Association between Ownership Structure and Public Announcements' Disclosures

• Date: 01 January 2009
• Author: Laivi Laidroo
• Published date: 01 January 2009
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00717.x

Association between Ownership Structure and

Public Announcements’ Disclosures

Laivi Laidroo

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The impact of ownership structure on annual report disclosures and overall disclosure quality

has received some attention in previous literature, but no study has examined it in the context of public announcements.

This paperinvestigates the issue by using a disclosure score based on six disclosure quality attributes and by employing two

quantitative disclosure measures in the context of three European emerging capital markets in the Baltics – the Tallinn,Riga,

and Vilnius Stock Exchanges.

Research Findings/Results: In line with expectations, public announcement disclosure quality had a negative association

with ownership concentration and foreign ownership and a positive association with institutional ownership. In terms of

other company characteristics, sales growth and size of entry barriers exhibited positive associations with disclosure as

expected. Unlike in previous research, statistically signif‌icant negative associations between size and announcement length

were supported. This is due to the sample used, which included several f‌irms from the Vilnius Stock Exchange with short

announcements for the pre-2003 period.

Theoretical Implications: This paper presents possibilities for employing information theory in the context of f‌inance for

determining possible disclosure quality attributes that could be used in the creation of a disclosure quality score.

Practical Implications: Empirical tests reveal the importance of ownership structure in determining the disclosure choice

of companies that, in turn, may provide information about the types of companies that need more effective regulative

enforcement.

Keywords: Corporate Governance, Corporate Governance Rating/Index, Central and Eastern Europe, Ownership Issues

INTRODUCTION

The def‌inition of disclosure captures the release of rel-

evant information, either in the form of press releases,

public announcements, or f‌inancial reports. The quality of

these disclosures made by listed companies is of special

interest to investors and capital market regulators, because

the expectation is that the higher the quality of disclosure,

the lower the information asymmetries resulting in fewer

agency conf‌licts between investors and managers. This, in

turn, increases the informational eff‌iciency of the stock

exchange. These issues are of special interest for emerging

capital markets, as their regulatory environments and the

disclosure policies of listed companies are developing.

The actual disclosure of information heavily depends on

the company’s disclosure policy, which is strongly affected

by several corporate governance mechanisms, including the

managers elected, management structure, remuneration

principles, and ownership structure. One variable that has

received considerable attention in previous research is the

ownership structure, for which the data is also the easiest to

obtain (Schadewitz and Blevins, 1998; Chen and Jaggi, 2000;

Eng and Mak, 2003; Makhija and Patton, 2004; Huafang and

Jianguo, 2007; Lakhal, 2007). This paper investigates the

impact of ownership structure on public announcement dis-

closures in the context of three European emerging capital

markets in the Baltics – the Tallinn, Riga, and Vilnius Stock

Exchanges (VSC; http://www.lt.omxgroup.com). The time

frame is limited to the years 2001 to 2005, for which the data

was already processed as part of a larger research project.

This paper expands upon existing literature in several

respects. First, although corporate governance literature has

paid considerable attention to the impact of governance

mechanisms on the disclosure quality of f‌inancial reports

(mostly annual reports), public announcements have

remained unexplored. One of the possible reasons is the lack

Address for correspondence: laivi.laidroo@gmail.com

13

Corporate Governance: An International Review, 2009, 17(1): 13–34

© 2009 TheAuthor

Journal compilation © 2009 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00717.x

of suitable disclosure quality proxies for this medium. This

paper proposes a disclosure quality score based on six dis-

closure quality attributes that could be considered a proxy

for the disclosure quality of public announcements. The

latter are def‌ined as news items compiled by the listed

company to fulf‌ill disclosure requirements and published

under the company news section on the stock exchange’s

webpage. To provide some possibility of comparing the

results with more frequently used quantitative measures,

announcement length and frequency are also used as depen-

dent variables. As in previous research, individual and time

f‌ixed-effects regressions are run to determine the associa-

tions between disclosure and ownership variables. In addi-

tion, other company characteristics, assumed to affect

disclosure choice, are used as controls. Second, the associa-

tion between corporate governance mechanisms and disclo-

sure has received some attention in other emerging markets,

but on the three markets in question no similar study exists.

Therefore, this paper is the f‌irst attempt to investigate dis-

closure in such a setting.

This paper has been divided into f‌ive sections. Back-

ground and hypotheses are described in Section 2. Section 3

introduces the sample and the def‌inition of variables Section

4 presents the analysis and results of hypothesis testing.

Finall, Section 5 discusses conclusions.

BACKGROUND AND HYPOTHESES

Disclosure Measures

Most empirical disclosure determinants studies (see Appen-

dices 1 and 2) use annual report based disclosure quality

scores. Public announcement disclosure quality has not

received such attention, and most of the studies involving

announcements usuallyconcentrate on event-study method-

ology (Morse, 1982; Chan, 2003; Amman and Kessler, 2004;

Ryan and Taff‌ler, 2004; Vega, 2006). The only exception is

Clarkson, Kao and Richardson (1999) that concentrates on

disclosure in press releases, in addition to annual report

management discussion and analysis. The main reasons for

the unpopularity of these disclosures lies in the lack of dis-

closure quality measures because of poor theoretical litera-

ture, the quality’s subjective nature, and its dependence on

the medium.

Empirical approaches used for constructing disclosure

quality measures have been summarized by Beattie,

McInnes and Fearnley (2004). These include the following:

disclosure indexes similar to the ones introduced by Botosan

(1997) that assume that the amount of disclosure on speci-

f‌ied topics proxies for the quality of disclosure; disclosure

quality scores compiled by some institutions (e.g., the Asso-

ciation of Investment Management Research – AIMR) that

are based on analyst evaluations of certain aspects of disclo-

sure; and content analysis-based narrative disclosure quality

scores that proxy disclosure quality with the quantity of

disclosure (determined during content analysis and

adjusted for company’s size). The latter approach would be

suitable for public announcements; however, in that case

other quality attributes would be overlooked, making the

adequacy of this approach questionable. One solution to this

problem is provided by Beattie et al. (2004) for annual report

narratives. It assumes that annual report disclosure quality

depends on four quality attributes – relative amount of dis-

closure, concentration of disclosure across main topics, con-

centration of disclosure across sub-categories, and number

of non-empty categories. However this approach is not

entirely suitable for public announcements, as these disclo-

sures cannot be expected to be evenly distributed across

topics, and the approach employed by Beattie et al. (2004)

lacks suff‌icient theoretical background. This paper uses an

approachdesigned especially for public announcements that

is discussed in more detail under the sample and variables

section.

Disclosure and Corporate Governance Practices

Disclosure practices depend heavily on the countries in

question. This paper focuses on three European developing

stock exchanges in the Baltic States – Estonia, Latvia, and

Lithuania. These three countries parted from the Soviet

Union and became independent in the early 1990s. This

event was followed by the extensive development of legis-

lation and privatization of property (land, real estate, and

state-owned companies).

The stock exchanges in the three countries, respectively,

are the Tallinn Stock Exchange (TSE; http://www.ee.

omxgroup.com), the Riga Stock Exchange (RSE; http://

www.lv.omxgroup.com),and the VSE.1They have been oper-

ating since 1995. The f‌irst objective of these markets was to

offer the possibility of transactions with shares of newly

privatized companies. As a result of privatization, the own-

ership structures of listed companies became quite versatile.

On average31 per cent of the companies went into the hands

of foreign companies specializing in the same f‌ield of activ-

ity (average holdings 68 per cent). On average 17 per cent of

the companies remained partly in the hands of governments

(average holdings 52 per cent). Institutional shareholders

obtained holdings in 46 per cent of the listed companies

(average holdings 25 per cent). Managerial holdings

remained only in 15 per cent of the companies (average

holdings 19 per cent). Because of historical reasons, there

have been no listed family f‌irms. In terms of block holders

(holdings of shareholders over 5 per cent), all listed compa-

nies had such shareholders at the end of 2005 with average

holdings of 76 per cent, indicating quite concentrated own-

ership structures.

National accounting regulations were established based

on international accounting standards and modif‌ied accord-

ing to European Union regulations. Stock exchange rules

across the three stock exchanges differed initially, but the

convergence of TSE and RSE began in 2000, and by the end

of 2005 the regulations over all three of them were quite

similar (as all three markets had become part of the Aktie-

bolaget Optionsmäklarna/Helsinki Stock Exchange, or

OMX, group in 2004). These rules basically def‌ine manda-

tory public announcement disclosures, and although

companies have considerable discretion on which non-

mandatory information to disclose, it is not used often.

Corporate governance codes took longer to be imple-

mented, and the mandatory reporting on corporate gover-

nance practices started in 2006. Previous research by Berglöf

and Pajuste (2005) indicates that the regulatory quality, the

14 CORPORATE GOVERNANCE

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Journal compilation © 2009 BlackwellPublishing Ltd