Corporate communication as a governance mechanism: A content analysis of corporate public disclosures

Sam Kolahgar,Azadeh Babaghaderi,Harjeet S Bhabra

doi:10.22495/cocv18i3siart16

Abstract

Corporate communication efforts have mainly been viewed as a by-product of governmental regulations and board of directors’ oversight. In this paper, we examine the role of corporate communication as a stand-alone governance mechanism. We introduce a new business-related dictionary and conduct automated textual analysis of over 150,000 electronic documents filed by a sample of firms listed on the S&P/TSX Composite Index from 1999 to the end of 2014. Our findings demonstrate the governing role of corporate communication by documenting the adverse market effects of deviations from the expected level of communication. Moreover, as a governance mechanism, corporate communication shows substitution/complementary relationships with other established governance mechanisms. In addition, we find a non-linear relationship between a firm’s communication efforts and its value and risk levels. Results are robust after controlling for major corporate events (M&A, spin-offs, financial distress and bankruptcy, and significant lawsuits). These findings contribute to corporate governance literature and the understanding of agency theory predictions of communications and disclosures’ economic effects

Highlights

This study examines corporate communications’ governing role (Amel-Zadeh & Serafeim, 2018; Brammer & Pavelin, 2008; Shahab et al, 2020) and investigates its impact on the firm’s value and risk, and studies the substitution-complementary relationship between corporate communication and other governance attributes
We demonstrate that corporate communication has a substitution-complementary relationship with board size, board independence, board education, board expertise, CEO duality, frequency of board meetings, board gender diversity, institutional ownership, and product market competition
These significant associations suggest that communication should be part of the governance bundle, and the optimum level of communication should be according to the specific configuration for each firm

Summary

Introduction

This study examines corporate communications’ governing role (Amel-Zadeh & Serafeim, 2018; Brammer & Pavelin, 2008; Shahab et al, 2020) and investigates its impact on the firm’s value and risk, and studies the substitution-complementary relationship between corporate communication and other governance attributes. The literature of corporate disclosures and transparency relies on the premise that rules and regulations set by regulatory authorities determine the level and quality of the mandatory disclosures, and requirements set by the board of directors determine the level and quality of the voluntary disclosures This picture reflects only part of the reality; it lacks a third element — the role of communication culture (In this paper, we do not equate communication with disclosure and instead consider communication to be a broader concept that illustrates a firm’s commitment to connecting with its stakeholders)

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Conclusion