The Relative Value Relevance of Shareholder versus Stakeholder Corporate Governance Disclosure Policy Reforms in South Africa

• Author: Kwaku K. Opong,Collins G. Ntim,Jo Danbolt
• Date: 01 January 2012
• Published date: 01 January 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00891.x

The Relative Value Relevance of Shareholder

versus Stakeholder Corporate Governance

Disclosure Policy Reforms in South Africa

Collins G. Ntim*, Kwaku K. Opong, and Jo Danbolt

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: South Africa (SA) has pursued distinctive corporate governance (CG) disclosure policy reforms

in the form of the King Reports, which require f‌irms to disclose a set of recommended good CG practices on both

shareholders and stakeholders. This paper investigates the effect of the new shareholder and stakeholder CG disclosure

rules on f‌irm value, as well as the relative value relevance of disclosing good CG practices on shareholders versus

stakeholders.

Research Findings/Insights: Using a sample of 169 SA listed f‌irms from 2002 to 2007, we f‌ind that disclosing good CG

practices on both shareholders and stakeholders impacts positively on f‌irm value, with the latter evidence providing new

explicit support for the resource dependence theory. However, we provide additional new evidence, which suggests that

disclosing shareholder CG practices contributes signif‌icantly more to f‌irm value than stakeholder ones. Our results are

robust to controlling for different types of endogeneities.

Theoretical/Academic Implications: The papergenerally contributes to the literature on the association between disclosure

of CG practices and f‌irm value by specif‌ically modeling the relationship within a unique institutional and CG environment.

Specif‌ically, we make two new contributions to the extant literature.First, we show how stakeholder CG disclosure practices

impact on f‌irm value. Second, we provideevidence on the relative value relevance of disclosing shareholder and stakeholder

CG practices.

Practical/Policy Implications: Our results have important policy and regulatory implications, especially for authorities in

other developing countries facing socio-economic problems that are currently contemplating or pursuing CG disclosure

policy reforms. Since our evidence indicates that additional value can be created for f‌irms that provide more transparent

information on stakeholder CG practices, it provides authorities in other emerging countries currently planning or pursing

CG reforms with a strong motivation to formally extend CG disclosure rules to cover both shareholder and stakeholder

provisions.

Keywords: Corporate Governance, Disclosure Policy Reforms, Shareholders and Stakeholders, Firm Value, South

Africa

INTRODUCTION

This study examines the central question of whether dif-

ferences in the levels of disclosure of recommended

good corporate governance (CG) practices can explain

observable variations in the market value of f‌irms. Specif‌i-

cally, we utilize a natural and distinct corporate setting in

South Africa (SA), where recent CG disclosure policy

reforms uniquely require f‌irms to provide more transparent

information on a set of recommended good CG practices for

both shareholders and stakeholders to investigate the rela-

tive value relevance of such disclosures. Using data on SA

listed f‌irms and 50 CG provisions from the 2002 King

Report, we provide new evidence, which generally indicates

that disclosing CG practices relating to both shareholders

and stakeholders is associated with improved market value.

However, we provide extra new evidence, which suggests

that the positive association between disclosing CG practices

*Address for correspondence: Collins G. Ntim, Centre for Empirical Finance,School of

Management and Business,Aberystwyth University, Cledwyn Building, Aberystwyth

SY23 3DD, UK. Tel: 44-197-062-2211; Fax:44-197-062-2409; E-mail: cln@aber.ac.uk

84

Corporate Governance: An International Review, 2012, 20(1): 84–105

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00891.x

and f‌irm value is stronger for shareholder than stakeholder

CG provisions. Our study thereby provides new insights on

the moderating and intermediate effects of disclosing share-

holder CG practices on the link between stakeholder CG

disclosure practices and f‌irm value.

The overall aim of CG mechanisms is to reduce agency

problems by aligning the interests of managers and owners

and thereby improving f‌irm value (Jensen & Meckling, 1976).

A major way of resolving such agency conf‌licts is for f‌irms to

engage in increased disclosure of CG practices.1Specif‌ically,

past studies suggest a number of channels through which

increased disclosure of CG practices can be translated into

improved f‌irm value (Hermalin & Weisbach, 2011). First,

disclosing CG practices can facilitate eff‌icient allocation of

scarce resources by helping managers and investors to iden-

tify prof‌itable investment opportunities (Bushman & Smith,

2001). Second, providing more transparent information on

CG practices for shareholders can decrease the costs of exter-

nal capital by reducing managerial monitoring and bonding

costs (Beiner, Drobetz, Schmid, & Zimmermann, 2006) and

consequently, the overall corporate risk premia (Mallin,

2002). Third, disclosing CG practices can increase f‌irm value

by reducing information asymmetry between managers and

investors (Sheu, Chung, & Liu, 2010).

The results of recent studies generally support the above

proposition (Henry, 2008; Renders, Gaeremynck, & Sercu,

2010). For example, La Porta, Lopez-De-Silanes, Shleifer,

and Vishny (2002) f‌ind evidence of higher valuation of f‌irms

in countries that provide more transparent information on

the rights of minority shareholders than those that do not.

Gompers, Ishii, and Metrick (2003) and Durnev and Kim

(2005) report a positive link between disclosing CG practices

and f‌irm value.

A separate crucial policy question that has received little

empirical attention despite generating extensive debate2is

whether providing more transparent information on share-

holder or stakeholder CG practices contributes more to f‌irm

value. Stakeholder theorists (Freeman & Reed, 1983; Slinger,

1999) suggest that disclosing stakeholder CG practices can

not only reduce political costs (Cheung, Rau, & Stouraitis,

2010) by legitimizing corporate operations (Branco & Rod-

rigues, 2008), but also gain greater access to resources

(Jensen, 2002) that can improve f‌irm value. By contrast, dis-

closing CG practices relating to stakeholders imposes extra

costs on f‌irms (Friedman, 1970), which can impact nega-

tively on f‌irm value.

In this paper, we contribute to extant CG disclosure litera-

ture by responding to recent calls (Filatotchev & Boyd, 2009;

van Ees, Gabrielsson, & Morton, 2009) for studies that

examine both shareholder and stakeholder CG disclosure

practices, as well as draw on multiple theoretical perspec-

tives, including agency, legitimacy, and resource depen-

dence theories by providing empirical evidence on the

central question of whether providing more transparent

information on shareholder or stakeholder CG practices

contributes more to f‌irm value in SA. Similar to otherAnglo-

American countries, SA has pursued CG disclosure policy

reforms following the collapse of Apartheid in 1994 in the

form of the 1994 and 2002 King Reports (Aguilera & Cuervo-

Cazurra, 2009). Distinct from other Anglo-American coun-

tries, the reforms require f‌irms to provide more transparent

information on CG practices for both shareholders and

stakeholders (Ntim, Opong, Danbolt, & Thomas, 2011). This

uniquely permits us to investigate and compare the impact

of disclosing good CG practices on both shareholders and

stakeholders, which is rarely studied. Hence, this study

allows us to shed some light on the important question of

whether providing more transparent information on share-

holder or stakeholder CG practices contributes more to f‌irm

value, thereby making a number of new contributions to the

extant literature.

First, from an agency theoretical perspective, providing

more transparent information on CG mechanisms can

reduce agency conf‌licts between corporate managers and

shareholders (Jensen & Meckling, 1976; Mallin, 2002).

However, since there are signif‌icant costs implications for

corporate disclosures (Core, 2001; Dye, 2001), f‌irms that

commit to greater levels of transparency on shareholder CG

practices distinguish themselves by sending a credible

signal about their intention of aligning their interests with

those of existing and future investors (Sheu et al., 2010). The

positive perception of their CG mechanisms from investors

can be expected to impact favorablyon f‌irm value in the form

of increased share prices (La Porta et al., 2002). Consistent

with agency theory, our results contribute to the literature by

indicating a positive link between high levels of transpar-

ency on shareholder CG practices and f‌irm value.

Second, we argue that in developing countries facing deep

socio-economic problems, similar to SA, companies that

provide more transparent information relating to stake-

holder CG practices can gain f‌inancially through increased

market valuation. Legitimacy theory indicates that greater

transparency through increased disclosure of CG practices

that seek to protect the interests of stakeholders is a central

means by which companies, particularly large ones, can

legitimize their operations (Branco & Rodrigues, 2008). On

the other hand, the resource dependence theory suggests

that disclosing stakeholder CG practices can provide access

to critical resources, such as raw materials and government

contracts (Jensen, 2002; Nicholson & Kiel, 2003), leading to

improved f‌irm value. Consistent with legitimacy and

resource dependence theories, we provide new evidence

that suggests a positive association between disclosing

stakeholder CG practices and f‌irm value.

Third, and most importantly, we provide new insights on

the moderating and intermediate effects of disclosing share-

holder CG practices on the association between stakeholder

CG disclosures and f‌irm value. It can be argued that the

emphasis on shareholder primacy in the Anglo-Saxon corpo-

rate world on the theory of the f‌irm suggests that disclosing

CG practices on shareholders may be more important than

disclosing stakeholder CG practices.Therefore, we argue that

even though being more transparenton CG practices relating

to both shareholders and stakeholders contributes to f‌irm

value, it is expected that f‌irms with good disclosure of CG

practices for stakeholders are more likely to also disclose

more information on shareholder CG mechanisms. Hence,

disclosure of CG practices for stakeholders leads to higher

market value primarily through the provision of more trans-

parent information on CG practices for shareholders, and

thus the value creation is mainly through the disclosure of

shareholder rather than stakeholder CG practices.

CORPORATE GOVERNANCE DISCLOSURE AND FIRM VALUE 85

Volume 20 Number 1 January 2012© 2011 Blackwell Publishing Ltd