Comprehensive Corporate Governance Mechanism and Disclosure Quality: Evidence from the United Kingdom

Abstract

Our study empirically examines the relationship between corporate governance and disclosure quality from the context of the United Kingdom. While studies on corporate governance and disclosure quality are extensive, we argue that only limited studies have utilised analyst forecast accuracy as a proxy for disclosure quality. We concentrateon the analyst forecast accuracy since we value the credibility of financial analysts in forecasting the firm’s earnings. Analyst are the expert users of the firm’s information and they rely on their analysis to predict firm’s earnings as well as to make a recommendation. We derived our sample from the analyst perception on the firms with high quality of disclosure that is the Investor Relation (IR) Magazine Award. Specifically we used 127 match-paired sample (i.e., winners and non-winners) of IR Magazine Award during the year 2005-2008. We measure corporate governance using board characteristics, audit committee characteristics, chairman and audit committee multiple directorships, chairman tenure and institutional ownership. Our findings report that multiple directorship by audit committee consistently increases disclosure quality. This suggest that the multiple directorships held by audit committee in other firms potentially improve their knowledge and experience in improving the quality of disclosure.Moreover, the result also shows a negative association between audit committee financial expertiseand board independent on the extent of quality of disclosure. These findings imply that the appointment of audit committee with financial expertise as well as an independent directors are merely a ticking the box activities, thus it appears in the letter form, but not in spirit. Our results are robust across various estimation, alternative measurement as well as endogeneity test that we have conducted.