Covid-19 and performance disclosure: does governance matter?

• DOI: https://doi.org/10.1108/IJAIM-04-2021-0086
• Published date: 11 October 2021
• Date: 11 October 2021
• Pages: 776-792
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Mahmoud Elmarzouky,Khaldoon Albitar,Khaled Hussainey

Covid-19 and performance

disclosure: does governance matter?

Mahmoud Elmarzouky

Kingston Business School, Kingston University, London, UK, and

Khaldoon Albitar and Khaled Hussainey

Portsmouth Business School, University of Portsmouth, Portsmouth, UK

Abstract

Purpose –This paper aims to investigatewhether Covid-19 related information is associated with a higher

level of performance disclosure in the annual reports. Furthermore, it examines the moderating effect of

corporate governance on the relationship between Covid-19 and the performance disclosure by using three

governancemechanisms: board size, board independence and gender diversity.

Design/methodology/approach –The authors use quantitativecontent analysis. The authors applied

an automated textual analysis technique to measure the level of Covid-19 information and performance

disclosurefor the UK Financial Times Stock Exchange all-share non-f‌inancialf‌irms.

Findings –The authors found a signif‌icant positive relationship between the Covid-19 disclosure and

the f‌irm performance disclosure in the annual reports. The authors also f‌ind that both board

independence and gender diversity moderatethe relationship between the Covid-19 related information

and the level of performance disclosure in the annual reports. The authors further run a robustness

analysis, which conf‌irms the main results.

Practical implications –The f‌inding is benef‌icialfor the regulatory setters to better understand whether

f‌irms provide generic or meaningful Covid-19 information linked to the f‌irm’s performance. The unique

f‌indings ofthis paper are relevant to regulators, governments,management, shareholders and academics.

Originality/value –The authors contribute to the literature in a unique and core research area not

researched previously.The paper links the Covid-19 disclosure with the f‌irm performance from the corporate

narrative perspective. The paperunderlines governance factors as a moderating role in this relationship by

consideringthree main mechanisms: board size, board independenceand gender diversity.

Keywords Textual analysis, Board independence, Gender diversity, Board size,

Covid-19 disclosure, Performance disclosure

Paper type Research paper

1. Introduction

The UK faces the most challenging economic turbulence,as the global f‌inancial crisis (GFC)

(Goodell, 2020:Albitaret al., 2021a). Covid-19 pandemic is acting as a catalyst for increasing

uncertainty about f‌irm performance. Whilst the f‌inancial institutions’performance mainly

caused the f‌inancial crisis, the Covid-19 pandemic is a global natural crisis and has no

institution sectorto be blamed. The UK gross domestic product growth hasdeclined by 35%

in some sectors such as construction, whilstother industries are not negatively affected. To

deliver this message to stakeholders, managers may associate their Covid-19 information

with more performance disclosure. Covid-19 is classif‌ied as systematic risk, so managers

would like to disclose their ability to mitigate this risk. The UK also has imposed various

levels of lockdowns, which increase the uncertainty about f‌irm performance. According to

the signalling theory (Spence, 2002;Connelly et al.,2011), business entities may disclose

Covid-19 related information associated with performance disclosure to send positive

IJAIM

29,5

776

Received29 April 2021

Revised7 August 2021

Accepted6 September 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 5, 2021

pp. 776-792

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2021-0086

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

signals to stakeholders and markets regarding handling the current situation and provide

more assurance about the f‌irm future performance.

Based on the Trueman theory (Trueman, 1986), we argue that managers will

demonstrate their skills and abilities by increasing the level of performance disclosure

associated with any communicated Covid-19 information. This is to provide stakeholders

with a positive assessment of their management abilities. The performance disclosure will

predict any changes caused by the Covid-19 pandemic and, therefore, aid in selecting

appropriate mitigation plans. Additionally, performance disclosure indicates a strong

position for the f‌irm in the future, whichmay entail a higher share price being interpreted by

the capital markets (Trueman,1986).

Financial reporting council (FRC) hasissued a framework on corporate governance and

Covid-19 reporting to encourage f‌irms to provide information on how they impacted and

reacted to the Covid-19 pandemic. FRC has also issued a framework on corporate

governance and reporting to companies. It is believed that the narrative sections of the

annual reports could provide an opportunity for companies to communicate the impact of

the Covid-19 pandemic on their activities and the proposed actions to be taken. The

framework highlights the importance of communicating meaningful information (rather

than generic information) in the narrative sections of the annual reports. We are, therefore,

motivated by considering whether companies provide meaningful or generic information

related to Covid-19and how this information is linked to performance-related information.

Recently published research related to Covid-19 were mainly focussed on either the

future of f‌inancial reporting (Hassan et al., 2021) or the theoretical perception of Covid-19

across f‌inancial markets,banking and insurance entities and government and public entities

(Nabity-Grover, et al., 2020;Donthu and Gustafsson, 2020) or the f‌inance reaction on the

market such as stock return (Broadstocket al., 2020;Erdem, 2020:Wang and Xing, 2020)or

stock volatility (Mazur et al.,2020;Salisu and Vo, 2020). At the same time, other research

focussed on f‌inancial performancepre and post Covid-19 (Khatib and Nour, 2021) or the ESG

disclosure impacts on f‌inancial performance during the Covid-19 crisis (Broadstock et al.,

2020) or discusses the determinants of Covid-19 in the CSR reports (Albitar et al., 2021b).

which raises whether Covid-19 related information associates with a higher level of

performance disclosurein the annual reports. We examined how Covid-19 disclosureaffects

the f‌irm’s performance disclosure. Furthermore, we examine the moderat ing effect of corporate

governance in enhancing the relationship between Covid-19 and the performance disclosure by

using board size, board independence and gender diversity. Furthermore, we run a robustness

check using subsample groups of various board size, board independence and gender diversity

to better understand the association between the Covid-19 disclosure and f‌irm performance

disclosure. We use the “performance disclosure index”to capture the performance score in the

annual reports (El-Haj et al., 2016). Further, we used our self-developed index to measure Covid-

19 disclosure.

We f‌ind a signif‌icant positive association between the level of Covid-19 disclosure and

performance disclosure in annual reports. We also found that board independence and

gender diversity play acrucial role in the relationship between Covid-19 disclosureand f‌irm

performance disclosure. Unlike the board size, our data could not suggest any moderating

effect of the board size in enhancing the relationship between Covid-19 and performance

disclosure. Moreover, following the literature, we use a subsample group to understand

whether the effect of Covid-19 disclosure on performancevaries with changes in board size,

board independence and gender diversity (Ahmedand Courtis, 1999;Chen and Jaggi, 2000;

Ntim et al.,2013;Albitar et al., 2020). Interestingly, our results show that the relationship

between the Covid-19 disclosureand performance disclosure is positive and signif‌icant with

Covid-19 and

performance

disclosure

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