Role of media and independent directors in corporate transparency and disclosure: evidence from an emerging economy

• DOI: https://doi.org/10.1108/CG-01-2018-0042
• Pages: 858-885
• Date: 16 April 2018
• Published date: 16 April 2018
• Author: Rashid Zaman,Stephen Bahadar,Umar Nawaz Kayani,Muhammad Arslan
• Subject Matter: Corporate governance,Strategy

Role of media and independent directors

in corporate transparency and disclosure:

evidence from an emerging economy

Rashid Zaman, Stephen Bahadar, Umar Nawaz Kayani and Muhammad Arslan

Abstract

Purpose –The purpose of this paper is to examinethe impact of corporate governance, with particular

reference to the role of independentdirectors on boards and audit committees, and mediacoverage on

corporate transparencyand disclosure. In addition, the paper also investigates the role of the media on

independentdirectors’ behaviours towards corporatetransparency and disclosure.

Design/methodology/approach –The paper uses the well-developed two-step system generalised

method of moments approach on a sample of 99 Pakistan stock exchange (PSX) listed financial firms

over the period2007-2012.

Findings –The empiricalanalysis shows that media andindependent directors on audit committeesplay

a significant positive role in line with agenda setting and agency theories in promoting corporate

transparency and disclosure. On the contrary, the boards’ independent directors are risk-averse and

hold the information to protect their reputation. Nevertheless, the study does not find any significant

influence of media coverageon independent directors’ behaviours in promotingcorporate transparency

and disclosure.

Practical implications –The findings provide some useful insightinto cost benefits analysis of media

coverage towards an understanding of independent directors’ behaviours for promoting transparency

and disclosure in financialsector. Moreover, the study findings can be useful for both shareholdersand

stakeholdersin taking decisions about firm activities.

Originality/value –To the best ofthe authors’ knowledge, this is the firststudy that proposed and tested

a multi-levelframework for corporate transparencyand disclosure practices. In addition,this study is also

among the very few studies that use financial sectors as a sample, in particular, and media coverage,

specifically,thus adding some value to the limited literature.

Keywords Agency theory, Agenda setting theory, System GMM, Media coverage,

Independent directors, Corporate transparency and disclosure

Paper type Research paper

1. Introduction

Corporate transparency, in general, and internal control, in particular, are the most

important elements of corporate governance (CG) associated with a firm’s competitive

practices (Aksu and Kosedag, 2006). This notion has resulted in a considerable amount of

interest from all stakeholders especiallyafter the global financial crisis (GFC) and corporate

scandals, which put firms under pressure to improve their level of disclosure to

stakeholders. The increased interest in CG also started the academic debate to explore the

channels through which firms can improve their disclosure practices. However, despite

the surge, a majority of the CG literature hasfocused on industrial developed and examined

the role the internal control CG mechanisms, e.g. ownership structure, board composition

and managerial incentive towards the improvement of firm disclosure practices.

Nevertheless, the levels of corporate transparency and disclosure to stakeholders vary

Rashid Zaman,

Stephen Bahadar and

Umar Nawaz Kayani are all

based at the Department of

Financial and Business

Systems, Faculty of

Agribusiness and

Commerce, Lincoln

University, Christchurch,

New Zealand.

Muhammad Arslan is

based at the Faculty of

Agribusiness and

Commerce, Lincoln

University, Lincoln, New

Zealand.

Received 24 January 2018

Revised 3 March 2018

Accepted 4 March 2018

PAGE 858 jCORPORATE GOVERNANCE jVOL. 18 NO. 5 2018, pp. 858-885, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2018-0042

among countries and companies (Dalwai et al., 2015;Jizi et al., 2014) owing to differences

in the national context. For instance, Patel and Dallas (2002) using the international sample

found that the disclosure levels of the UK and US companies are higher compared to

companies from Latin America and Asia, while Vanstraelen et al. (2003) found significant

differences across industries’ disclosure practices.

In a national context, the legal infrastructure often fails to satisfy all stakeholder demands

and requirements, which emphasise the concepts of firms’ self-monitoring and good

citizenship (Eisenbeiss et al., 2015;Kirkpatrick, 2009). For instance,in the case of the great

financial crisis, the firms were apparently fulfilling the regulatory requirement. Despite this

fact, most of these firms collapsed and the post failure analysis highlighted the absence of

self-monitoring and good citizenship concepts as reasons among others (Kemper and

Martin, 2010;Kirkpatrick, 2009). Furthermore, this self-monitoring and good citizenship also

enhance the stakeholders andinvestors’ trust in companies, resulting in profit maximisation.

Corporate transparency and disclosure is an element to gain stakeholders’ trust among

companies (Barako et al., 2006). Furthermore, it is a well-established fact that high quality

corporate transparency and disclosure reduce the information asymmetries, increase

stakeholder trust –and are associated with positive capital market consequences such as

lower cost of capital (Qian et al., 2015), increasein shareholders’ value (Aksu and Kosedag,

2006), better firm performance and competitive advantage (Aksu and Kosedag, 2006;

Zaman et al., 2014).

Recent corporate scandals, a changing regulatory environment and the rise of responsible

investors have led firms to improve transparency and disclosure (Nadeem et al., 2017a,

2017b,2017c). In fact, corporate transparency and disclosure are considered a vital

mechanism in managing the divergent stakeholders’ interest (Boesso and Kumar, 2007)

and to avoid the management opportunistic behaviour, thus reducing agency conflict

(Anderson and Reeb, 2004;Fama and Jensen,1983).

There are multiple reasons and situations in which firms voluntarily disclose their practices

(Torchia et al., 2016), such as to attract investors, reduce information asymmetry and gain

legitimacy (Hermalin and Weisbach, 2012;Islam and Deegan, 2010). Corporate

transparency and disclosure are amongthe most important tasks associated with boards of

directors (Cerbioni and Parbonetti, 2007;Haniffa and Cooke, 2005) owing to their

significance as corporate transparency disclosure is an appropriate tool available to

external parties in taking decisions about the future action of companies (Michelon and

Parbonetti, 2010).

In this regard, board and audit committeeindependence, in terms of a higher proposition of

non-executive directors is a guarantee of increased transparency and disclosure (Garcia-

Sanchez et al., 2014;Samaha et al., 2012) as these members are more interested in

demonstrating higher compliance and commitment towards stakeholders (Jiang et al.,

2015).

In addition, non-executive directors are typically experienced professionals such as

university deans, politicians, regulators and successful entrepreneurs who bring the

independence that carries a superior objective to monitor management behaviours by

disclosing information. Their diligence might stem partially from monetary incentives to

serve as directors (Sengupta and Zhang, 2015), but possibly their desire to enhance,

cultivate and protect their personalreputations are more important (Torchia et al., 2016).

However, authors such as Abbott et al. (2004),Eng and Mak (2003) and Barako et al.

(2006) found limited influence of non-executive directors on the level of corporate

disclosure, irrespective of their presence on board or audit committee. The possible

consequences for non- disclosure could result in accounting cost and an advantage for

rivals. Some authors argued that disclosure could be harmful as it displays important and

valuable information to market rivals[1].Although these factors play a limited role in resisting

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