Corporate boards, audit committees and voluntary disclosure: evidence from Italian Listed Companies
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Corporate boards, audit committees and voluntary disclosure: evidence from Italian Listed Companies Marco Allegrini • Giulio Greco
Published online: 24 February 2011 Springer Science+Business Media, LLC. 2011
Abstract This paper investigates the interplay between governance and disclosure in an agency setting, featured by concentrated ownership and high insider shareholders representation in the board. In this context, agency conflicts happen between large controlling shareholders and minority outside investors, with risks of private benefits exploitation. We regressed a voluntary disclosure index on seven governance variables related either to the board structure and functioning. The empirical evidence is provided by the Italian stock market. Our results suggest the presence of a complementary relationship between governance and disclosure. Diligent monitoring activity is associated with greater transparency to the outside. The findings are consistent with the view that internal and external control tend to be present at the same time, since the presence of one of them reduces the incentive for the controlling shareholders to limit the other. The empirical evidence also show that larger boards are not detrimental to outside shareholders, with regard to voluntary disclosure. The study can contribute to the understanding of the relationship between governance and disclosure in a particular agency setting. They might be of interest to practitioners and regulators, insofar as they are consistent with calls for more disclosure requirements in this agency setting. Keywords Corporate governance Corporate boards Audit committees CEO duality Voluntary disclosure Annual report JEL Classification
G38 M48 M3
M. Allegrini G. Greco (&) Department of Business Administration ‘‘E. Giannessi’’, University of Pisa, Via C. Ridolfi, 10, 56124 Pisa, Italy e-mail: [email protected] M. Allegrini e-mail: [email protected]
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M. Allegrini, G. Greco
1 Introduction In recent years, authorities and market regulators in several countries considered corporate governance and disclosure as two key inseparable instruments for investor protection and the functioning of the capital markets (Cadbury Committee Report 1992; Blue Ribbon Report 1999; OECD 1999). Agency theory predicts that companies with high agency costs will try to reduce them using control mechanisms such as the monitoring activity, delivered by its corporate governance structures, and the voluntary disclosure1 (Jensen and Meckling 1976; Leftwich et al. 1981; Fama and Jensen 1983). Agency theorybased empirical literature find support for both the hypothesis of a complementary and a substitutive relationship between governance and disclosure. Since disclosure is not costless, companies might opt for strengthening internal governance mechanisms instead of increasing the level of disclosure (Cheng and Courtenay 2006; Cerbioni and Parbonetti 2007). In this study we explore the interplay between governance and disclosure in an agency setting characterized
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