Examining Anti-Corruption Disclosures, Profitability and Financial Stability Among Extractive Firms in Africa

Abstract

This study examines the determinants of anti-corruption disclosures and the effect of disclosures on the profitability and financial stability of extractive firms in Africa. The study also tests the presence of convergence in anti-corruption disclosure, profitability, and financial stability of the firms. The study uses an unbalanced panel data of 27 firms operating in 5 African countries covering the period 2006 to 2018. The data was collected from different corporate reports of the firms that form part of the Global Reporting Initiative (GRI) database. The study uses a composite index to measure overall disclosure and individual items are coded as binary. Profitability is measured using the return on asset and return on equity while the z-score measures financial stability. The study uses panel logistic regression for binary dependent variables and panel corrected standard error regression/random effect regression for continuous variables. The results indicate that the determinants of anti-corruption disclosure are: membership in the United Nations Global Compact (UNGC) and Extractive Industry Transparency Initiative, multinational enterprise status, corruption perception index, and human development index. Specifically, UNGC membership and multinational status enhance the disclosure on corruption analysis while countries with a high prevalence of corruption have firms that report more on corruption analysis. Disclosure on corruption training is high among firms that are UNGC signatories, countries with a high human development index, and countries with a high prevalence of corruption. There is a weak effect of firm-level, industry-level, and country-level factors on disclosures on corruption response. There is evidence that corruption disclosure reduces the financial stability of firms. Disclosures on corruption analysis and corruption training are the main factors driving the reduction in financial stability. The effect on profitability is not significant except in the case of disclosure on corruption response which also reduces profitability. There is strong statistical evidence to suggest that anti-corruption disclosure, profitability, and financial stability of extractive firms converge. The study has relevant implications for practitioners, policymakers, and the academic community. It is very beneficial to the GRI Secretariat and other sustainability standard setters. The study uses data that is skewed towards large extractive firms. This study is premier in exploring the nexus between anti-corruption disclosure, profitability, and financial stability in extractive firms in Africa. It is also unique in providing a test of both beta and sigma convergence among the firms.