Do compositions of board and audit committee improve financial disclosures?

Abstract

PurposeThis paper aims to examine the impact of corporate governance practices on the level of financial disclosures made by the Indian firms. This assumes importance in the context of the role of financial disclosures in addressing the agency problem.Design/methodology/approachFinancial disclosure score is computed by considering disclosures provided by the generally accepted accounting principles and is the dependent variable. The independent variable – corporate governance score – is an index comprising internal governance mechanisms. The authors empirically examine the impact of corporate governance practices on financial disclosure using multiple regression model for 200 large listed Indian firms.FindingsThe study suggests that quality of governance practices significantly improves financial disclosure practices of the firm. Particularly, the composition of the audit committee is effective in improving disclosures.Practical implicationsThe finding has implications for policy makers and practitioners. It will help investors, lenders, and other stakeholders to assess firms’ financial disclosure quality. In addition, the findings, suggest the influence of governance practices on disclosure, might help in the formulation of appropriate policies about board structure and audit function. It is also a call to investors to emphasize on governance quality of the investing firms.Originality/valueThe study builds a case for an urgent intervention for improving the existing governance standards to advance the quality of financial disclosure in an emerging market context.