Board of directors and financial transparency and disclosure. Evidence from Italy

• Date: 06 June 2016
• DOI: https://doi.org/10.1108/CG-01-2016-0019
• Published date: 06 June 2016
• Pages: 593-608
• Author: Mariateresa Torchia,Andrea Calabrò
• Subject Matter: Strategy,Corporate governance

Board of directors and financial

transparency and disclosure. Evidence

from Italy

Mariateresa Torchia and Andrea Calabrò

Mariateresa Torchia and

Andrea Calabrò are both

based at the University of

Witten/Herdecke, Witten,

Germany.

Abstract

Purpose –The purpose of this paper is to examine the link between board of directors’ composition

(independent directors’ ratio, board size, CEO-duality) and financial transparency and disclosure

(T&D).

Design/methodology/approach –The paper analyzes board composition and financial T&D of Italian

listed companies using multiple linear regression analysis.

Findings –The results of this paper show a significant link between board composition and the level of

financial T&D. In particular, the authors found a positive and significant relationship between the

independent directors’ ratio and the level of financial T&D and a negative relationship between board

size and the level of financial T&D.

Research limitations/implications –While this paper focuses on a sample of 100 Italian listed

companies, the authors acknowledge the importance of extending the results to other national context

and to other type of firms (e.g. non-listed firms or SMEs). Moreover, while this paper concerns the

amount of information disclosed by firms, it does not look at the quality or accuracy of disclosure.

Practical implications –This paper reveals the importance of evaluating the effectiveness of

corporate governance mechanisms (such as board composition) in enhancing the level of financial

T&D. Indeed, the authors provide some indications to firms to improve their internal governance

mechanisms (e.g. the importance of high proportion of independent directors and of small- and

medium-sized boards of directors).

Originality/value –This paper provides interesting insights to firms which are under pressure to

improve the level of information to stakeholders. Moreover, has the level of information that is not

legally required vary among companies and countries, the authors shed light on a context

characterized by high level of ownership concentration, where firms can experience different types

of conflict of interests.

Keywords Corporate governance, Board of directors, CEO duality, Independent directors,

Board size, Financial transparency and disclosure

Paper type Research paper

1. Introduction and motivation

In the wake of the global financial crisis and corporate scandals, firms are under

pressure to improve the level of information to stakeholders. However, the level of

information that is not legally required and that is disclosed can vary among companies

and countries. Legal requirements do not always satisfy stakeholder demands, and

there is a huge need for more information. Moreover, it seems clear that

high-quality financial transparency reduces information asymmetries, increases overall

transparency and is associated with positive capital market consequences such as

lower cost of equity and debt capital (Francis et al., 2004), higher market liquidity

(Diamond and Verrecchia, 1991), better firm performance and higher competitiveness.

Recent financial crisis and corporate scandals lead firms to improve substantially their

financial transparency and disclosure (T&D). In fact, financial T&D are considered to be

important mechanisms for aligning diverging interests (Bushman and Smith, 2001;

Received 28 January 2016

Accepted 30 March 2016

DOI 10.1108/CG-01-2016-0019 VOL. 16 NO. 3 2016, pp. 593-608, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 593

Healy and Palepu, 2001;Hermanson, 2000;Healy et al., 1999) to avoid opportunistic

behaviors and mitigate agency problems (Fama and Jensen, 1983).

In contexts characterized by high ownership concentration, the issue of high-quality

financial T&D becomes even more important to increase the level of protection of minority

shareholders who are often exposed to high risk of expropriation by majority shareholders.

This problem (e.g. in the Italian context) is commonly known as the agency problem II

(Cascino et al., 2010). When ownership is highly concentrated, the nature of the agency

problem shifts away from manager–shareholder conflicts to conflicts between the

controlling owner and minority shareholders (Fan and Wong, 2002;Berle and Means,

1932). In these contexts, T&D represents an important indicator of corporate governance

quality (OECD, 1999).

Research on the determinants of voluntary disclosure initially focused on corporate

characteristics such as company size (Depoers, 2000) and listing status (Meek et al.,

1995). However, recent research suggests that other factors may determine a firm’s

disclosure policy. Scholars are increasingly focusing their attention on the links between

corporate governance mechanisms and the level of firms’ T&D (Agyei-Mensah, 2016,Ho

and Taylor, 2013). In this study, we seek to extend prior research by focusing on the link

between corporate governance and disclosure. The focus is on the link between board of

directors composition (independent directors ratio, board size and CEO-duality) and the

level of T&D provided in the financial statements of Italian listed companies.

The board of directors has an important role in mitigating the conflicts of interests arising

from agency problems (Jensen and Meckling, 1976). Indeed, the board of directors is

regarded as a relevant mechanism in the oversight of managerial actions (Fama and

Jensen, 1983). Researchers have examined the role played by certain practices aimed at

enhancing the monitoring role of the board on the provision of voluntary information (Nagar

et al., 2003;Ho and Wong, 2001;Chen and Jaggi, 2000). It seems also important to

highlight that in contexts characterized by concentrated ownership, like the Italian one, the

board of directors becomes the main arena in which possible conflicting interests (majority

shareholders, minorities, board members, top management team members, customers,

etc.) may find balance. Thus, the exploration of boards’ characteristics may shed new light

on the factors that may enhance the level of financial T&D.

The paper draws from an extension of agency theory perspective (Fama and Jensen, 1983;

Jensen and Meckling, 1976). Indeed, we use a stakeholder theory perspective, which

extends the agency assumptions taking into account the existence of multiple principles

and agents that arises many agency problems. Thus, starting from the existence of

conflicts of interest between the various stakeholders involved in the firm governance

system (Fama and Jensen, 1983;Fama, 1980;Jensen and Meckling, 1976;Donaldson and

Preston, 1995), it will be possible to identify cases where the dominant shareholder

influences the reported earnings to maximize his interests (La Porta et al., 2000). Therefore,

financial T&D seem to be crucial to protect the interests of the various stakeholders

involved in the business (Donaldson and Preston, 1995).

Hypotheses on the relationships between independent directors’ ratio, board size, CEO

duality and financial T&D are tested on a sample of 100 Italian listed firms (the sample is

the top 100 Italian listed firms by market capitalization in 2007). This study has different

contributions. First, it provides empirical evidence of a positive association between board

independence and a direct measure of voluntary financial disclosure; second, it

documents that the size of the board influence the level of T&D; and third, this

demonstrates that CEO duality is not associated with the level of T&D. Additionally, the

paper addresses the importance of studying the existing links between firms’ governance

structures and mechanisms and financial T&D also in context characterized by

concentrated ownership. This links the importance of minorities’ protection to the

importance of good governance practices and high level of financial T&D.

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