects on information asymmetry : an analysis for Iberian Peninsula listed companies

Abstract

The practices of Corporate Governance, in relation to the optimization of the quality of information flows, allow to increase the company transparency and to assist shareholders in their portfolio decisions. One of the main roles of an effective disclosure policy is the reduction of the information asymmetries between managers – insiders – and general investors – outsiders. The information asymmetry results from the fact that managers have more and much better information, than the general investors, about the present situation and future perspectives of the company. Otherwise, the information asymmetry between administration and new shareholders can affect the investment decisions of the company because of the sub or under evaluation of the shares in the market. This study analyses the corporate governance determinants of voluntary disclosure and its impact on the reduction of information asymmetry. Our sample consists of Iberian Peninsula listed companies. We employed univariate and multivariate techniques for data analysis to study the direct and indirect relations between corporate governance characteristics, voluntary disclosure and information asymmetry proxies. We built a voluntary disclosure index based on the information firms provided in their annual reports and used the turnover ratio and the bid-ask spread as proxies for the information asymmetry in the market. We examined the association not only between the level of voluntary disclosure and the proxies for information asymmetry, but also their relation with ownership structure, directors’ and supervisors’ structures, applying the technique of structural equation modelling, path analysis, to test simultaneously for existing viii relationships among these variables. We examined whether corporate governance affects the level of information asymmetry in the capital market. We hypothesized that firms with effective corporate governance would be more likely to voluntarily disclose corporate information and that this would be associated with lower levels of information asymmetry. The results indicate that the main determinants of voluntary disclosure are the variables related with firm size, growth opportunities, organizational performance, board compensation and large shareholder ownership. The results also show that for firms with high levels of disclosure the bid-ask spread is lower. However, in firms with a high ownership concentration investors tend to increase the bid-ask spreads and trade less, which, in this case, reduces the liquidity of the stock. Our results corroborate some of the main theoretical foundations so far available concerning the relationship between corporate governance and voluntary disclosure, as well as the relationship between voluntary disclosure and information asymmetry. In addition, the results from the structural equation model allowed us to understand how the governance rules exert influence on the proxies of information asymmetry in the market. We concluded that the ownership structure exerts a direct influence on information asymmetry and that directors’ and supervisors’ structures exert an indirect influence, through the organizational performance and the voluntary disclosure of information.