Transparency & Disclosure in the Istanbul Stock Exchange: Did IFRS Adoption and Corporate Governance Principles Make a Difference?

Abstract

The purpose of this study is to investigate if the transparency and disclosure level of a sample of Istanbul Stock Exchange firms is enhanced by the promulgation of a set of local Corporate Governance (CG) Principles and by the voluntary adoption of the International Financial Reporting Standards (IFRS), an international best-practice. The Capital Market Board's CG principles are promulgated on a comply or explain basis and have been effective since the fiscal year 2004. First, the year 2003 Transparency & Disclosure (TD) index previously created in collaboration with Standard and Poor's is replicated for the fiscal year 2004. Using this short panel data of transparency and disclosure scores for our sample of 52 large and liquid Istanbul Stock Exchange firms, the improvement in the scores over the two years is measured. Second, with appropriate control variables in the model, we analyze the determinants of the significant improvement. We use the voluntary adoption of IFRS as an indicator of and commitment to TD, and find that the scores and their relationship with performance are higher in early adaptors. We then create a parsimonious 3-attribute Commitment-to-Better-Disclosure Index and observe a high correlation between the two indices. Finally, using a matched pairs design and controlling for IFRS adoption, we are able to attribute the improvement in the TD scores to the CG principles. The study should be of interest to researchers, managers, analysts, boards, policy makers and regulators at a time when debate on convergence to IFRS and the impact of local CG guidelines has become intense.