Abstract
Prior studies provide evidence that both corporate governance and corporate investment efficiency affect corporate disclosure practice. In this paper, we examine their joint effect on disclosure. In particular, we examine whether corporate governance quality and corporate investment efficiency act as substitutes or complements in their impact on narrative disclosure. We collect disclosure scores from Lancaster University’s Corporate Financial Information Environment (CFIE) website for a sample of non-financial UK companies for the period 2007–2014. We regress measures of corporate governance and corporate investment efficiency on two different proxies of disclosure practice (performance commentaries disclosure and the tone of narrative disclosure). Consistent with prior studies, we find that both governance and investment efficiency affect disclosure. We contribute to narrative disclosure studies in two crucial respects. First, we provide empirical evidence that governance and investment efficiency has a complementary effect on performance commentaries disclosure. Second, we contribute to the disclosure tone literature by providing empirical evidence that both governance and investment efficiency have a substitution effect on the tone of narrative disclosure.
Highlights
We examine the impact of corporate investment efficiency and corporate governance on corporate narrative disclosure in the UK
This study aimed to examine the joint effect of corporate investment efficiency and corporate governance on voluntary disclosure as an extension of the work by Elberry and Hussainey (2020)
After introducing the effect of corporate governance and the joint effect of investment efficiency and corporate governance into the regression models, we find that there is a complementary effect between governance and investment efficiency on voluntary disclosure and a substitution effect on disclosure tone
Summary
We examine the impact of corporate investment efficiency and corporate governance on corporate narrative disclosure in the UK. Our paper complements the recent work of Elberry and Hussainey (2020) by considering the joint impact of corporate governance and investment efficiency on disclosure practice. We add corporate governance into the corporate efficiency-disclosure model because prior research shows that corporate governance is a common determinant for both corporate investment efficiency (Billett et al 2011; Chen et al 2011, 2019) and voluntary disclosure (Xiao et al 2004; Samaha et al 2015; Habbash et al 2016). Legitimacy, capital need, and stakeholder theories were used to explain how corporate governance mechanisms influence corporate voluntary disclosure (Xiao et al 2004; Samaha et al 2015; Habbash et al 2016)
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