The impact of flexible corporate governance disclosures on value relevance. Empirical evidence from South Africa

DOIhttps://doi.org/10.1108/CG-05-2017-0106
Pages369-385
Date24 January 2018
Published date24 January 2018
AuthorJonty Tshipa,Leon Brummer,Hendrik Wolmarans,Elda Du Toit
Subject MatterCorporate governance,Strategy
The impact of f‌lexible corporate
governance disclosures on value
relevance. Empirical evidence
from South Africa
Jonty Tshipa, Leon Brummer, Hendrik Wolmarans and Elda Du Toit
Abstract
Purpose Considering that the Johannesburg Stock Exchange (JSE) has enacted in its Listings
Requirements, compliance of listed f‌irms to International Financial Reporting Standards (IFRS)
and King Code of Good Corporate Governance, this study aims to investigate the impact of
internal corporate governance attributes on the value relevance of accounting information in
South Africa.
Design/methodology/approach The f‌ixed effect generalised least squares regression is used for the
period from 2002 to 2014. Proxies for internal corporate governance are the size of the board, leadership
structure, board activity, staggered board, boardroom independence, presence of key committees and
board gender diversity. Value relevance is measured using the adjusted R
2
derived from a regression of
stock price on earnings and equity book values by following Ohlson’s accounting-based valuation
framework.
Findings The f‌indings suggest that the net asset value per share is value-relevant in South African
listed f‌irms and also when the boardroom is largely independent. The value of earnings per share
(EPS) is more robust when corporate governance structures, such as separating the roles of chief
executive off‌icer and chairperson, proportion of board-independent board members and presence
of board committees, are in place. This suggests that EPS favours agency and resource
dependence theories.
Practical implications The value relevance of accounting information in the South African f‌inancial
market underscores the importance of requisite rules and supervision regarding f‌inancial reporting to
allow asset owners and managers in the allocation of capital decisions. This study supports the view that
corporate governance plays a key role in ensuring, amongst others, credible f‌inancial reporting. The
outcome of this study could inform the JSE to enforce, even stricter, compliance with IFRS and corporate
governance to improve the value relevance of f‌inancial information.
Social implications Signif‌icant corporate governance reforms around the world suggest that
regulators and policy makers consider corporate governance as a pertinent tonic in ensuring, amongst
others, credible f‌inancial reporting. The implications of the study might assure users of f‌inancial
information of how compliance to corporate governance practices may inf‌luence the value of the f‌irm.
This paper provides empirical evidence in the South African context that EPS, unlike net asset value per
share, is driven by corporate governance structures.
Originality/value The period of this study is unique, because it covers a relatively stable economic
period before the f‌inancial crisis, a challenging and unstable period of time when the f‌inancial crisis
materialised, and the aftermath of the f‌inancial crisis. In addition, the examination period of the study
also covers the two corporate governance reforms in South Africa, King II in 2002 and King III in
2009, as well as the new Companies Act No. 71 of 2008. These exogenous factors may inf‌luence the
results.
Keywords Governance, Management, Corporate governance, Disclosure, Compliance,
Value relevance, Investors, Non-executive directors
Paper type Research paper
Jonty Tshipa is based at the
Department of Financial
Management, University of
Pretoria – Hatf‌ield Campus,
Pretoria, South Africa.
Leon Brummer is Professor,
Hendrik Wolmarans is
Associate Professor and
Elda Du Toit is Senior
Lecturer, all at the
University of Pretoria
Hatf‌ield Campus, Pretoria,
South Africa.
Received 28 May 2017
Revised 1 August 2017
2 September 2017
Accepted 13 September 2017
DOI 10.1108/CG-05-2017-0106 VOL. 18 NO. 3, 2018, pp. 369-385, © Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 369
Introduction
An accounting amount is def‌ined as value-relevant if it has a predicted relationship with
equity market values (Barth et al., 2001). The primary objective of value relevance research
is to investigate whether the f‌inancial statements that f‌irms produce provide investors and
other users both high-quality and valuable accounting information that enables them to
make informed decisions (Alfaraih and Alanezi, 2011). Relevance is one of the four principal
qualitative characteristics that f‌inancial information should possess to enable decision-
making (IASB, 2008). Accordingly, f‌inancial statement information is relevant when it
provides useful information for shareholders to make investment decisions (Abu-Abbas and
Al-Abdullah, 2012).
It is envisaged that the quality of accounting information is captured in the share prices of
f‌irms (Omokhudu and Ibadin, 2015). Cohen et al. (2004) and Fiador (2013) assert that one
of the most important functions of internal corporate governance is to ensure the quality of
the accounting information. Corporate governance mainly seeks to improve the value of
accounting information by enforcing compliance to appropriate standards (de Almeida
et al., 2009). As such, and as revealed in the studies by Alfraih and Alanezi (2015), Habib
and Azim, (2008), Malik and Shah (2014), Mungly et al. (2016) and Tshipa and Mokoaleli-
Mokoteli (2015), the market value of corporate governance-compliant f‌irms is higher than
those of f‌irms that do not comply to corporate governance practices.
Corporate governance is particularly relevant in developing economies, where the injection
of foreign investment is essential to economic growth (Vaughn and Ryan, 2006). According
to Chen et al. (2009), institutional investors from around the world are willing to pay a price
premium for shares in companies with good corporate governance practices, especially
when the companies are in countries with weak legal protection of investors. Consequently,
corporate governance increasingly contributes to the economy of any country. To this end,
South Africa has to take stock of its corporate governance culture to attract inward
investment (Malherbe and Segal, 2001; Tshipa et al., 2018).
Because of the positive externalities of corporate governance, policymakers grapple with
the idea of enacting voluntary or mandatory corporate governance. After all, some
mandatory minimum disclosure rules could increase f‌irm market values (Ararat et al., 2017).
South Africa, like the UK, Australia, Romania and Canada, has a f‌lexible approach to
corporate governance, where South African listed companies are required by King III to
apply or explain non-compliance, whereas in the USA and Sri Lanka, corporate governance
is mandatory (Cuomo et al., 2016; Tshipa and Mokoaleli-Mokoteli, 2015).
Armstrong et al. (2005) argue that it may be premature to talk about corporate governance
regulations in much of Africa, where the private sector is relatively very small and capital
markets are poorly developed. South Africa, though, has kept abreast with international
best standards by constantly reviewing its corporate governance practices. The most
recent one being King IV, which was commissioned in 2016. As a result, South Africa, as an
African emerging market, offers an interesting research context in which the corporate
governance and value relevance nexus can be empirically examined. Unlike many African
countries, South Africa is ahead of most African emerging markets in the implementation
and enforcement of corporate governance standards (African Corporate Governance
Network, 2016). With regards to the stock exchange, the Johannesburg Stock Exchange
(JSE) continues to dominate the sub-Saharan Africa (SSA) region, representing 38 per cent
of all listed companies and 83 per cent of total market capitalisation in the region in 2012
(World Bank, 2013). In fact, 68 of SSA’s 100 largest companies in terms of market
capitalisation are listed on the JSE, including the f‌ive largest companies in Africa (African
Business Magazine, 2013). Apart from being the most advanced stock exchange in the
region, the JSE is also among the global top 20 of exchanges in terms of market
capitalisation and turnover. With a market capitalisation of 159 per cent of gross domestic
PAGE 370 jCORPORATE GOVERNANCEjVOL. 18 NO. 3, 2018

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