The current evidence on the relation between corporate governance on disclosure and the timeliness of firm’s price discovery is mainly country specific. Our paper “Corporate governance, companies’ disclosure practices, and market transparency: A cross country study” (available here) examines the association between firm’s corporate governance, and disclosures and stock price discovery on a cross country basis.
We used data from listed companies in 23 OECD countries covering the period 1 January 2003 to 31 December 2008. Our analysis involved examination of announcements made to the stock market by over 2,000 firms and share prices of 5,800 firms.
The individual firm’s corporate governance was assessed using Institutional Shareholder Services (ISS) data. The underlying data from ISS is used to create an index which is increasing in the quality of individual firm’s corporate governance. The ISS corporate governance data includes an assessment of the structure and function of board of directors and its main committees (audit, nomination and remuneration). It also includes measures relating to directors’ compensation and share ownership, and provisions in the firm’s charter and bylaws that could be used to prevent take-over of the firm.
By conducting a cross-country study we wanted to resolve the question of whether there was a complementary or substitution relation between corporate governance, and firm disclosure and the timeliness of information relating to the firm’s annual earnings performance (as reflected in individual firm’s share prices). For example, if corporate governance and disclosure are complements, we would expect firms with better quality corporate governance to release more information to the market. If instead, corporate governance and disclosure are substitutes, we would expect firms with better corporate governance to be associated with fewer disclosures to the market. We also consider how these relationships differ by litigation pressure and investor protection of a country: this is proxied by the legal tradition of countries (i.e. civil or common law). Investors are expected to have greater investor protection in common law countries given the greater likelihood of litigation and greater enforcement of laws there. Our cross-country study has the advantage of a more integrated analysis, providing a good basis to resolve the conflicting results from previous individual country analyses.
Our results suggest there is a complementary relation between the quality of firm’s corporate governance and disclosure (i.e. firms with better corporate governance structures release more information to the stock market). This is consistent with prior work for Australia, Canada and Japan. Also we find better-governed firms are more timely at releasing information to the stock market. Therefore, not only are firms with better corporate governance associated with more information disclosure, information is also released on a timelier basis than in other firms. In common law countries, firms with better corporate governance appear to have a conservative bias as they are associated with increased timeliness of document releases when there is bad news.
We also find better corporate governance is associated with less timely price discovery (i.e. information relating to the annual earnings performance takes longer to affect share price). This suggests that firms with better corporate governance substitute corporate governance for greater transparency, or alternatively market participants take longer to digest the additional information released from better-governed firms. In subsequent analysis, we find corporate governance is associated with greater timeliness of price discovery for firms in common law countries when there is a low level of disclosure (relative to the industry and country of the firm). This may suggest that there is an optimal level of disclosure for the market to work effectively.
Our paper concludes by acknowledging that corporate governance can have a positive impact on the amount of information available in the marketplace about a firm. The results relating to the timeliness of price discovery are interesting and are the subject of further work we have in progress which examines the impact of corporate governance on analyst following and analyst forecasts on earnings per share.
Dr Wendy Beekes is a Senior Lecturer and Dr Qiyu Zhang is a Lecturer 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.