Description
The purpose of this paper is to investigate the impact of different categories of ownership
concentration on corporate voluntary disclosure practices in New Zealand.
Accounting Research Journal
The impact of different types of ownership concentration on annual report voluntary
disclosures in New Zealand
Haiyan J iang Ahsan Habib
Article information:
To cite this document:
Haiyan J iang Ahsan Habib, (2009),"The impact of different types of ownership concentration on annual
report voluntary disclosures in New Zealand", Accounting Research J ournal, Vol. 22 Iss 3 pp. 275 - 304
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Xiao Huafang, Yuan J ianguo, (2007),"Ownership structure, board composition and corporate voluntary
disclosure: Evidence from listed companies in China", Managerial Auditing J ournal, Vol. 22 Iss 6 pp.
604-619http://dx.doi.org/10.1108/02686900710759406
Poh-Ling Ho, Grantley Taylor, (2013),"Corporate governance and different types of voluntary disclosure:
Evidence from Malaysian listed firms", Pacific Accounting Review, Vol. 25 Iss 1 pp. 4-29 http://
dx.doi.org/10.1108/01140581311318940
M. Akhtaruddin, Hasnah Haron, (2010),"Board ownership, audit committees’ effectiveness, and
corporate voluntary disclosures", Asian Review of Accounting, Vol. 18 Iss 3 pp. 245-259 http://
dx.doi.org/10.1108/13217341011089649
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The impact of different types of
ownership concentration on
annual report voluntary
disclosures in New Zealand
Haiyan Jiang and Ahsan Habib
School of Business, Auckland University of Technology (AUT),
Auckland, New Zealand
Abstract
Purpose – The purpose of this paper is to investigate the impact of different categories of ownership
concentration on corporate voluntary disclosure practices in New Zealand.
Design/methodology/approach – The study applies panel data regression analysis to a sample of
New Zealand listed companies from 2001 to 2005. Two-stage least squares analysis (2SLS) is
conducted. Ownership concentration is categorised into four mutually exclusive ownership structures.
Findings – The paper ?nds that ?rm-year observations characterised by ?nancial institution-
controlled ownership structure tends to make signi?cantly fewer (more) disclosures at high (low)
concentration levels supporting expropriation. In contrast, ?rm-year observations in the high (low)
concentration group with government- and management-controlled ownership structures exhibit
considerably higher (lower) voluntary disclosure scores, suggesting a positive monitoring effect at
high ownership concentration level.
Research limitations/implications – The results provide evidence for the proposition that the
ef?ciency of large block holders’ monitoring varies with the level of ownership concentration.
Practical implications – To promote transparency in capital markets, regulators can encourage or
discourage certain types of large shareholding, while monitoring the level of ownership concentration
by means of regulation. Investors, especially less sophisticated retail investors, will bene?t from the
?ndings that different ownership groups affect disclosure policies differently.
Originality/value – The ?ndings strengthen the importance of differentiating ownership structures
into various classes to infer the real impact of differential controlling properties on managerial
disclosure decisions. Furthermore, the results reveal that the relationship between ownership
concentration and voluntary disclosure practices has a non-linear pattern.
Keywords Structural analysis, Disclosure, New Zealand
Paper type Research paper
1. Introduction
This study aims to examine the impact of different types of ownership concentration
on voluntary disclosures in New Zealand. Prior research identi?es ownership
concentration as a determinant of corporate voluntary disclosures (Eng and Mak, 2003;
Luo et al., 2006; Mak, 1991; Makhija and Patton, 2004), and uses one or two types of
block ownership as a measure for ownership concentration. This study extends prior
research by considering the impact of four types of concentrated ownership structures
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors would like to thank two anonymous reviewers for providing many helpful
comments. The ?rst author would like to acknowledge the considerable ?nancial assistance
offered by the Lincoln doctoral scholarship and the New Zealand Institute of Chartered
Accountants PhD research scholarship during her PhD study. The usual disclaimer applies.
Disclosures in
New Zealand
275
Accounting Research Journal
Vol. 22 No. 3, 2009
pp. 275-304
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610911005590
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on voluntary disclosures using a single regression formulation. This study makes an
additional contribution by formulating and testing non-linear effect between
ownership concentration and voluntary disclosures. Furthermore, this study
considers endogenous nature of the relationship between ownership concentration
and voluntary disclosures and uses two-stage least squares analysis (2SLS) to control
for such endogeneity.
The theoretical debate on the bene?cial effects of concentrated ownership as a
corporate governance mechanism on ?rm performance generates two competing
hypotheses namely, ef?cient-monitoring versus opportunistic hypotheses (explained
later). Empirical ?ndings, too, are inconclusive. Corporate disclosure provides a
context for testing these two competing hypotheses because such disclosures play a
critical role in the ef?cient functioning of capital markets by mitigating agency
con?icts among managers, majority shareholders and minority shareholders (Healy
and Palepu, 2001). The extent and the quality of corporate disclosures are the outcome
of con?icting interests among management, majority and minority shareholders. With
controlling power, large block holders may manipulate the extent of disclosures to
maximize private bene?ts (opportunistic hypothesis) or serve as an effective monitor
encouraging managers to provide timely and credible disclosures (ef?cient monitoring
hypothesis).
Most studies regarding the relationship between ownership concentration and
voluntary disclosure practices are conducted in Anglo-Saxon countries with relatively
dispersed corporate ownership structure and transparent legal system. This paper
revisits this issue in New Zealand. Unlike some other OECD (Organization for
Economic Cooperation and Development) countries, New Zealand is characterized to
have signi?cant ownership concentration, higher shareholder litigation costs, and
weaker enforcement of law (Hossain et al., 2001). Moreover, previous researchers have
usually used “total ownership concentration” irrespective of the differences in the
structures of such ownership. This may provide limited information because of the
disparity in the monitoring costs incurred and the incompatible monitoring power held
by different types of dominant shareholders (Badrinath et al., 1989; Del Guercio, 1996;
Falkenstein, 1996; Bennett et al., 2003). We extend this stream of research by
classifying shareholding structures into four mutually exclusive types: ?nancial
institution-controlled; management-controlled; government-controlled; and
other-company-controlled and examine the impact of different types of ownership
concentration on corporate voluntary disclosures in New Zealand.
We also hypothesize and test the non-linear relationship between ownership
concentration and voluntary disclosure level under each type of ownership
concentration based on the non-linear relationship between ownership concentration
and ?rm value documented by Morck et al. (1988).
Reported results based on listed, non-?nancial companies on the New Zealand Stock
Exchange from 2001 to 2005, show that ?rm-year observations characterised by
?nancial institution ownership control tend to make signi?cantly fewer (more)
disclosures at high (low) concentration levels supporting the expropriation hypothesis
(ef?cient monitoring hypothesis) at high (low) ownership concentration level. In
contrast, ?rm-year observations in the high concentration group with government and
management controlled ownership structures has considerably higher voluntary
disclosure scores compared with their low concentration counterparts, suggesting a
positive monitoring effect of such ownerships. These ?ndings strengthen the
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importance of differentiating ownership structures into various classes to infer the real
impact of differential controlling properties on managerial disclosure decisions. In
addition, the results reveal that the relationship between ownership concentration and
voluntary disclosure practices follow a non-linear pattern, re?ecting the tendency for
the ef?ciency of large block holders’ monitoring to vary with the level of ownership
concentration.
This paper proceeds as follows: section 2 surveys the related literature, followed by
a discussion on the New Zealand institutional environment and the development of
testable hypotheses. Section 3 explains the research methodology employed in this
study. Descriptive statistics and substantive test results are presented in section 4, and
section 5 presents implications of the ?ndings. Section 6 concludes.
2. Literature survey and New Zealand institutional framework
2.1 Literature survey
Many previous empirical studies investigating the association between ownership
structure and voluntary disclosure practices produce inconclusive results (Mak, 1991;
Aitken et al., 1997; Toms, 1998; Chau and Gray, 2002; Eng and Mak, 2003; Makhija and
Patton, 2004; Arcay and Vazquez, 2005; Ballesta and Garcia-Meca, 2005; Luo et al.,
2006). These studies test two sets of competing hypotheses. The ef?cient-monitoring
hypothesis suggests that large block holders are better at monitoring management
than individual shareholders, because they are able to absorb monitoring and takeover
costs (Shleifer and Vishny, 1986), execute their vested ?duciary responsibilities with
greater expertise (Pound, 1988), and acquire more precise signals of management
efforts (Berle and Means, 1932; Huddart, 1993). According to this perspective, ?rms
with large block holders are likely to make extensive voluntary disclosures. El-Gazzar
(1998) reports that ?rms with high percentages of large institutional ownership provide
high levels of voluntary earnings disclosure prior to earnings announcements, which
pre-empts earnings disclosures in ?nancial markets. Haniffa and Cooke (2002) also
report a positive relationship between the proportion of shares held by the ten largest
shareholders and the extent of voluntary disclosure in Malaysia. Luo et al. (2006) report
that the existence of outside block ownership considerably increases corporate
voluntary disclosures by management in Singapore.
However, the con?ict-of-interest hypothesis predicts that because of other pro?table
business relationships with the ?rm, large block holders are effectively “coerced” into
voting their shares with management. Tirole and Holmstrom (1993) show that
institutional ownership concentration may limit information diffusion and reduce
share market liquidity, and contended that concentrated ownership, by reducing
market liquidity, reduced the bene?ts of market monitoring on ?rms’ management.
The strategic-alignment hypothesis suggests that institutional investors and managers
?nd it mutually advantageous to work together. This cooperation cripples large block
holders’ incentive and ability to monitor managerial actions (Pound, 1988). Both the
con?ict-of-interest and strategic-alignment hypotheses suggest managerial
entrenchment, with the “cooperation” of large block holders. Instead of sharing
information with minority shareholders, large block holders may prefer less disclosure.
In addition, large block holders have strong incentives to search for private
pre-disclosure information about companies in order to discharge their ?duciary
responsibilities, so that a negative relationship between ownership concentration and
voluntary disclosure might be expected. Better-informed shareholders (large block
Disclosures in
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holders) preferred less disclosure than less well-informed ones (Kim, 1993; Chau and
Gray, 2002). The same might be expected to hold when institutional investors’ primary
objective is the consumption of private bene?ts of control rather than an increased share
price in the capital market (Makhija and Patton, 2004). A number of empirical studies
?nd consistent evidence supporting this proposition (Hossain et al., 1994; Lakhal, 2005;
Chau and Gray, 2002; Schadewitz and Blevins, 1998). In Australia, Mitchell et al. (1995)
investigate how ?rm characteristics affect voluntary segment information disclosure in
1983, before segment information disclosure was made mandatory in 1985. They report
weak support for the hypothesized positive relationship between the level of segment
information disclosure and ownership diffusion.
Although the empirical studies reviewed previously provide interesting insights
into the effect of ownership concentration on voluntary disclosure practices, they suffer
from at least two limitations. One important limitation relates to the fact that these
studies do not make ?ner classi?cation of the ownership variable. Bushee (1998, 2001)
divides institutional investors into three clusters, namely dedicated, transient and
quasi-indexer institutions, based on three metrics (portfolio turnover, diversi?cation
and momentum trading). Based on this methodology, Bushee and Noe (2000) ?nd that
?rms with high Association for Investment Management and Research (AIMR)
disclosure ranking have greater numbers of transient institutional shareholders who
incline to a high portfolio turnover, high diversi?cation and high extent of momentum
share trading. Bushee and his colleagues also provide interesting insights into the
effect of institutional ownership clusters on insider trading, stock return volatility and
institutional investors’ preferences for governance mechanisms (Bushee, 2004; Bushee
et al., 2007). Eng and Mak (2003) adopt a managerial ownership, block holder
ownership and government ownership classi?cation and ?nd that managerial
(government) ownership is negatively (positively) related to the voluntary disclosure
score for a sample of Singapore ?rms. Taken together, this stream of research implies
that there can be diverse investment strategies and discrepant monitoring costs
incurred by different types of large shareholders who may have differential impacts on
voluntary disclosure practices. However, these studies do not address the potential
non-linear relationship between block holder ownership and disclosure level.
The other limitation relates to the linearity assumption of the relationship between
ownership structure and voluntary disclosures, although the non-linear relationships
between ownership structure and governance issues like ?rm value, investment-cash
?ow sensitivity, debt, and dividend decisions have been well documented. The
disclosure studies reviewed previously fail to address both of these limitations. Some
empirical studies address the ?rst concern but remain silent on non-linearity issue. Our
paper enriches the ownership structure and disclosure literature by addressing the
aforementioned limitations.
2.2 New Zealand institutional framework and development of hypotheses
NewZealand is believed to have concentrated equity ownership, relatively small equity
markets, and a regulatory environment less stringent than many (Hossain et al., 2001).
The extent to which voluntary disclosure practices are shaped by concentrated
ownership structures in New Zealand is an important empirical question. New Zealand
belongs to the same common law reporting regime as the USA, and the UK, yet differs
markedly with respect to ownership structure. Governance literature identi?es
important roles played by both ?rm-level and country-level governance structures.
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Managerial entrenchments are more likely to occur when both ?rm-level and
country-level governance structures are poor. In New Zealand, a strong country-level
governance regime operates (La Porta et al., 2000). If country-level governance
protection is suf?cient to induce managers to undertake value-maximizing behaviour,
then concentrated ownership (assuming it represents a poor ?rm-level governance
characteristic) will have minimal effect on voluntary disclosure practices. However,
?rm-level governance is an important monitoring device and concentrated ownership
structures could positively (negatively) affect voluntary disclosure practices,
depending on ef?cient monitoring (entrenchment) views. In New Zealand, there is a
dearth of research on the relationship between ownership structure and ?rm
disclosure. A recent study fails to ?nd any signi?cant relationship between proportion
of managerial ownership (insider ownership) and disclosure of forward-looking
information (Hossain et al., 2005). This paper extends current research in two ways.
First, we decompose ownership structures into four mutually exclusive groups:
(1) Financial institution-controlled.
(2) Government-controlled.
(3) Management-controlled.
(4) Other company-controlled.
Financial institution-controlled ownership structure occurs when the percentage of
?nancial institutions’ shareholding accounts for the majority of the top-?ve
shareholdings. Similarly, ownership structures can be categorized as being
government, management, or other company-controlled, if these groups account for the
majority shareholding among the top-?ve shareholdings. Furthermore, the non-linearity
between ownership structure and disclosure is incorporated into the research design.
Regarding non-linearity between ownership composition and disclosure practices,
Makhija and Patton (2004) recognize that large shareholders may derive bene?ts:
(1) Directly from ?rms (private bene?ts of control).
(2) From changes in share values in the capital market.
Large shareholders may also try to maximize their total bene?ts, which are the sum of
(1) and (2). Such motivations positively (negatively) affect corporate disclosure
practices if large shareholders’ objective is to obtain share price bene?ts (camou?age
their consumption of private bene?ts). What fundamentally shapes a large
shareholders’ objective is the level of large shareholdings, which is a proxy for their
controlling power in management issues. If external large shareholders enjoy absolute
controlling rights in the ?rm, they can exert a powerful in?uence on management in
deriving private bene?t fromcontrols. Alowdegree of voluntary disclosure in this case
is desirable, as it conceals the consumption of such private bene?ts. Conversely, with
the decrease in their shareholding, reduced voting rights can no longer secure private
bene?ts. In that case, large shareholders might prefer to align their interests with those
of other shareholders in obtaining greater share values from increased corporate
disclosure. Thus, the relationship between ownership concentration and disclosure is
likely to be nonlinear, and will vary with the level of the large shareholders’ holding.
Although companies in New Zealand have higher institutional and concentrated
shareholdings, their overall effectiveness and willingness to monitor are arguably
weak (Bhabra, 2007). The popular press is replete with criticisms for the lack of
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shareholder activism in New Zealand compared with that in the USA, UK, and even
Australia. With respect to ?nancial institutions’ investment in the New Zealand equity
market, foreign ?nancial institutions and corporations account for the majority of
investments, which leads to Bhabra’s (2007) conclusion that geographical separation of
foreign institutional investors from their invested companies is partially responsible
for the ineffective institutional monitoring observed in New Zealand.
Navissi and Naiker (2006) report a non-linear relationship between institutional
ownership and ?rm value in New Zealand by documenting a positive (negative)
association with ?rm value at lower (higher) levels of ownership. Active monitoring of
institutional shareholding improved ?rm value only up to a certain level of
shareholding (ef?cient monitoring). At high levels of shareholding, institutional
shareholders may encourage sub-optimal decisions harmful to the ?rms (managerial
entrenchment). This argument is corroborated by the recent successive collapses of
?nancial companies in New Zealand. The failure of 18 ?nancial companies between
2006-2008 resulted in the loss of more than two billion dollars of investors’ funds
(Bergh and Nichols, 2008). The failure of these ?nance companies appears to have more
to do with their poor management, the lack of information they provided to ?nance
markets, as well as the asymmetrical nature of the industry resulting from the
dysfunctional price signal (McKay, 2007). The New Zealand Stock Exchange (NZX)
states: “The lack of willingness to regulate or supervise these companies has been
resounding . . . None of these (?nance companies) has been governed by the continuous
disclosure rules of the NZX because they were not listed. Also, because ?nance
companies are not banks, they have not been regulated by the Reserve Bank of New
Zealand (RBNZ) (NZPA, 2007a)” The inadequate legislation, along with the failures,
raises the concern that ?nance companies’ governance system may be ?awed, and
signi?cant risk exists in this sector (NZPA, 2007b). This lack of monitoring could allow
institutional funds to siphon or tunnel value out of portfolio companies by way of
special contracts, transfer pricing and non-transparent side deals with ?rms connected
to the fund management companies (Ellerman, 1998).
Because increased disclosures might expose such value siphoning or tunneling by
entrenched management and ?nancial shareholders, a negative association would be
expected between ?nancial institution ownership concentration and corporate
disclosure scores if the con?ict-of-interest or strategic-alignment hypotheses held.
This situation might be severe when ?rm’s ownership concentration levels are high,
while less so when large shareholders have fewer voting rights. Based on the preceding
discussion, we formulate the following hypotheses:
H1(a). The extent of voluntary disclosure is negatively related to the ?nancial
institutional ownership at high levels of ownership concentration.
H1(b). The extent of voluntary disclosure is positively related to the ?nancial
institutional ownership at low levels of ownership concentration.
Regarding the impact of government ownership on voluntary disclosure levels, it is
conjectured that companies with government ownership might not disclose
extensively because of:
.
their separate monitoring by the government;
.
their access to government funding and, hence, reduced need to raise funds
externally; and
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the fact that returns in holding companies are guaranteed to governmental
owners (Naser and Nuseibeh, 2003).
Empirically, Ghazali and Weetman (2006) report that government ownership in
Malaysia does not promote greater disclosure and better transparency. They argue
that in a developing country like Malaysia, government-controlled companies are
strongly politically associated, and such companies tend to disclose less information to
protect their political linkages or even their bene?cial owners.
In contrast, Makhija and Patton (2004) state that government tends to hold on too
large a stake in companies that are regarded as having strategic value or perceived as
“national silver”. These non-economic considerations suggest that companies with
large governmental shareholdings might choose to disclose more to ful?ll their
accountability role to the public at large. Eng and Mak (2003) argue that agency costs
are higher in government-owned companies because of con?icting objectives between
the pure pro?t goals of a commercial enterprise, and goals related to the interests of the
nation. This argument is supported by their evidence that the need to communicate
with other shareholders is greater in government-controlled companies, leading to
increased disclosure. However, lower levels of government ownership may reduce this
bene?cial aspect of governmental ownership, indicating decreased controlling power
in corporate issues, and reduced non-economic disclosure motivation. Thus, the
following hypotheses are developed:
H2(a). The extent of voluntary disclosure is positively related to governmental
ownership at high ownership concentration levels.
H2(b). The extent of voluntary disclosure is negatively/insigni?cantly related to
governmental ownership at low ownership concentration levels.
Another group that is likely to exert signi?cant in?uence on corporate disclosure
policies is the management group. On the one hand, management could maximise the
private bene?ts of control by providing minimal disclosures or less credible disclosures
to outsiders. Gelb (2000) ?nds that there is indeed a negative relationship between
managerial ownership and disclosures measured by AIMR. Ruland et al. (1990) report
that managerial earnings forecasting decreased when insider ownership increased.
However, Hossain et al. (2005) fail to ?nd the predicted negative relationship between
insider ownership (directors and top ?ve managers) and prospective information
disclosure by New Zealand companies.
On the other hand, a high level of managerial ownership can align the interests of
managers with outside shareholders’ disclosure preferences, because managers with
greater shareholdings can derive greater share-market bene?ts from better disclosure.
War?eld et al. (1995) report that the earnings-return correlation is greater for ?rms
with high levels of managerial ownership, and interpreted this result as evidence that
accounting disclosures’ information content increases with the level of managerial
ownership. Nagar et al. (2003) argue that managers are privy to information that
investors demand, and are reluctant to publicly disseminate it unless they are provided
with appropriate incentives (stock-based compensation, for example). In Malaysia,
Mohd-Nasir and Abdullah (2004) also ?nd that the executive directors’ shareholdings
has a positive in?uence on the voluntary disclosure level.
With respect to the non-linearity assumption, Leung and Horwitz (2004) ?nd that
voluntary segment disclosure increases as director ownership increases from 1 percent
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to 25 percent in Hong Kong. However, it decreases when the level of insider ownership
rises above the 25 percent ownership level. They state that higher levels of managerial
ownership reduce the alignment of interests, and the agency problem shifts from
managers/shareholder con?icts to majority/minority shareholder con?icts. A recent
study by Bhabra (2007) in New Zealand, however, reports a curvilinear relationship
between insider-ownership (director ownership) and ?rm value. Bhabra ?nds that
insider ownership and ?rm value are positively correlated at ownership levels below 14
percent and above 40 percent; and inversely correlated at intermediate levels of
ownership. These results suggest that ?rm value initially increases with insider
ownership at lower levels (market discipline), then reduces over intermediate insider
ownership levels (entrenchment) and, ?nally, increases beyond a critical ownership level
(convergence of interest). Therefore, in New Zealand listed companies, managerial control
might be expected to have a positive impact on disclosure at high ownership
concentration levels, but a negative or insigni?cant relationship with disclosure level at
lowownership concentration levels. Based on this discussion, we develop two hypotheses.
H3(a). The extent of voluntary disclosure is positively related to managerial
ownership at high ownership concentration levels.
H3(b). The extent of voluntary disclosure is negatively/insigni?cantly related to
managerial ownership at a low ownership concentration levels.
Regarding ownership concentration by other company groups, this study develops no
hypotheses since it would not be possible to identify precisely the disclosure
motivation of such ownership groups.
3. Research methodology
3.1 Research design
The regression model used in this paper is designed to estimate the impact of
ownership concentration on voluntary disclosures after controlling for the known
determinants of voluntary disclosure scores. A common problem encountered by
researchers in regressing disclosure scores on ownership structure is the endogeneity
between these two variables, as corporate disclosure and ownership are arguably
determined simultaneously. In other words, corporate disclosure can attract
concentrated (dispersed) shareholders, while different ownership structures may be
associated with different disclosure policies (Makhija and Patton, 2004;
Venkatachalam, 2000). To alleviate the concern of endogenous relationships between
disclosures and ownership structure and detect the one-way effect of ownership
structure on voluntary disclosure, a 2SLS analysis is conducted. At the ?rst stage, the
ownership concentration measure – the Her?ndahl index – is regressed on an
instrumental variable, shareholder intensity, de?ned as the ratio of total shareholders
to total outstanding shareholdings. On a theoretical level, this variable should be a
determinant of ownership concentration but should bear no relationship to the
voluntary disclosure index. Acorrelation analysis reveals that this ratio correlates with
the ownership concentration measure but not with voluntary disclosure scores. From
the ?rst stage equation, ?tted values of the Her?ndahl index were obtained. In the
second stage, ?tted values of the Her?ndahl index are incorporated into the following
panel data regression model which pools the observations both cross-sectionally and
temporally to replace the original Her?ndahl index:
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A
t
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:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
SDSCORE
it
¼ b
0
þb
1
^
H
it
þb
2
PER
it
þb
3
CAP_INTEN
it
þ
b
4
SIZE
it
þb
5
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 5
ð1Þ
where SDSCORE
i
is scaled voluntary disclosure index of each ?rm in each ?nancial
year;
^
H
i
represents the ?tted value of Her?ndahl index which is a proxy for the
ownership concentration of each ?rm in each ?nancial year. The equation includes
common control variables used in academic research on the determinants of voluntary
disclosures. Firm pro?tability has been found to have a positive impact on voluntary
disclosure choices (Darrough and Stoughton, 1990; Miller, 2002; Verrecchia, 1983).
Firm pro?tability is proxied by net pro?t divided by total assets and is denoted
byPER
i
. Capital intensity, CAP_INTEN
it
, would also be expected to relate positively to
voluntary disclosure choices, as ?rms’ willingness to disclose information increases
with an increase in their demand for capital (Verrecchia, 1983; Wagenhofer, 1990).
CAP_INTEN
it
is the ratio of ?xed assets divided by total assets. Firm size, SIZE
it
, has
been reported to be a factor in?uencing the quality and the quantity of ?rm disclosure
(Johnson et al., 2001; and Lang and Lundholm, 1993). This is because:
.
larger companies are more likely to be exposed to litigation than their smaller
counterparts and, therefore, may disclose more voluntarily to avoid this cost
(Kasznik and Lev, 1995); and
.
reporting detailed information is relatively less costly for larger companies than
for smaller ones (Raffournier, 1995). Firm size, SIZE
it,
is measured as the natural
log of total assets.
Disclosure level has also been hypothesised to increase with leverage (Healy et al.,
1999; Lang and Lundholm, 1993; Raffournier, 1995), as shareholders would like to be
informed by voluntary disclosure regarding the debt information, to ensure that the
debt acts as a disciplining mechanism in curbing managerial opportunistic use of
excess cash (Jensen, 1986). Firm leverage, LEVERAGE
it
, is calculated as total liability
divided by total assets.
Equation 1 does not, however, classify ownership into different classes to
investigate the impact of each group on voluntary disclosure scores. Equation (2)
incorporates this feature into the analysis.
SDSCORE
it
¼b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
*FDUM
it
þb
5
^
H
it
*GDUM
it
þb
6
^
H
it
*MDUM
it
þb
7
^
H
it
*OTHDUM
it
þb
8
PER
i
þb
9
CAP_INTEN
it
þb
10
SIZE
i
þb
11
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 5
ð2Þ
Equation (2) captures the marginal effect of each type of controlling ownership on
disclosure level. FDUM is coded one when company has ?nancial
Disclosures in
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2
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:
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2
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a
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a
r
y
2
0
1
6
(
P
T
)
institutions-controlled ownership structures, and zero otherwise; GDUM is coded one
when ownership concentration was government controlled and zero otherwise; MDUM
is coded one when ownership concentration is management controlled (directors,
executives and/or companies’ family founders), and zero otherwise; OTHDUM is coded
one when ownership concentration is other company-controlled and zero otherwise.
The effect of ownership concentration on corporate voluntary disclosures under
?nancial institution-controlled, government controlled, and management controlled
ownership structures are captured by coef?cients b
4
,b
5
and b
6
respectively.
To test the hypothesised non-linear relationship between ownership concentration
and extent of voluntary disclosures, equation (3) as shown in the following is
estimated.
SDSCORE
it
¼b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
* FDUM
it
þb
5
^
H
it
* GDUM
it
þb
6
^
H
it
* MDUM
it
þb
7
^
H
it
* OTHDUM
it
þb
8
^
H
2
it
* FDUM
it
þb
9
^
H
2
it
* GDUM
it
þb
10
^
H
2
it
* MDUM
it
þb
11
^
H
2
it
* OTHDUM
it
þb
12
PER
it
þb
13
CAP_INTEN
it
þb
14
SIZE
it
þb
15
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 467
ð3Þ
Equation (3) is performed on entire sample observations. The quadratic relationship
between ownership concentration controlled by ?nancial institutions and the extent of
disclosure will be supported if b
4
is positive (H1b), and b
8
is negative (H1a). For
government-controlled ownership structures, the quadratic relationship between
government-controlled ownership structures and voluntary disclosures will be
supported if b
5
is negative (H2b), and b
9
is positive (H2a). Finally, the quadratic
relationship between management-controlled ownership structures and voluntary
disclosures will be supported if b
6
is negative (H3b), and b
10
is positive (H4a).
3.2 Measurement of variables
The Her?ndahl index is used as the proxy for ownership concentration (Demsetz and
Lehn, 1985; Hartzell and Starks, 2003; Kraft and Niederpru¨m, 1999; Lakhal, 2005;
Makhija and Patton, 2004). It has been reported to be the best of ?ve measures used by
Woerheide and Persson (1993) who investigated securities portfolio diversi?cation. It is
calculated using the formula: H ¼
P
n
i¼1
S
i
. Where n is the top ?ve largest
shareholders including ?nancial institutions, ?rms’ inside shareholders (directors and
executives) and other outside block shareholders; S is the percentage share owned by
each of the top ?ve largest shareholders. These data were retrieved from the
“Substantial security holders” section of the annual reports. Total sample observations
are categorised into high and low ownership concentration levels, based on a cut-off
point of 0.18.
Dummy variables are used to identify four different types of ownership structure. A
company will have ?nancial institution-controlled ownership structure when ?nancial
institutions’ shareholding accounts for the majority of the top-?ve shareholdings. For
example, a company may have top ?ve shareholders holding 60 percent of the shares
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2
0
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6
(
P
T
)
distributed as 30, 10, 10, 5 and 5 percent among top ?ve shareholders. Assume that the
?rst and fourth largest shareholders are ?nancial institutions with a total shareholding
of 35 percent. Because 35 percent is more than the rest of top ?ve shareholdings (25
percent), this company will be categorized to have ?nancial institution-controlled
ownership structure. For this ?rm FDUM will be coded 1, and GDUM, MDUM and
OTHDUM will be coded zero. The same procedure is repeated for each ?rm-year
observation to categorize government, management, or other company-controlled
ownership structure. The ownership type of company block shareholders is identi?ed
through searching New Zealand companies of?ce web site and block holders’ company
web site. Managerial shareholdings are identi?ed based on information provided in
“Substantial security holders” section of annual reports.
A voluntary disclosure checklist is constructed based on Botosan (1997). She
constructs a disclosure index based on the amount of voluntary disclosure provided by
?rms in their annual reports. The items included in her disclosure index are identi?ed
by investors and ?nancial analysts as useful in investment decision making, and the
selection of items is guided by an American study of business reporting, an
international survey of investor information needs, and a Canadian study of the
usefulness of corporate annual reports (Botosan, 1997). Our disclosure index
construction follows Botosan’s (1997) practice. The items in our disclosure index are
checked against the mandatory annual report disclosure requirements in New Zealand
to make sure that the disclosure index re?ects only voluntary disclosure items (the
Appendix provides the disclosure checklist used in this paper). The items on the
checklist are placed into ?ve information categories:
(1) Background information.
(2) A summary of historical results.
(3) Key non-?nancial statistics.
(4) Projected information.
(5) Management discussion and analysis.
The voluntary disclosure index used for each company was scored according to this
checklist, and scaled by the maximum disclosure score. Firm-year observation is given
one point if the company annual report has disclosed the relevant items on the
checklist, and an additional point is awarded if the disclosed items have been found to
be quanti?ed either as a point or range estimate. Quanti?cation of prospective
information is believed to be more informative to investors and hence this extra weight.
3.3 Sample selection
The sample for this study is selected from companies listed on the New Zealand Stock
Exchange (NZSX) and New Zealand Alternative Exchange (NZAX) Markets over the
period 2001-2005. NZSX is the Main Board of NZX and its premier equities market,
while NZAX was created speci?cally for fast growing, small to medium sized and
non-standard companies, to facilitate effective capital ?nancing. Although companies
on NZAX were not included in previous New Zealand studies, this paper includes
them, because such companies may carry out different voluntary disclosure practices
and have different ownership concentration structures from their counterparts in the
NZX main board. A sample period from 2001-2005 is selected to capture the most
recent tendencies for voluntary disclosure and ownership practice in New Zealand.
Disclosures in
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I
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Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Consistent with extant studies the sample excludes ?nancial institutions (e.g. pension
funds, mutual funds, money managers, insurance companies, investment banks,
commercial trusts, endowment funds, and hedge funds), as well as overseas companies
listed on NZ stock markets. Overseas companies comply with different governance and
disclosure regulations owing to cross listing. A total sample of 630 ?rm-year
observations representing 146 companies over the sample period of 2001 to 2005 is
selected. The sample size is reduced to 526 ?rm-year observations representing 119
companies after sample screening. Tables I and II provide the sample selection
procedure and industry composition of the sample observations.
4. Empirical results
4.1 Descriptive analysis
Tables III and IV present the descriptive statistics and the correlation matrix
respectively for the dependent and independent variables. As is evident from Table III
there is wide variation in the voluntary disclosure scores. The mean scaled voluntary
disclosure index is 0.27 with a minimum value of zero and maximum value of 0.70.
Ownership concentration represented as the Her?ndahl index has a mean value of 0.18.
The US Department of Justice states that a Her?ndahl index larger or equal to 0.18
within an industry indicates high concentration, whereas ownership concentration is
considered to be moderate (insigni?cant or competitive) if the index is between 0.1 and
0.18 (less than 0.1) respectively (Brown and Warren-Boulton, 1988). The mean
Her?ndahl index of 0.18 in the present study suggests a concentrated ownership
pattern.
Industrial groups No. of ?rms Observations Percentage
Healthcare 11 49 10.49
Consumer goods 20 69 14.78
Consumer services 22 87 18.63
Industrials 25 105 22.48
Basic materials 5 24 5.14
Telecommunications 4 17 3.64
Property development 16 65 13.92
Technology 7 25 5.35
Utilities 4 16 3.43
Oil and gas 2 10 2.14
Total 116 467 100.00
Table II.
Industry composition
Firms Observations
Base sample (NZX provided data, Fiscal 2001-2005) 146 630
Eliminations
1. Financials 25 95
2. Overseas 2 9
3. Unavailable voluntary disclosure information 3 39
4. Unavailable ownership structure information 0 20
Final usable sample 116 467
Table I.
Sample selection
procedure
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:
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2
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a
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y
2
0
1
6
(
P
T
)
V
a
r
i
a
b
l
e
s
C
o
d
e
M
e
a
n
M
e
d
i
a
n
M
a
x
i
m
u
m
M
i
n
i
m
u
m
S
t
d
d
e
v
.
O
b
s
.
V
o
l
u
n
t
a
r
y
d
i
s
c
l
o
s
u
r
e
S
D
S
C
O
R
E
0
.
2
6
9
6
0
.
2
6
1
9
0
.
7
0
2
4
0
.
0
0
0
0
0
.
1
2
6
9
4
6
7
H
e
r
?
n
d
a
h
l
i
n
d
e
x
H
0
.
1
7
9
8
0
.
1
2
2
5
0
.
7
8
0
9
0
.
0
0
0
0
0
.
1
6
7
8
4
6
7
N
e
t
p
r
o
?
t
a
f
t
e
r
t
a
x
(
i
n
$
0
0
0
)
P
E
R
1
1
6
,
6
6
2
3
,
0
4
4
9
1
6
,
0
0
0
2
1
,
4
0
8
,
7
8
2
1
.
2
4
0
0
0
4
6
7
C
a
p
i
t
a
l
i
n
t
e
n
s
i
t
y
C
A
P
_
I
N
T
E
N
0
.
3
3
0
1
0
.
2
6
2
7
0
.
9
5
9
6
0
.
0
0
0
0
0
.
2
9
2
0
4
6
7
N
a
t
u
r
a
l
l
o
g
o
f
t
o
t
a
l
a
s
s
e
t
s
S
I
Z
E
1
7
.
8
9
1
1
1
7
.
9
1
5
7
2
2
.
9
1
7
4
1
1
.
0
9
7
4
2
.
1
7
6
5
4
6
7
D
e
b
t
t
o
a
s
s
e
t
s
r
a
t
i
o
L
E
V
E
R
A
G
E
0
.
4
2
6
2
0
.
3
6
8
4
1
3
.
8
6
3
6
0
.
0
0
4
3
0
.
6
7
7
8
4
6
7
Table III.
Descriptive statistics
Disclosures in
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1
:
0
9
2
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a
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u
a
r
y
2
0
1
6
(
P
T
)
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
S
D
S
C
O
R
E
1
.
0
0
0
0
H
0
.
0
8
5
8
1
.
0
0
0
0
H
2
0
.
0
8
0
2
0
.
9
4
4
8
1
.
0
0
0
0
H
*
M
D
U
M
2
0
.
0
9
2
2
0
.
2
0
4
4
0
.
1
8
7
5
2
0
.
0
9
2
9
1
.
0
0
0
0
H
*
O
T
H
D
U
M
0
.
0
6
8
0
0
.
3
1
0
5
0
.
2
8
4
6
2
0
.
0
6
9
1
2
0
.
1
4
5
5
1
.
0
0
0
0
H
2
*
G
D
U
M
0
.
1
5
6
4
0
.
3
6
8
7
0
.
3
7
6
9
0
.
9
8
4
9
2
0
.
0
8
6
2
2
0
.
0
6
4
1
1
.
0
0
0
0
H
2
*
M
D
U
M
2
0
.
0
3
4
3
0
.
3
0
6
8
0
.
3
4
7
1
2
0
.
0
4
9
0
0
.
8
7
8
1
2
0
.
0
7
6
8
2
0
.
0
4
5
5
1
.
0
0
0
0
H
2
*
O
T
H
D
U
M
0
.
0
6
1
0
0
.
3
4
8
6
0
.
3
7
4
6
2
0
.
0
4
8
0
2
0
.
1
0
1
1
0
.
9
1
6
6
2
0
.
0
4
4
5
2
0
.
0
5
3
3
1
.
0
0
0
0
P
E
R
0
.
1
3
5
2
2
0
.
0
1
9
7
2
0
.
0
2
7
0
0
.
0
1
7
1
2
0
.
0
2
5
1
2
0
.
0
6
6
8
0
.
0
1
6
0
2
0
.
0
1
3
3
2
0
.
0
6
3
4
1
.
0
0
0
0
C
A
P
_
I
N
T
E
N
0
.
4
4
3
4
0
.
2
2
2
5
0
.
2
5
5
4
0
.
2
2
8
3
2
0
.
2
5
4
4
0
.
1
1
2
0
0
.
1
9
2
9
2
0
.
1
5
1
2
0
.
0
9
1
9
0
.
0
2
7
4
1
.
0
0
0
0
S
I
Z
E
0
.
7
2
5
5
*
0
.
1
3
7
1
0
.
1
1
7
4
0
.
1
1
5
5
2
0
.
2
1
6
7
0
.
1
3
5
2
0
.
1
1
5
2
2
0
.
0
9
8
1
0
.
1
1
1
5
0
.
1
3
1
5
0
.
4
3
1
7
1
.
0
0
0
0
L
E
V
E
R
A
G
E
0
.
0
0
1
9
2
0
.
0
6
5
4
2
0
.
0
5
7
2
2
0
.
0
3
5
3
2
0
.
0
4
8
9
2
0
.
0
5
6
0
2
0
.
0
3
2
3
2
0
.
0
4
5
8
2
0
.
0
3
1
6
0
.
0
0
7
2
2
0
.
0
1
5
6
2
0
.
0
8
8
7
1
.
0
0
0
0
N
o
t
e
s
:
1
¼
S
D
S
C
O
R
E
;
2
¼
H
;
3
¼
H
2
;
4
¼
H
*
G
D
U
M
;
5
¼
H
*
M
D
U
M
;
6
¼
H
*
O
T
H
D
U
M
;
7
¼
H
2
*
G
D
U
M
;
8
¼
H
2
*
M
D
U
M
;
9
¼
H
2
*
O
T
H
D
U
M
;
1
0
¼
P
E
R
;
1
1
¼
C
A
P
_
I
N
T
E
N
;
1
2
¼
S
I
Z
E
;
1
3
¼
L
E
V
E
R
A
G
E
;
S
D
S
C
O
R
E
¼
s
c
a
l
e
d
D
S
C
O
R
E
i
n
d
e
x
;
^
H
¼
t
h
e
?
t
t
e
d
v
a
l
u
e
o
f
t
h
e
H
e
r
?
n
d
a
h
l
i
n
d
e
x
;
F
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
?
n
a
n
c
i
a
l
i
n
s
t
i
t
u
t
i
o
n
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
G
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
g
o
v
e
r
n
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
M
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
m
a
n
a
g
e
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
(
d
i
r
e
c
t
o
r
s
,
e
x
e
c
u
t
i
v
e
s
a
n
d
/
o
r
c
o
m
p
a
n
i
e
s
’
f
a
m
i
l
y
f
o
u
n
d
e
r
s
)
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
O
T
H
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
o
t
h
e
r
c
o
m
p
a
n
i
e
s
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
P
E
R
¼
n
e
t
p
r
o
?
t
a
f
t
e
r
t
a
x
a
t
t
h
e
e
n
d
o
f
c
u
r
r
e
n
t
?
n
a
n
c
i
a
l
y
e
a
r
;
C
A
P
_
I
N
T
E
N
¼
c
a
p
i
t
a
l
i
n
t
e
n
s
i
t
y
c
a
l
c
u
l
a
t
e
d
a
s
r
a
t
i
o
o
f
?
x
a
s
s
e
t
s
t
o
t
o
t
a
l
a
s
s
e
t
s
;
S
I
Z
E
¼
n
a
t
u
r
a
l
l
o
g
a
r
i
t
h
m
o
f
t
o
t
a
l
a
s
s
e
t
s
a
t
t
h
e
e
n
d
o
f
?
n
a
n
c
i
a
l
y
e
a
r
s
;
L
E
V
E
R
A
G
E
¼
l
e
v
e
r
a
g
e
r
a
t
i
o
c
a
l
c
u
l
a
t
e
d
a
s
t
o
t
a
l
l
i
a
b
i
l
i
t
y
d
i
v
i
d
e
d
b
y
t
o
t
a
l
a
s
s
e
t
s
a
t
t
h
e
e
n
d
o
f
?
n
a
n
c
i
a
l
y
e
a
r
s
Table IV.
Correlation matrix
ARJ
22,3
288
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Correlation results in Table IV show that ?rm size (SIZE) and Capital intensity
(CAP_INTEN) are signi?cantly positively correlated with disclosure scores
(SDSCORE) (correlation coef?cients of 0.73 and 0.43 respectively), indicating that
large companies and capital-intensive companies tend to disclose more. Apart from
these two variables, other explanatory variables have no obvious correlation with
SDCORE. The correlations among explanatory variables show that signi?cant
multicollinearity exists between the Her?ndahl index (H) and its squared value (H
2
)
(correlation coef?cient of 0.94). The correlation coef?cients among the interaction
terms (H
*
GDUM, H
*
MDUM and H
*
OTHDUM) and their counterparts (H
2
*
GDUM,
H
2
*
MDUM and H
2
*
OTHDUM) are notably high because of the variable
construction procedure. Multicollinearity biases the t-statistics downwards (Gujarati,
2006) and hence it is not much of a concern if regression analysis results show
suf?ciently large t-statistics to justify rejecting the null hypotheses. Table V reports
the shareholding percentage and voluntary disclosure levels for four types of
ownership concentration and reveals that governmental shareholders have
signi?cantly large shareholding and higher voluntary disclosure level compared to
other ownership groups. Table VI shows the mean SDSCORE by four sub-categories
used in constructing SDSCORE. Result reveals that companies are more likely to
disclose background information such as corporate objectives and managerial efforts
made to achieve such objectives, whereas they are less likely to provide quantitative
information on historical operation. This is different from the voluntary disclosure
observed in other equity markets where ?ve-year summary of historical results is
commonly presented in companies’ annual reports (Botosan, 1997).
Background
information
Ten- or ?ve-year summary
of historical results
Key non-
?nancial
statistics
Projected
information
Management
discussion and
analysis
0.0749 0.0315 0.0543 0.0503 0.0511
Note: SDSCORE = scaled DSCORE index
Table VI.
Mean SDSCORE by
sub-categories for sample
listed companies during
2001-2005
Financial
shareholding
Governmental
shareholding
Managerial
shareholding
Other-company
shareholding
Shareholding percentage of four types of ownership structures
Mean 54.3599 77.5144 52.0914 64.5915
Median 56.4495 77.2800 52.2200 62.8800
Std dev. 22.3607 8.5653 18.5387 15.7519
SDSCORE of four types of ownership structures
Mean 0.2705 0.3841 0.2429 0.2888
Median 0.2738 0.4405 0.2262 0.2738
Std dev. 0.1233 0.1268 0.1228 0.1251
Observations 226 23 153 65
Note: SDSCORE = scaled DSCORE index
Table V.
Shareholding percentage
and voluntary disclosure
level of four types of
ownership structures
Disclosures in
New Zealand
289
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
4.2 Substantive empirical results
We employ un-balanced panel data analysis for the regression analysis and report
panel data results. Table VII shows the results of regression equation (1) for entire
sample observations. Ownership concentration (
^
H) has a signi?cant positive effect
(p ¼ 0:017) on voluntary disclosure level (SDSCORE) after controlling ?rm
pro?tability, capital intensity, size and leverage. Except for leverage, all other
control variables are related to the voluntary disclosure level at better than the 1
percent level of signi?cance. The positive effect of ownership concentration on
voluntary disclosure scores seems to support the ef?cient monitoring hypothesis
rather than the entrenchment hypothesis. However, treating ownership concentration
as a whole may fail to provide suf?cient information to infer disclosure motivations,
because of the disparity in the monitoring costs incurred and incompatible monitoring
power held by different types of dominant shareholders. To address this possibility
equation (2) is estimated, and the results are reported in Table VIII.
In Table VIII, the results of regression equation (2) are presented for:
.
the full sample;
.
?rm-year observations in the high concentration group; and
.
?rm-year observations in the low concentration group.
Results reveal that for the full sample, none of the slope dummy variables
was statistically signi?cant. This may be attributed to the fact that monitoring effects
of controlling shareholders varies with the level of ownership concentration, and
those effects are non-linear in essence. For the high concentration group, the
coef?cient capturing ?nancial institutions controlled ownership structure (
^
H
*
FDUM)
is signi?cantly negatively related to the voluntary disclosure scores
(coef?cient ¼ 25.35, t-statistic ¼ 24.72, signi?cant at better than the 1 percent
level). This ?nding suggests that controlling ?nancial institutions might discourage
managers from making more voluntary disclosures, thus supporting hypothesis H1a.
Furthermore, unreported results reveal that this trend becomes much more pronounced
in the recent period (2004-2005) compared with earlier periods (2001-2002). For
example, the coef?cient on (
^
H
*
FDUM) is statistically insigni?cant over the 2001-2002
period (t-statistic ¼ 20.61), while it is signi?cantly negative in the latter period,
SDSCORE
it
¼ a
0
þa
1
^
H
it
þa
2
PER
it
þa
3
CAP_INTEN
it
þa
4
SIZE
it
þa
5
LEVERAGE
it
þ1
it
(1)
Intercept
^
H PER CAP_INTEN SIZE LEVERAGE R
2
adjusted F-statistics Obs.
20.52
* * *
0.20
*
0.00
* *
0.05
* *
0.04
* *
0.01 0.57 35.81
* *
467
(221.44) (2.40) (2.93) (5.93) (33.13) (6.98)
Notes:
*
and
* *
denote statistical signi?cance at the 5 and 1 per cent level respectively. SDSCORE =
scaled DSCORE index;
^
H = the ?tted value of the Her?ndahl index; FDUM = 1 when ownership
concentration appears to be ?nancial institution controlling, and 0 otherwise; GDUM = 1 when
ownership concentration appears to be government controlling, and 0 otherwise; MDUM = 1 when
ownership concentration appears to be management controlling (directors, executives and/or
companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership concentration appears
to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at the end of current
?nancial year; CAP_INTEN = capital intensity calculated as ratio of ?x assets to total assets;
SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage ratio
calculated as total liability divided by total assets at the end of ?nancial years
Table VII.
Regression results of the
impact of different
classes of ownership
concentration on
voluntary disclosure
practices – equation (1)
ARJ
22,3
290
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Table VIII.
Regression results of the
impact of different
classes of ownership
concentration on
voluntary disclosure
practices – equation (2)
S
D
S
C
O
R
E
i
t
¼
b
0
þ
b
i
t
F
D
U
M
2
þ
b
2
G
D
U
M
i
t
þ
b
3
M
D
U
M
i
t
þ
b
4
^
H
i
t
*
F
D
U
M
i
t
þ
b
5
^
H
i
t
*
G
D
U
M
i
t
þ
b
6
^
H
i
t
*
M
D
U
M
i
t
þ
b
7
^
H
i
t
*
O
T
H
D
U
M
i
t
þ
b
8
P
E
R
i
t
þ
b
9
C
A
P
_
I
N
T
E
N
i
t
þ
b
1
0
S
I
Z
E
i
t
þ
b
1
1
L
E
V
E
R
A
G
E
i
t
þ
1
i
t
i
¼
1
;
2
;
:
:
:
;
4
6
7
t
¼
1
;
2
;
:
:
:
;
5
H
i
g
h
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
g
r
o
u
p
L
o
w
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
g
r
o
u
p
V
a
r
i
a
b
l
e
s
P
r
e
d
i
c
t
e
d
s
i
g
n
C
o
e
f
?
c
i
e
n
t
t
-
s
t
a
t
i
s
t
i
c
P
r
e
d
i
c
t
e
d
s
i
g
n
C
o
e
f
?
c
i
e
n
t
t
-
s
t
a
t
i
s
t
i
c
I
n
t
e
r
c
e
p
t
?
2
1
.
1
8
2
3
.
4
8
*
*
*
?
2
0
.
5
3
2
1
.
8
4
*
F
D
U
M
?
1
.
8
0
6
.
0
5
?
2
0
.
4
4
2
1
.
8
6
*
G
D
U
M
?
2
1
.
2
2
2
1
.
1
4
?
0
.
8
3
1
.
3
0
M
D
U
M
?
0
.
3
5
1
.
1
3
?
2
0
.
3
8
2
1
.
4
9
^
H
*
F
D
U
M
2
2
5
.
3
5
2
4
.
7
2
*
*
*
þ
0
.
0
3
0
.
1
9
^
H
*
G
D
U
M
þ
1
0
.
7
8
2
.
1
7
*
*
2
2
8
.
0
8
2
2
.
1
6
*
*
^
H
*
M
D
U
M
þ
2
.
5
3
7
.
0
7
*
*
*
2
2
0
.
3
0
2
0
.
4
2
^
H
*
O
T
H
D
U
M
?
4
.
1
1
2
.
4
3
*
*
*
?
2
2
.
8
6
2
2
.
0
3
*
*
P
E
R
þ
0
.
0
0
0
.
9
4
þ
0
.
0
0
7
.
5
2
*
*
*
C
A
P
_
I
N
T
E
N
þ
0
.
0
9
8
.
5
8
*
*
*
þ
2
0
.
0
0
2
0
.
0
3
S
I
Z
E
þ
0
.
0
3
2
0
.
1
6
*
*
*
þ
0
.
0
6
1
3
.
2
6
*
*
*
L
E
V
E
R
A
G
E
?
0
.
0
1
8
.
3
0
*
*
*
?
2
0
.
0
2
2
1
.
9
9
*
*
R
2
a
d
j
u
s
t
e
d
0
.
6
3
0
.
6
4
F
-
s
t
a
t
i
s
t
i
c
s
2
2
.
5
9
*
*
*
1
2
.
7
3
*
*
*
O
b
s
e
r
v
a
t
i
o
n
s
3
0
5
1
6
2
N
o
t
e
s
:
S
D
S
C
O
R
E
=
s
c
a
l
e
d
D
S
C
O
R
E
i
n
d
e
x
;
^
H
¼
t
h
e
?
t
t
e
d
v
a
l
u
e
o
f
t
h
e
H
e
r
?
n
d
a
h
l
i
n
d
e
x
;
F
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
?
n
a
n
c
i
a
l
i
n
s
t
i
t
u
t
i
o
n
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
G
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
g
o
v
e
r
n
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
M
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
m
a
n
a
g
e
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
(
d
i
r
e
c
t
o
r
s
,
e
x
e
c
u
t
i
v
e
s
a
n
d
/
o
r
c
o
m
p
a
n
i
e
s
’
f
a
m
i
l
y
f
o
u
n
d
e
r
s
)
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
O
T
H
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
o
t
h
e
r
c
o
m
p
a
n
i
e
s
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2004-2005 (t-statistic ¼ 28.25). This result implies that ?nancial institution-controlled
governance regimes present potential threats to information asymmetry owing to their
constraining function on corporate voluntary disclosure practices. This trend has
become more severe in recent years.
The slope dummies (
^
H
*
GDUM and
^
H
*
MDUM) show a signi?cantly positive
relationship to voluntary disclosure scores at high ownership concentration levels. The
marginal effect on voluntary disclosure scores when ownership concentration is
government-controlled (
^
H
*
GDUM) is 10.78, and is signi?cant at the 5 percent level
(two-tailed test). Similarly, the marginal effect of managerial ownership concentration
is unequivocally positive. The corresponding coef?cient on
^
H
*
MDUM is 2.53
(t-statistic ¼ 7.07, signi?cant at better than the 1 per cent level). These results provide
supportive evidence for H2a and H3a.
In contrast, analysis for the “less concentrated group” show a positive relationship
between ?nancial institutions-controlled ownership variable and voluntary disclosure
level although this relation is not signi?cant, suggesting that the negative impact of
concentrated ownership characterized as ?nancial institution-controlled on voluntary
disclosure levels is attenuated when their voting rights are reduced. However, a
negative impact of governmental control on the relationship between ownership
concentration and disclosure level is reported (coef?cient ¼ 28.08, t-statistic ¼ 22.16,
signi?cant at the 5 percent level). This suggests that ?rms’ disclosure levels decrease
with a reduction in governmental shareholdings. Thus, H2b is supported. Regarding
managerial-controlled ownership structures, the signi?cant positive effect on
voluntary disclosure levels detected under high ownership concentrations changes
to a negative sign in less concentrated group analysis, the coef?cient, however, is not
statistically signi?cant.
Regarding the control variables, ?rm performance (PER) measured by net pro?t is
positively related to voluntary disclosure levels for total sample observations,
suggesting that pro?table companies tend to disclose more. Capital intensity
(CAP_INTEN), ?rm size (SIZE) and leverage (LEVERAGE) have signi?cantly positive
effects on voluntary disclosure levels. However, ?rm performance has no signi?cant
relationship with disclosure level when ownership concentration level is high
(t-statistics 0.94), and capital intensity is not an explanatory variable for disclosure
under low ownership concentration structures (t-statistic ¼ 20.03). In addition, it is
noteworthy that leverage has a positive effect on the disclosure level (t-statistic ¼ 8.30)
at high ownership concentration levels, while it has a negative effect on disclosure level
(t-statistic ¼ 21.99) at low ownership concentration levels. This indicates that
debtors, like banks, may be concerned about expropriation by concentrated
shareholders and, therefore, demand more corporate disclosures to protect their own
investment in the same companies; while at lower concentration level such concerns
are attenuated. Ten industry sectors are controlled during the analyses (industry
coef?cients are not reported for the sake of brevity). All reported adjusted R
2
s are over
55 percent, and all F-statistics are signi?cant at better than the 1 percent level.
Therefore, the general ?tness of the model seems satisfactory.
We detected heteroskedasticity and autocorrelation during our data analysis. To
tackle both heteroskedasticity and autocorrelation, we employ the variants of the Panel
Corrected Standard Error (PCSE) methodology to estimate ef?cient estimators robust
to both cross-sectional heteroskedasticity and serial correlation in the disturbances
(Beck and Katz, 1995). Meanwhile, the ?xed period effect in panel data analysis is
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controlled for the possible impact of regulations during the focused time-period
2001-2005.
4.3 Non-linear relationship between ownership concentration and voluntary disclosures
To address non-linearity in accounting research, researchers often formulated the
quadratic relationships by using the primary variable of interest and its squared value
in the speci?cation, so we estimate equation (3) to test the hypothesized non-linearity
between ownership structure and voluntary disclosure levels. We present the results in
Table IX.
Table IX shows the coef?cients of
^
H
*
FDUM is 3.61, while coef?cient of
^
H
2
*
FDUM
is 212.85. Both these coef?cients are statistically signi?cant at better than the 1
percent level. Taking derivatives with respect to
^
H, the slope of the plot of voluntary
disclosure level against ownership concentration being ?nancial institution-controlled
ownership structure (
^
H) is 3.61-2
*
12.58
* ^
H. This implies a positive slope from 0 to 0.14
SDSCORE
it
¼ b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
*
FDUM
it
þb
5
^
H
it
*
GDUM
it
þb
6
^
H
it
*
MDUM
it
þb
7
^
H
it
*
OTHDUM
it
þb
8
^
H
it
*
FDUM
it
þb
9
^
H
it
*
GDUM
it
þ
b
10
^
H
it
*
MDUM
it
þb
11
^
H
it
*
OTHDUM
it
þb
12
PER
it
þb
13
CAP_INTEN
it
þb
14
SIZE
it
þb
15
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467 t ¼ 1; 2; :::; 467(3)
Variables Predicted sign Coef?cient t-statistics
Intercept ? 3.49
* * *
3.80
FDUM ? 24.14
* * *
24.41
GDUM ? 1.04 0.30
MDUM ? 23.32
* * *
22.86
^
H
*
FDUM þ 3.61
* * *
5.74
^
H
*
GDUM 2 258.11 21.35
^
H
*
MDUM 2 27.90
* *
22.31
^
H
*
OTHDUM ? 245.55
* * *
24.25
^
H
2
*
FDUM 2 212.85
* * *
26.01
^
H
2
*
GDUM þ 169.98 1.37
^
H
2
*
MDUM þ 26.23
* * *
2.62
^
H
2
*
OTHDUM ? 131.12
* * *
4.31
PER þ 0.00
* * *
2.83
CAP_INTEN þ 0.06
* * *
4.62
SIZE þ 0.04
* * *
38.64
LEVERAGE þ 0.01
* * *
3.22
R
2
adjusted 0.60
F-statistics 26.39
* * *
Observations 467
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively.
SDSCORE ¼ scaled DSCORE index;
^
H = the ?tted value of the Her?ndahl index; FDUM = 1 when
ownership concentration appears to be ?nancial institution controlling, and 0 otherwise; GDUM = 1
when ownership concentration appears to be government controlling, and 0 otherwise; MDUM = 1
when ownership concentration appears to be management controlling (directors, executives and/or
companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership concentration appears
to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at the end of current
?nancial year; CAP_INTEN = capital intensity calculated as ratio of ?x assets to total assets;
SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage ratio
calculated as total liability divided by total assets at the end of ?nancial years
Table IX.
Non-linear relationship
between ownership
concentration and
voluntary disclosures
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?nancial institution-controlled ownership concentration level, followed by a negative
slope beyond that. Hence, the results lend support to hypotheses H1a and H1b. The
coef?cients of ownership concentration being controlled by managerial shareholdings
(
^
H
*
MDUM) and their squared variables (
^
H
2
*
MDUM) also provide supportive
evidence for the quadratic relationships predicted by hypotheses three (H3a and H3b).
The slope of the plot of voluntary disclosure level against ownership concentration
being management-controlled ownership structure (
^
H) is (27.90 þ 2
*
26.23
* ^
H). This
suggests that management-controlled ownership structure increases (decreases)
voluntary disclosure when ownership concentration level is higher (lower) than the
Her?ndahl index of 0.15. However, the coef?cients on
^
H
*
GDUM (258.11, t-statistic
21.35) and
^
H
2
*
GDUM (169.98, t-statistic 1.37) are not statistically signi?cant,
although the signs are as predicted. This implies a negative slope at low
government-controlled ownership concentration level, followed by a positive slope at
high ownership concentration level. Other control variables show the consistent
?ndings with predicted signs. The adjusted R
2
of the model is 0.60, and the F-statistic
is signi?cant at better than the 1 percent level.
4.4 Sensitivity analysis
A number of sensitivity analyses are performed and results are presented in
Tables X-XII.
First, instead of using the Her?ndahl index, regression analysis is conducted
employing total top-?ve largest shareholding (in percentage) as the measure of
ownership concentration. Table X presents results of estimating equation (2), while
Table XI reports the results of equation (3). The cut-off point for high/low ownership
concentration groups in Table X is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. Table X demonstrates that three
hypotheses at high ownership concentration level are well supported, while the
?ndings are inconclusive at low concentration group analysis. Results shown in
Table XI are pretty consistent with results shown in Table IX.
Second sensitivity analysis controls for the impact of board-related governance
variables on managerial propensity to make voluntary disclosures. A growing body of
empirical research examines the impact of corporate governance attributes such as
board structure on voluntary disclosure practices (Eng and Mak, 2003; Ho and Wong,
2001). An extended version of equation (3) incorporating four board-related variables is
estimated. Four board-related variables are the number of board meetings, board size,
board insider and CEO duality. Results are presented in Table XII. Findings reveal that
controlling for board governance variables does not change the ?ndings regarding
?nancial institution-controlled ownership structure. However, the coef?cients on
government- and management-controlled ownership structures become insigni?cant.
As the sample size in this sensitivity analysis is signi?cantly reduced (only 198
observations are usable for analysis) due to missing data on four board-related
variables in companies’ annual reports, the results of this sensitivity analysis should be
interpreted with caution.
Final sensitivity analysis uses two sub-disclosure indices (historical and projected
information) instead of the total disclosure score to measure the impact of ownership
concentration on such disclosures. Unreported results based on equation (1) shows that
ownership concentration as a whole has no signi?cant effect on any of these two
sub-disclosure scores. Regression results of equations (2) and (3) do not support the
hypothesised non-linear relationship between different ownership composition and
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disclosure of historical information. Interestingly, same regression analysis using
projecteddisclosures provide ?ndings consistent withour primaryresults. Furthermore,
managerial ownership is found to signi?cantly increase (decrease) companies’ projected
information disclosure at high (low) ownership concentration level.
5. Discussion
Although the primary regression analysis reveals a positive effect of concentrated
ownership on voluntary disclosure practices, interesting results emerge when
ownership structures are analysed in greater detail. Regression results support two
sub-hypotheses of hypothesis one. These results reveal that when ownership
concentration level was high, ?rm-year observations with ?nancial institution-
controlled ownership structure make fewer voluntary disclosures. Several potential
reasons for the reduced voluntary disclosure are:
High ownership concentration group Low ownership concentration group
Variables Predicted sign Predicted sign
Intercept ? 21.40 (23.40)
* * *
? 20.45 (22.62)
* * *
FDUM ? 2.28 (6.54)
* * *
? 20.54 (22.95)
* * *
GDUM ? 21.88 (21.20) ? 1.11 (1.56)
MDUM ? 0.48 (1.28) ? 20.48 (21.64)
*
C
^
O
*
FDUM 2 20.02 (-4.82)
* * *
þ 20.00 (20.04)
C
^
O
*
GDUM þ 0.05 (2.12)
* *
2 20.03 (22.28)
* *
C
^
O
*
MDUM þ 0.01 (7.12)
* * *
2 20.00 (20.38)
C
^
O
*
OTHDUM ? 0.02 (2.57)
* * *
? 20.01 (23.07)
* * *
PER þ 0.00 (1.02) þ 0.00 (15.17)
* * *
CAP_INTEN þ 0.09 (10.41)
* * *
þ 0.00(0.12)
SIZE þ 0.03 (18.46)
* * *
þ 0.06 (19.86)
* * *
LEVERAGE ? 0.01 (7.80)
* * *
? 20.02 (23.32)
* * *
R
2
adjusted 0.63 0.65
F-statistics 22.63
* * *
13.32
* * *
Observations 307 160
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively. Dependent
variable ¼ scaled DSCORE index; C
^
O = the ?tted value of ownership concentration, measured as the
total percentage of top ?ve largest shareholding; The cut-off point for high/low ownership
concentration groups in Panel A sensitivity analysis is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. FDUM = 1 when ownership concentration appears to be
?nancial institution controlling, and 0 otherwise; GDUM=1 when ownership concentration appears to
be government controlling, and 0 otherwise; MDUM = 1 when ownership concentration appears to be
management controlling (directors, executives and/or companies’ family founders), and 0 otherwise;
OTHDUM = 1 when ownership concentration appears to be other companies controlling, and 0
otherwise; PER ¼ net pro?t after tax at the end of current ?nancial year; CAP_INTEN = capital
intensity calculated as ratio of ?x assets to total assets; SIZE ¼ natural logarithm of total assets at the
end of ?nancial years; LEVERAGE ¼ leverage ratio calculated as total liability divided by total assets
at the end of ?nancial years. BM ¼ the number of board meetings, measured as total board meetings
attended by all board members in one ?nancial year; BS ¼ board size, measured as the number of
board members; BI ¼ board insider, measured as the ratio of executive directors to total number of
board members; CEOD ¼ CEO duality, measured as dummy variable, which is 1 if CEO and board
chairman are the same person, otherwise 0
Table X.
Sensitivity analysis using
top-?ve largest
shareholding (percentage)
as measure of ownership
concentration based on
equation (2)
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companies may have less incentive to make voluntary disclosures if
concentrated owners provide the bulk of the capital;
.
private information acquisition by ?nancial institutions could suppress portfolio
companies’ disclosure incentives;
.
the absence of ?nancial shareholder activism caused by the physical distance of
the majority of overseas ?nancial institutions from their investees in New
Zealand, means that ?nancial institutions’ monitoring on their investee
companies is ineffective, and the management is likely to be entrenched; and
.
the con?ict of interest and strategic alignment between management and
majority ?nancial shareholders motivate both parties’ cooperation in “covering
up” their expropriation of minority shareholders’ interests by reduced corporate
disclosure.
Variables Predicted sign Coef?cient t-statistics
Intercept ? 5.98
*
3.98
FDUM ? 26.84
*
24.49
GDUM ? 1.73 0.30
MDUM ? 25.38
*
22.84
C
^
O
*
FDUM þ 0.02
*
5.82
C
^
O
*
GDUM 2 20.30 21.35
C
^
O
*
MDUM 2 20.04
*
22.38
C
^
O
*
OTHDUM ? 20.24
*
24.27
C
^
O
2
*
FDUM 2 20.0002
*
26.01
C
^
O
2
*
GDUM þ 0.0028 1.37
C
^
O
2
*
MDUM þ 0.0004
*
2.62
C
^
O
2
*
OTHDUM ? 0.0022
*
4.31
PER þ 0.00
*
2.83
CAP_INTEN þ 0.06
*
4.62
SIZE þ 0.04
*
38.64
LEVERAGE þ 0.01
*
3.22
R
2
adjusted 0.60
F-statistics 26.39
*
Observations 467
Notes:
*
denotes statistical signi?cance at the 1 per cent level. Dependent variable ¼ scaled DSCORE
index; C
^
O = the ?tted value of ownership concentration, measured as the total percentage of top ?ve
largest shareholding; The cut-off point for high/low ownership concentration groups in Panel A
sensitivity analysis is 56.18 percent, which is the mean percentage of top-?ve largest shareholding in our
sample. FDUM = 1 when ownership concentration appears to be ?nancial institution controlling, and 0
otherwise; GDUM = 1 when ownership concentration appears to be government controlling, and 0
otherwise; MDUM = 1 when ownership concentration appears to be management controlling (directors,
executives and/or companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership
concentration appears to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at
the end of current ?nancial year; CAP_INTEN= capital intensity calculated as ratio of ?x assets to total
assets; SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage
ratio calculated as total liability divided by total assets at the end of ?nancial years. BM ¼ the number of
board meetings, measured as total board meetings attended by all board members in one ?nancial year;
BS ¼ board size, measured as the number of board members; BI ¼ board insider, measured as the ratio
of executive directors to total number of board members; CEOD ¼ CEO duality, measured as dummy
variable, which is 1 if CEO and board chairman are the same person, otherwise 0
Table XI.
Sensitivity analysis using
top-?ve largest
shareholding percentage
as the measure of
ownership concentration
based on equation (3)
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This is supportive of the large shareholders’ expropriation hypothesis. It would be
interesting to investigate in future research the validity of these claims of inef?cient
monitoring by ?nancial institutions. Complementary analysis shows that over the
2001-2002 time periods, ?nancial institutions-controlled ownership structure was not
an explanatory variable of the decreased voluntary disclosures at high ownership
concentration levels. This negative effect did not start until the 2004-2005 time period,
despite the fact that more governance regulation had taken place in 2003 and
ownership concentration severity in New Zealand listed companies gradually reduced
Variables Predicted sign Coef?cient t-statistics
Intercept ? 20.40
* * *
26.37
FDUM ? 20.04
* *
22.03
GDUM ? 20.18
*
21.78
MDUM ? 0.04 0.18
^
H
*
FDUM þ 0.27
* * *
2.66
^
H
*
GDUM 2 1.73 0.94
^
H
*
MDUM 2 20.85 20.35
^
H
*
OTHDUM ? 22.05
* * *
23.62
^
H
2
*
FDUM 2 22.55
* * *
23.30
^
H
2
*
GDUM þ 25.27 20.78
^
H
2
*
MDUM þ 2.07 0.28
^
H
2
*
OTHDUM ? 7.45
* * *
3.44
PER þ 0.00 1.60
CAP_INTEN þ 0.02 1.23
SIZE þ 0.05
* * *
16.11
LEVERAGE þ 20.00 20.03
BM þ 20.02
* * *
28.02
BS 2 20.03 20.66
BI 2 20.00
*
21.70
CEOD 2 20.07
* * *
24.02
R
2
adjusted 0.49
F-statistics 7.11
* * *
Observations 1.98
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively. Dependent
variable ¼ scaled DSCORE index; C
^
O = the ?tted value of ownership concentration, measured as the
total percentage of top ?ve largest shareholding; The cut-off point for high/low ownership
concentration groups in Panel A sensitivity analysis is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. FDUM = 1 when ownership concentration appears to be
?nancial institution controlling, and 0 otherwise; GDUM=1 when ownership concentration appears to
be government controlling, and 0 otherwise; MDUM = 1 when ownership concentration appears to be
management controlling (directors, executives and/or companies’ family founders), and 0 otherwise;
OTHDUM = 1 when ownership concentration appears to be other companies controlling, and 0
otherwise; PER ¼ net pro?t after tax at the end of current ?nancial year; CAP_INTEN = capital
intensity calculated as ratio of ?x assets to total assets; SIZE ¼ natural logarithm of total assets at the
end of ?nancial years; LEVERAGE ¼ leverage ratio calculated as total liability divided by total assets
at the end of ?nancial years. BM ¼ the number of board meetings, measured as total board meetings
attended by all board members in one ?nancial year; BS ¼ board size, measured as the number of
board members; BI ¼ board insider, measured as the ratio of executive directors to total number of
board members; CEOD ¼ CEO duality, measured as dummy variable, which is 1 if CEO and board
chairman are the same person, otherwise 0
Table XII.
Sensitivity analysis
incorporating board
variables in equation (3)
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over recent years. Instead of becoming a good monitoring mechanism, ?nancial
shareholding at high ownership concentration levels seems to present inef?ciency in
information sharing, and to create a potential opportunity for management and large
shareholder entrenchment.
However, with a decrease in the ownership concentration level, the effect of ?nancial
institutions-controlled ownership concentration on voluntary disclosure became
positive, suggesting that:
.
large shareholders’ ability to expropriate minority shareholders lessened;
.
?nancial institution-provided capital was insuf?cient for company operations
and hence companies needed to increase voluntary disclosures to attract
prospective capital providers; and
.
with reduced voting rights in the companies, ?nancial institutions cannot ensure
the private bene?ts of controls and may realistically choose to encourage
companies to make more voluntary disclosures so that they can enjoy share price
appreciation bene?ts (Makhija and Patton, 2004).
This non-linear relationship, therefore, is evidence of the ef?cient-monitoring
hypothesis and the con?ict-of-interest (strategic-alignment) hypothesis at different
shareholding levels.
When concentrated ownership is governmental-controlled, the results show that
ownership concentration is positively (negatively) related to voluntary disclosure at its
high (low) levels. The ?ndings suggest that government-controlled ?rms may have
non-economic motivations, like a consideration for government’s social responsibility
and accountability, for releasing more information about the ?rms. The higher the
government shareholding, the higher are the incentives for government-controlled
?rms to communicate with society-at-large. Those companies may employ greater
voluntary disclosure as a means to legitimise and to live up to society’s expectations.
The ?ndings also indicate that governmental shareholders may provide better
monitoring on their invested companies’ governance by ensuring the provision of more
transparent information. The reported inverse relationship between ownership
concentration being governmental-controlled and the disclosure level at low ownership
concentration levels indicates a reduced bene?cial impact of governmental ownership.
Regarding managerial-controlled ownership structures, we ?nd strong evidence for
increased voluntary disclosures at high managerial ownership concentration levels,
supporting the alignment-of-interest hypothesis. In the ?nancial market, the increased
share price due to greater disclosure bene?ts controlling managerial shareholders.
This may generate a greater motivation towards discretionary disclosures by
managers. Moreover, when companies’ ownership concentration levels are high,
managerial shareholders can reap larger share price bene?ts (thanks to better
disclosure) than the potential costs incurred by minority shareholders’ competing for
?rms’ resources and public scrutiny from voluntary disclosure (Makhija and Patton,
2004). In contrast, when the general ownership concentration level is low, the
relationship between the managerial-controlled ownership structure and voluntary
disclosure level becomes negative. This negative relationship is consistent with the
proposition of Bhabra (2007) that at lower levels of insider stock ownership, the
positive forces that align the interests of managers with outsider shareholders are not
likely to be effective in countering a reduction in ?rm value due to management
entrenchment. Interestingly, other company-controlled ownership concentration is
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positively (negatively) related to voluntary disclosure level. However, we made no
attempt to interpret this ?nding because of a lack of well-established theories and small
sample size.
6. Conclusion
Although the ownership structure of ?rms has been recognised as an important
monitoring mechanism in the extant corporate governance literature, the theoretical
debate on the bene?cial effect of ownership concentration has been longstanding and
empirical evidence inconclusive. There are two competing propositions for the
monitoring of large shareholdings: namely the ef?cient monitoring hypothesis and the
entrenchment (con?ict-of-interest and strategic-alignment) hypothesis. This study
explores these two propositions in the New Zealand setting with its distinctively
corporate ownership structure. Froma voluntary disclosure perspective, effective large
shareholder monitoring should accelerate information sharing and enhance operational
transparency, while dysfunctional/sub-optimal large shareholding monitoring will
have a negative effect on voluntary disclosure levels.
Results suggest that the effect of ownership concentration on voluntary disclosure
is not monotonic, and different types of controlling shareholders affect corporate
disclosures differently. Firms with ?nancial institution-controlled ownership
structures disclose signi?cantly less (more) at high (low) ownership concentration
levels, suggesting the expropriation phenomenon is likely to dominate the ef?cient
monitoring by large shareholders with increasing ownership concentration controlled
by ?nancial institutions. However, ?rms with governmental and managerial-controlled
ownership structures report increased (reduced) voluntary disclosures at high (low)
ownership concentration levels. This indicates a positive monitoring effect of
governmental ownership and aligned interest of managerial ownership at high
ownership concentration levels.
These ?ndings strengthen the importance of differentiating ownership structures
into various classes to infer the real impact of differential controlling properties on
managerial disclosure decisions. In addition, the results reveal that the relationship
between ownership concentration and voluntary disclosure practices assumes a
non-linear pattern, re?ecting that the ef?ciency of large shareholders’ monitoring
varies with the level of ownership concentration. The ?ndings also shed light on the
ef?ciency of ownership concentration in terms of information sharing and
management monitoring in a country with little minority shareholder-protection,
and provide important implications for regulators, investors and companies. Given
that the majority of listed companies in New Zealand are ?nancial
institution-controlled, the inef?ciency of information sharing in such companies
presents a potential threat.
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Appendix. Check-list of the major elements of DSCORE
(1) Background information:
.
Statement of corporate goals or objectives;
.
General statement of corporate strategy is provided;
.
Competitive environment;
.
Description of organizational structure;
.
Principle products;
.
Principle markets; and
.
Actions taken during the year to achieve the corporate goal discussed.
Note: one point for each item and one additional point for quantitative data
(2) Ten- or ?ve-year summary of historical results:
.
Return-on-asset or suf?cient information to compute return-on-asset (i.e. net income,
tax rate, interest expense and total assets);
.
Net pro?t margin or suf?cient information to compute net pro?t margin (i.e. net
income, tax rate, interest expense and sales);
.
Asset turnover or suf?cient information to compute asset turnover (i.e. sales and total
assets);
.
Return-on-equity or suf?cient information to compute return-on-equity (i.e. net
income and stockholders’ equity);
.
Summary of sales and net income for most recent eight quarters; and
Disclosures in
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Comparison of main ?nancial performance indicators with budget or prospectus.
Note: one point for each item and two points for ten or more years
(3) Key non-?nancial statistics:
.
Number of employees;
.
Percentage of sales in products in last ?ve years;
.
Market share;
.
Units sold;
.
Production volume (through-put);
.
Unit selling price;
.
Growth in units sold;
.
Customer satisfaction; and
.
Regulation compliance.
Note: two points for each item
(4) Projected information:
.
Growth opportunity;
.
Cash ?ow forecast;
.
Capital expenditures and/or R&D expenditure forecast;
.
Pro?t forecast;
.
Sales forecast; and
.
Share price estimation.
Note: two points for each directional prediction and three points for a point estimate
(5) Management discussion and analysis:
.
Change in revenue;
.
Change in operating income;
.
Change in costs of goods sold;
.
Change in earnings before income tax, depreciation and amortisation (EBITDA);
.
Change in selling and administrative expenses;
.
Change in interest expense or interest income;
.
Change in net income;
.
Change in inventory;
.
Change in accounts receivable;
.
Change in capital expenditures or R&D; and
.
Change in market share.
Note: one point for each itemwith detailed explanation, and one additional point for explanation
with quantitative data.
Corresponding author
Haiyan Jiang can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
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doc_869732398.pdf
The purpose of this paper is to investigate the impact of different categories of ownership
concentration on corporate voluntary disclosure practices in New Zealand.
Accounting Research Journal
The impact of different types of ownership concentration on annual report voluntary
disclosures in New Zealand
Haiyan J iang Ahsan Habib
Article information:
To cite this document:
Haiyan J iang Ahsan Habib, (2009),"The impact of different types of ownership concentration on annual
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The impact of different types of
ownership concentration on
annual report voluntary
disclosures in New Zealand
Haiyan Jiang and Ahsan Habib
School of Business, Auckland University of Technology (AUT),
Auckland, New Zealand
Abstract
Purpose – The purpose of this paper is to investigate the impact of different categories of ownership
concentration on corporate voluntary disclosure practices in New Zealand.
Design/methodology/approach – The study applies panel data regression analysis to a sample of
New Zealand listed companies from 2001 to 2005. Two-stage least squares analysis (2SLS) is
conducted. Ownership concentration is categorised into four mutually exclusive ownership structures.
Findings – The paper ?nds that ?rm-year observations characterised by ?nancial institution-
controlled ownership structure tends to make signi?cantly fewer (more) disclosures at high (low)
concentration levels supporting expropriation. In contrast, ?rm-year observations in the high (low)
concentration group with government- and management-controlled ownership structures exhibit
considerably higher (lower) voluntary disclosure scores, suggesting a positive monitoring effect at
high ownership concentration level.
Research limitations/implications – The results provide evidence for the proposition that the
ef?ciency of large block holders’ monitoring varies with the level of ownership concentration.
Practical implications – To promote transparency in capital markets, regulators can encourage or
discourage certain types of large shareholding, while monitoring the level of ownership concentration
by means of regulation. Investors, especially less sophisticated retail investors, will bene?t from the
?ndings that different ownership groups affect disclosure policies differently.
Originality/value – The ?ndings strengthen the importance of differentiating ownership structures
into various classes to infer the real impact of differential controlling properties on managerial
disclosure decisions. Furthermore, the results reveal that the relationship between ownership
concentration and voluntary disclosure practices has a non-linear pattern.
Keywords Structural analysis, Disclosure, New Zealand
Paper type Research paper
1. Introduction
This study aims to examine the impact of different types of ownership concentration
on voluntary disclosures in New Zealand. Prior research identi?es ownership
concentration as a determinant of corporate voluntary disclosures (Eng and Mak, 2003;
Luo et al., 2006; Mak, 1991; Makhija and Patton, 2004), and uses one or two types of
block ownership as a measure for ownership concentration. This study extends prior
research by considering the impact of four types of concentrated ownership structures
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors would like to thank two anonymous reviewers for providing many helpful
comments. The ?rst author would like to acknowledge the considerable ?nancial assistance
offered by the Lincoln doctoral scholarship and the New Zealand Institute of Chartered
Accountants PhD research scholarship during her PhD study. The usual disclaimer applies.
Disclosures in
New Zealand
275
Accounting Research Journal
Vol. 22 No. 3, 2009
pp. 275-304
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610911005590
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on voluntary disclosures using a single regression formulation. This study makes an
additional contribution by formulating and testing non-linear effect between
ownership concentration and voluntary disclosures. Furthermore, this study
considers endogenous nature of the relationship between ownership concentration
and voluntary disclosures and uses two-stage least squares analysis (2SLS) to control
for such endogeneity.
The theoretical debate on the bene?cial effects of concentrated ownership as a
corporate governance mechanism on ?rm performance generates two competing
hypotheses namely, ef?cient-monitoring versus opportunistic hypotheses (explained
later). Empirical ?ndings, too, are inconclusive. Corporate disclosure provides a
context for testing these two competing hypotheses because such disclosures play a
critical role in the ef?cient functioning of capital markets by mitigating agency
con?icts among managers, majority shareholders and minority shareholders (Healy
and Palepu, 2001). The extent and the quality of corporate disclosures are the outcome
of con?icting interests among management, majority and minority shareholders. With
controlling power, large block holders may manipulate the extent of disclosures to
maximize private bene?ts (opportunistic hypothesis) or serve as an effective monitor
encouraging managers to provide timely and credible disclosures (ef?cient monitoring
hypothesis).
Most studies regarding the relationship between ownership concentration and
voluntary disclosure practices are conducted in Anglo-Saxon countries with relatively
dispersed corporate ownership structure and transparent legal system. This paper
revisits this issue in New Zealand. Unlike some other OECD (Organization for
Economic Cooperation and Development) countries, New Zealand is characterized to
have signi?cant ownership concentration, higher shareholder litigation costs, and
weaker enforcement of law (Hossain et al., 2001). Moreover, previous researchers have
usually used “total ownership concentration” irrespective of the differences in the
structures of such ownership. This may provide limited information because of the
disparity in the monitoring costs incurred and the incompatible monitoring power held
by different types of dominant shareholders (Badrinath et al., 1989; Del Guercio, 1996;
Falkenstein, 1996; Bennett et al., 2003). We extend this stream of research by
classifying shareholding structures into four mutually exclusive types: ?nancial
institution-controlled; management-controlled; government-controlled; and
other-company-controlled and examine the impact of different types of ownership
concentration on corporate voluntary disclosures in New Zealand.
We also hypothesize and test the non-linear relationship between ownership
concentration and voluntary disclosure level under each type of ownership
concentration based on the non-linear relationship between ownership concentration
and ?rm value documented by Morck et al. (1988).
Reported results based on listed, non-?nancial companies on the New Zealand Stock
Exchange from 2001 to 2005, show that ?rm-year observations characterised by
?nancial institution ownership control tend to make signi?cantly fewer (more)
disclosures at high (low) concentration levels supporting the expropriation hypothesis
(ef?cient monitoring hypothesis) at high (low) ownership concentration level. In
contrast, ?rm-year observations in the high concentration group with government and
management controlled ownership structures has considerably higher voluntary
disclosure scores compared with their low concentration counterparts, suggesting a
positive monitoring effect of such ownerships. These ?ndings strengthen the
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importance of differentiating ownership structures into various classes to infer the real
impact of differential controlling properties on managerial disclosure decisions. In
addition, the results reveal that the relationship between ownership concentration and
voluntary disclosure practices follow a non-linear pattern, re?ecting the tendency for
the ef?ciency of large block holders’ monitoring to vary with the level of ownership
concentration.
This paper proceeds as follows: section 2 surveys the related literature, followed by
a discussion on the New Zealand institutional environment and the development of
testable hypotheses. Section 3 explains the research methodology employed in this
study. Descriptive statistics and substantive test results are presented in section 4, and
section 5 presents implications of the ?ndings. Section 6 concludes.
2. Literature survey and New Zealand institutional framework
2.1 Literature survey
Many previous empirical studies investigating the association between ownership
structure and voluntary disclosure practices produce inconclusive results (Mak, 1991;
Aitken et al., 1997; Toms, 1998; Chau and Gray, 2002; Eng and Mak, 2003; Makhija and
Patton, 2004; Arcay and Vazquez, 2005; Ballesta and Garcia-Meca, 2005; Luo et al.,
2006). These studies test two sets of competing hypotheses. The ef?cient-monitoring
hypothesis suggests that large block holders are better at monitoring management
than individual shareholders, because they are able to absorb monitoring and takeover
costs (Shleifer and Vishny, 1986), execute their vested ?duciary responsibilities with
greater expertise (Pound, 1988), and acquire more precise signals of management
efforts (Berle and Means, 1932; Huddart, 1993). According to this perspective, ?rms
with large block holders are likely to make extensive voluntary disclosures. El-Gazzar
(1998) reports that ?rms with high percentages of large institutional ownership provide
high levels of voluntary earnings disclosure prior to earnings announcements, which
pre-empts earnings disclosures in ?nancial markets. Haniffa and Cooke (2002) also
report a positive relationship between the proportion of shares held by the ten largest
shareholders and the extent of voluntary disclosure in Malaysia. Luo et al. (2006) report
that the existence of outside block ownership considerably increases corporate
voluntary disclosures by management in Singapore.
However, the con?ict-of-interest hypothesis predicts that because of other pro?table
business relationships with the ?rm, large block holders are effectively “coerced” into
voting their shares with management. Tirole and Holmstrom (1993) show that
institutional ownership concentration may limit information diffusion and reduce
share market liquidity, and contended that concentrated ownership, by reducing
market liquidity, reduced the bene?ts of market monitoring on ?rms’ management.
The strategic-alignment hypothesis suggests that institutional investors and managers
?nd it mutually advantageous to work together. This cooperation cripples large block
holders’ incentive and ability to monitor managerial actions (Pound, 1988). Both the
con?ict-of-interest and strategic-alignment hypotheses suggest managerial
entrenchment, with the “cooperation” of large block holders. Instead of sharing
information with minority shareholders, large block holders may prefer less disclosure.
In addition, large block holders have strong incentives to search for private
pre-disclosure information about companies in order to discharge their ?duciary
responsibilities, so that a negative relationship between ownership concentration and
voluntary disclosure might be expected. Better-informed shareholders (large block
Disclosures in
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holders) preferred less disclosure than less well-informed ones (Kim, 1993; Chau and
Gray, 2002). The same might be expected to hold when institutional investors’ primary
objective is the consumption of private bene?ts of control rather than an increased share
price in the capital market (Makhija and Patton, 2004). A number of empirical studies
?nd consistent evidence supporting this proposition (Hossain et al., 1994; Lakhal, 2005;
Chau and Gray, 2002; Schadewitz and Blevins, 1998). In Australia, Mitchell et al. (1995)
investigate how ?rm characteristics affect voluntary segment information disclosure in
1983, before segment information disclosure was made mandatory in 1985. They report
weak support for the hypothesized positive relationship between the level of segment
information disclosure and ownership diffusion.
Although the empirical studies reviewed previously provide interesting insights
into the effect of ownership concentration on voluntary disclosure practices, they suffer
from at least two limitations. One important limitation relates to the fact that these
studies do not make ?ner classi?cation of the ownership variable. Bushee (1998, 2001)
divides institutional investors into three clusters, namely dedicated, transient and
quasi-indexer institutions, based on three metrics (portfolio turnover, diversi?cation
and momentum trading). Based on this methodology, Bushee and Noe (2000) ?nd that
?rms with high Association for Investment Management and Research (AIMR)
disclosure ranking have greater numbers of transient institutional shareholders who
incline to a high portfolio turnover, high diversi?cation and high extent of momentum
share trading. Bushee and his colleagues also provide interesting insights into the
effect of institutional ownership clusters on insider trading, stock return volatility and
institutional investors’ preferences for governance mechanisms (Bushee, 2004; Bushee
et al., 2007). Eng and Mak (2003) adopt a managerial ownership, block holder
ownership and government ownership classi?cation and ?nd that managerial
(government) ownership is negatively (positively) related to the voluntary disclosure
score for a sample of Singapore ?rms. Taken together, this stream of research implies
that there can be diverse investment strategies and discrepant monitoring costs
incurred by different types of large shareholders who may have differential impacts on
voluntary disclosure practices. However, these studies do not address the potential
non-linear relationship between block holder ownership and disclosure level.
The other limitation relates to the linearity assumption of the relationship between
ownership structure and voluntary disclosures, although the non-linear relationships
between ownership structure and governance issues like ?rm value, investment-cash
?ow sensitivity, debt, and dividend decisions have been well documented. The
disclosure studies reviewed previously fail to address both of these limitations. Some
empirical studies address the ?rst concern but remain silent on non-linearity issue. Our
paper enriches the ownership structure and disclosure literature by addressing the
aforementioned limitations.
2.2 New Zealand institutional framework and development of hypotheses
NewZealand is believed to have concentrated equity ownership, relatively small equity
markets, and a regulatory environment less stringent than many (Hossain et al., 2001).
The extent to which voluntary disclosure practices are shaped by concentrated
ownership structures in New Zealand is an important empirical question. New Zealand
belongs to the same common law reporting regime as the USA, and the UK, yet differs
markedly with respect to ownership structure. Governance literature identi?es
important roles played by both ?rm-level and country-level governance structures.
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Managerial entrenchments are more likely to occur when both ?rm-level and
country-level governance structures are poor. In New Zealand, a strong country-level
governance regime operates (La Porta et al., 2000). If country-level governance
protection is suf?cient to induce managers to undertake value-maximizing behaviour,
then concentrated ownership (assuming it represents a poor ?rm-level governance
characteristic) will have minimal effect on voluntary disclosure practices. However,
?rm-level governance is an important monitoring device and concentrated ownership
structures could positively (negatively) affect voluntary disclosure practices,
depending on ef?cient monitoring (entrenchment) views. In New Zealand, there is a
dearth of research on the relationship between ownership structure and ?rm
disclosure. A recent study fails to ?nd any signi?cant relationship between proportion
of managerial ownership (insider ownership) and disclosure of forward-looking
information (Hossain et al., 2005). This paper extends current research in two ways.
First, we decompose ownership structures into four mutually exclusive groups:
(1) Financial institution-controlled.
(2) Government-controlled.
(3) Management-controlled.
(4) Other company-controlled.
Financial institution-controlled ownership structure occurs when the percentage of
?nancial institutions’ shareholding accounts for the majority of the top-?ve
shareholdings. Similarly, ownership structures can be categorized as being
government, management, or other company-controlled, if these groups account for the
majority shareholding among the top-?ve shareholdings. Furthermore, the non-linearity
between ownership structure and disclosure is incorporated into the research design.
Regarding non-linearity between ownership composition and disclosure practices,
Makhija and Patton (2004) recognize that large shareholders may derive bene?ts:
(1) Directly from ?rms (private bene?ts of control).
(2) From changes in share values in the capital market.
Large shareholders may also try to maximize their total bene?ts, which are the sum of
(1) and (2). Such motivations positively (negatively) affect corporate disclosure
practices if large shareholders’ objective is to obtain share price bene?ts (camou?age
their consumption of private bene?ts). What fundamentally shapes a large
shareholders’ objective is the level of large shareholdings, which is a proxy for their
controlling power in management issues. If external large shareholders enjoy absolute
controlling rights in the ?rm, they can exert a powerful in?uence on management in
deriving private bene?t fromcontrols. Alowdegree of voluntary disclosure in this case
is desirable, as it conceals the consumption of such private bene?ts. Conversely, with
the decrease in their shareholding, reduced voting rights can no longer secure private
bene?ts. In that case, large shareholders might prefer to align their interests with those
of other shareholders in obtaining greater share values from increased corporate
disclosure. Thus, the relationship between ownership concentration and disclosure is
likely to be nonlinear, and will vary with the level of the large shareholders’ holding.
Although companies in New Zealand have higher institutional and concentrated
shareholdings, their overall effectiveness and willingness to monitor are arguably
weak (Bhabra, 2007). The popular press is replete with criticisms for the lack of
Disclosures in
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shareholder activism in New Zealand compared with that in the USA, UK, and even
Australia. With respect to ?nancial institutions’ investment in the New Zealand equity
market, foreign ?nancial institutions and corporations account for the majority of
investments, which leads to Bhabra’s (2007) conclusion that geographical separation of
foreign institutional investors from their invested companies is partially responsible
for the ineffective institutional monitoring observed in New Zealand.
Navissi and Naiker (2006) report a non-linear relationship between institutional
ownership and ?rm value in New Zealand by documenting a positive (negative)
association with ?rm value at lower (higher) levels of ownership. Active monitoring of
institutional shareholding improved ?rm value only up to a certain level of
shareholding (ef?cient monitoring). At high levels of shareholding, institutional
shareholders may encourage sub-optimal decisions harmful to the ?rms (managerial
entrenchment). This argument is corroborated by the recent successive collapses of
?nancial companies in New Zealand. The failure of 18 ?nancial companies between
2006-2008 resulted in the loss of more than two billion dollars of investors’ funds
(Bergh and Nichols, 2008). The failure of these ?nance companies appears to have more
to do with their poor management, the lack of information they provided to ?nance
markets, as well as the asymmetrical nature of the industry resulting from the
dysfunctional price signal (McKay, 2007). The New Zealand Stock Exchange (NZX)
states: “The lack of willingness to regulate or supervise these companies has been
resounding . . . None of these (?nance companies) has been governed by the continuous
disclosure rules of the NZX because they were not listed. Also, because ?nance
companies are not banks, they have not been regulated by the Reserve Bank of New
Zealand (RBNZ) (NZPA, 2007a)” The inadequate legislation, along with the failures,
raises the concern that ?nance companies’ governance system may be ?awed, and
signi?cant risk exists in this sector (NZPA, 2007b). This lack of monitoring could allow
institutional funds to siphon or tunnel value out of portfolio companies by way of
special contracts, transfer pricing and non-transparent side deals with ?rms connected
to the fund management companies (Ellerman, 1998).
Because increased disclosures might expose such value siphoning or tunneling by
entrenched management and ?nancial shareholders, a negative association would be
expected between ?nancial institution ownership concentration and corporate
disclosure scores if the con?ict-of-interest or strategic-alignment hypotheses held.
This situation might be severe when ?rm’s ownership concentration levels are high,
while less so when large shareholders have fewer voting rights. Based on the preceding
discussion, we formulate the following hypotheses:
H1(a). The extent of voluntary disclosure is negatively related to the ?nancial
institutional ownership at high levels of ownership concentration.
H1(b). The extent of voluntary disclosure is positively related to the ?nancial
institutional ownership at low levels of ownership concentration.
Regarding the impact of government ownership on voluntary disclosure levels, it is
conjectured that companies with government ownership might not disclose
extensively because of:
.
their separate monitoring by the government;
.
their access to government funding and, hence, reduced need to raise funds
externally; and
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the fact that returns in holding companies are guaranteed to governmental
owners (Naser and Nuseibeh, 2003).
Empirically, Ghazali and Weetman (2006) report that government ownership in
Malaysia does not promote greater disclosure and better transparency. They argue
that in a developing country like Malaysia, government-controlled companies are
strongly politically associated, and such companies tend to disclose less information to
protect their political linkages or even their bene?cial owners.
In contrast, Makhija and Patton (2004) state that government tends to hold on too
large a stake in companies that are regarded as having strategic value or perceived as
“national silver”. These non-economic considerations suggest that companies with
large governmental shareholdings might choose to disclose more to ful?ll their
accountability role to the public at large. Eng and Mak (2003) argue that agency costs
are higher in government-owned companies because of con?icting objectives between
the pure pro?t goals of a commercial enterprise, and goals related to the interests of the
nation. This argument is supported by their evidence that the need to communicate
with other shareholders is greater in government-controlled companies, leading to
increased disclosure. However, lower levels of government ownership may reduce this
bene?cial aspect of governmental ownership, indicating decreased controlling power
in corporate issues, and reduced non-economic disclosure motivation. Thus, the
following hypotheses are developed:
H2(a). The extent of voluntary disclosure is positively related to governmental
ownership at high ownership concentration levels.
H2(b). The extent of voluntary disclosure is negatively/insigni?cantly related to
governmental ownership at low ownership concentration levels.
Another group that is likely to exert signi?cant in?uence on corporate disclosure
policies is the management group. On the one hand, management could maximise the
private bene?ts of control by providing minimal disclosures or less credible disclosures
to outsiders. Gelb (2000) ?nds that there is indeed a negative relationship between
managerial ownership and disclosures measured by AIMR. Ruland et al. (1990) report
that managerial earnings forecasting decreased when insider ownership increased.
However, Hossain et al. (2005) fail to ?nd the predicted negative relationship between
insider ownership (directors and top ?ve managers) and prospective information
disclosure by New Zealand companies.
On the other hand, a high level of managerial ownership can align the interests of
managers with outside shareholders’ disclosure preferences, because managers with
greater shareholdings can derive greater share-market bene?ts from better disclosure.
War?eld et al. (1995) report that the earnings-return correlation is greater for ?rms
with high levels of managerial ownership, and interpreted this result as evidence that
accounting disclosures’ information content increases with the level of managerial
ownership. Nagar et al. (2003) argue that managers are privy to information that
investors demand, and are reluctant to publicly disseminate it unless they are provided
with appropriate incentives (stock-based compensation, for example). In Malaysia,
Mohd-Nasir and Abdullah (2004) also ?nd that the executive directors’ shareholdings
has a positive in?uence on the voluntary disclosure level.
With respect to the non-linearity assumption, Leung and Horwitz (2004) ?nd that
voluntary segment disclosure increases as director ownership increases from 1 percent
Disclosures in
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to 25 percent in Hong Kong. However, it decreases when the level of insider ownership
rises above the 25 percent ownership level. They state that higher levels of managerial
ownership reduce the alignment of interests, and the agency problem shifts from
managers/shareholder con?icts to majority/minority shareholder con?icts. A recent
study by Bhabra (2007) in New Zealand, however, reports a curvilinear relationship
between insider-ownership (director ownership) and ?rm value. Bhabra ?nds that
insider ownership and ?rm value are positively correlated at ownership levels below 14
percent and above 40 percent; and inversely correlated at intermediate levels of
ownership. These results suggest that ?rm value initially increases with insider
ownership at lower levels (market discipline), then reduces over intermediate insider
ownership levels (entrenchment) and, ?nally, increases beyond a critical ownership level
(convergence of interest). Therefore, in New Zealand listed companies, managerial control
might be expected to have a positive impact on disclosure at high ownership
concentration levels, but a negative or insigni?cant relationship with disclosure level at
lowownership concentration levels. Based on this discussion, we develop two hypotheses.
H3(a). The extent of voluntary disclosure is positively related to managerial
ownership at high ownership concentration levels.
H3(b). The extent of voluntary disclosure is negatively/insigni?cantly related to
managerial ownership at a low ownership concentration levels.
Regarding ownership concentration by other company groups, this study develops no
hypotheses since it would not be possible to identify precisely the disclosure
motivation of such ownership groups.
3. Research methodology
3.1 Research design
The regression model used in this paper is designed to estimate the impact of
ownership concentration on voluntary disclosures after controlling for the known
determinants of voluntary disclosure scores. A common problem encountered by
researchers in regressing disclosure scores on ownership structure is the endogeneity
between these two variables, as corporate disclosure and ownership are arguably
determined simultaneously. In other words, corporate disclosure can attract
concentrated (dispersed) shareholders, while different ownership structures may be
associated with different disclosure policies (Makhija and Patton, 2004;
Venkatachalam, 2000). To alleviate the concern of endogenous relationships between
disclosures and ownership structure and detect the one-way effect of ownership
structure on voluntary disclosure, a 2SLS analysis is conducted. At the ?rst stage, the
ownership concentration measure – the Her?ndahl index – is regressed on an
instrumental variable, shareholder intensity, de?ned as the ratio of total shareholders
to total outstanding shareholdings. On a theoretical level, this variable should be a
determinant of ownership concentration but should bear no relationship to the
voluntary disclosure index. Acorrelation analysis reveals that this ratio correlates with
the ownership concentration measure but not with voluntary disclosure scores. From
the ?rst stage equation, ?tted values of the Her?ndahl index were obtained. In the
second stage, ?tted values of the Her?ndahl index are incorporated into the following
panel data regression model which pools the observations both cross-sectionally and
temporally to replace the original Her?ndahl index:
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A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
SDSCORE
it
¼ b
0
þb
1
^
H
it
þb
2
PER
it
þb
3
CAP_INTEN
it
þ
b
4
SIZE
it
þb
5
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 5
ð1Þ
where SDSCORE
i
is scaled voluntary disclosure index of each ?rm in each ?nancial
year;
^
H
i
represents the ?tted value of Her?ndahl index which is a proxy for the
ownership concentration of each ?rm in each ?nancial year. The equation includes
common control variables used in academic research on the determinants of voluntary
disclosures. Firm pro?tability has been found to have a positive impact on voluntary
disclosure choices (Darrough and Stoughton, 1990; Miller, 2002; Verrecchia, 1983).
Firm pro?tability is proxied by net pro?t divided by total assets and is denoted
byPER
i
. Capital intensity, CAP_INTEN
it
, would also be expected to relate positively to
voluntary disclosure choices, as ?rms’ willingness to disclose information increases
with an increase in their demand for capital (Verrecchia, 1983; Wagenhofer, 1990).
CAP_INTEN
it
is the ratio of ?xed assets divided by total assets. Firm size, SIZE
it
, has
been reported to be a factor in?uencing the quality and the quantity of ?rm disclosure
(Johnson et al., 2001; and Lang and Lundholm, 1993). This is because:
.
larger companies are more likely to be exposed to litigation than their smaller
counterparts and, therefore, may disclose more voluntarily to avoid this cost
(Kasznik and Lev, 1995); and
.
reporting detailed information is relatively less costly for larger companies than
for smaller ones (Raffournier, 1995). Firm size, SIZE
it,
is measured as the natural
log of total assets.
Disclosure level has also been hypothesised to increase with leverage (Healy et al.,
1999; Lang and Lundholm, 1993; Raffournier, 1995), as shareholders would like to be
informed by voluntary disclosure regarding the debt information, to ensure that the
debt acts as a disciplining mechanism in curbing managerial opportunistic use of
excess cash (Jensen, 1986). Firm leverage, LEVERAGE
it
, is calculated as total liability
divided by total assets.
Equation 1 does not, however, classify ownership into different classes to
investigate the impact of each group on voluntary disclosure scores. Equation (2)
incorporates this feature into the analysis.
SDSCORE
it
¼b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
*FDUM
it
þb
5
^
H
it
*GDUM
it
þb
6
^
H
it
*MDUM
it
þb
7
^
H
it
*OTHDUM
it
þb
8
PER
i
þb
9
CAP_INTEN
it
þb
10
SIZE
i
þb
11
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 5
ð2Þ
Equation (2) captures the marginal effect of each type of controlling ownership on
disclosure level. FDUM is coded one when company has ?nancial
Disclosures in
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283
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A
t
2
1
:
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9
2
4
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a
n
u
a
r
y
2
0
1
6
(
P
T
)
institutions-controlled ownership structures, and zero otherwise; GDUM is coded one
when ownership concentration was government controlled and zero otherwise; MDUM
is coded one when ownership concentration is management controlled (directors,
executives and/or companies’ family founders), and zero otherwise; OTHDUM is coded
one when ownership concentration is other company-controlled and zero otherwise.
The effect of ownership concentration on corporate voluntary disclosures under
?nancial institution-controlled, government controlled, and management controlled
ownership structures are captured by coef?cients b
4
,b
5
and b
6
respectively.
To test the hypothesised non-linear relationship between ownership concentration
and extent of voluntary disclosures, equation (3) as shown in the following is
estimated.
SDSCORE
it
¼b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
* FDUM
it
þb
5
^
H
it
* GDUM
it
þb
6
^
H
it
* MDUM
it
þb
7
^
H
it
* OTHDUM
it
þb
8
^
H
2
it
* FDUM
it
þb
9
^
H
2
it
* GDUM
it
þb
10
^
H
2
it
* MDUM
it
þb
11
^
H
2
it
* OTHDUM
it
þb
12
PER
it
þb
13
CAP_INTEN
it
þb
14
SIZE
it
þb
15
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467
t ¼ 1; 2; :::; 467
ð3Þ
Equation (3) is performed on entire sample observations. The quadratic relationship
between ownership concentration controlled by ?nancial institutions and the extent of
disclosure will be supported if b
4
is positive (H1b), and b
8
is negative (H1a). For
government-controlled ownership structures, the quadratic relationship between
government-controlled ownership structures and voluntary disclosures will be
supported if b
5
is negative (H2b), and b
9
is positive (H2a). Finally, the quadratic
relationship between management-controlled ownership structures and voluntary
disclosures will be supported if b
6
is negative (H3b), and b
10
is positive (H4a).
3.2 Measurement of variables
The Her?ndahl index is used as the proxy for ownership concentration (Demsetz and
Lehn, 1985; Hartzell and Starks, 2003; Kraft and Niederpru¨m, 1999; Lakhal, 2005;
Makhija and Patton, 2004). It has been reported to be the best of ?ve measures used by
Woerheide and Persson (1993) who investigated securities portfolio diversi?cation. It is
calculated using the formula: H ¼
P
n
i¼1
S
i
. Where n is the top ?ve largest
shareholders including ?nancial institutions, ?rms’ inside shareholders (directors and
executives) and other outside block shareholders; S is the percentage share owned by
each of the top ?ve largest shareholders. These data were retrieved from the
“Substantial security holders” section of the annual reports. Total sample observations
are categorised into high and low ownership concentration levels, based on a cut-off
point of 0.18.
Dummy variables are used to identify four different types of ownership structure. A
company will have ?nancial institution-controlled ownership structure when ?nancial
institutions’ shareholding accounts for the majority of the top-?ve shareholdings. For
example, a company may have top ?ve shareholders holding 60 percent of the shares
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y
2
0
1
6
(
P
T
)
distributed as 30, 10, 10, 5 and 5 percent among top ?ve shareholders. Assume that the
?rst and fourth largest shareholders are ?nancial institutions with a total shareholding
of 35 percent. Because 35 percent is more than the rest of top ?ve shareholdings (25
percent), this company will be categorized to have ?nancial institution-controlled
ownership structure. For this ?rm FDUM will be coded 1, and GDUM, MDUM and
OTHDUM will be coded zero. The same procedure is repeated for each ?rm-year
observation to categorize government, management, or other company-controlled
ownership structure. The ownership type of company block shareholders is identi?ed
through searching New Zealand companies of?ce web site and block holders’ company
web site. Managerial shareholdings are identi?ed based on information provided in
“Substantial security holders” section of annual reports.
A voluntary disclosure checklist is constructed based on Botosan (1997). She
constructs a disclosure index based on the amount of voluntary disclosure provided by
?rms in their annual reports. The items included in her disclosure index are identi?ed
by investors and ?nancial analysts as useful in investment decision making, and the
selection of items is guided by an American study of business reporting, an
international survey of investor information needs, and a Canadian study of the
usefulness of corporate annual reports (Botosan, 1997). Our disclosure index
construction follows Botosan’s (1997) practice. The items in our disclosure index are
checked against the mandatory annual report disclosure requirements in New Zealand
to make sure that the disclosure index re?ects only voluntary disclosure items (the
Appendix provides the disclosure checklist used in this paper). The items on the
checklist are placed into ?ve information categories:
(1) Background information.
(2) A summary of historical results.
(3) Key non-?nancial statistics.
(4) Projected information.
(5) Management discussion and analysis.
The voluntary disclosure index used for each company was scored according to this
checklist, and scaled by the maximum disclosure score. Firm-year observation is given
one point if the company annual report has disclosed the relevant items on the
checklist, and an additional point is awarded if the disclosed items have been found to
be quanti?ed either as a point or range estimate. Quanti?cation of prospective
information is believed to be more informative to investors and hence this extra weight.
3.3 Sample selection
The sample for this study is selected from companies listed on the New Zealand Stock
Exchange (NZSX) and New Zealand Alternative Exchange (NZAX) Markets over the
period 2001-2005. NZSX is the Main Board of NZX and its premier equities market,
while NZAX was created speci?cally for fast growing, small to medium sized and
non-standard companies, to facilitate effective capital ?nancing. Although companies
on NZAX were not included in previous New Zealand studies, this paper includes
them, because such companies may carry out different voluntary disclosure practices
and have different ownership concentration structures from their counterparts in the
NZX main board. A sample period from 2001-2005 is selected to capture the most
recent tendencies for voluntary disclosure and ownership practice in New Zealand.
Disclosures in
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Y
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S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Consistent with extant studies the sample excludes ?nancial institutions (e.g. pension
funds, mutual funds, money managers, insurance companies, investment banks,
commercial trusts, endowment funds, and hedge funds), as well as overseas companies
listed on NZ stock markets. Overseas companies comply with different governance and
disclosure regulations owing to cross listing. A total sample of 630 ?rm-year
observations representing 146 companies over the sample period of 2001 to 2005 is
selected. The sample size is reduced to 526 ?rm-year observations representing 119
companies after sample screening. Tables I and II provide the sample selection
procedure and industry composition of the sample observations.
4. Empirical results
4.1 Descriptive analysis
Tables III and IV present the descriptive statistics and the correlation matrix
respectively for the dependent and independent variables. As is evident from Table III
there is wide variation in the voluntary disclosure scores. The mean scaled voluntary
disclosure index is 0.27 with a minimum value of zero and maximum value of 0.70.
Ownership concentration represented as the Her?ndahl index has a mean value of 0.18.
The US Department of Justice states that a Her?ndahl index larger or equal to 0.18
within an industry indicates high concentration, whereas ownership concentration is
considered to be moderate (insigni?cant or competitive) if the index is between 0.1 and
0.18 (less than 0.1) respectively (Brown and Warren-Boulton, 1988). The mean
Her?ndahl index of 0.18 in the present study suggests a concentrated ownership
pattern.
Industrial groups No. of ?rms Observations Percentage
Healthcare 11 49 10.49
Consumer goods 20 69 14.78
Consumer services 22 87 18.63
Industrials 25 105 22.48
Basic materials 5 24 5.14
Telecommunications 4 17 3.64
Property development 16 65 13.92
Technology 7 25 5.35
Utilities 4 16 3.43
Oil and gas 2 10 2.14
Total 116 467 100.00
Table II.
Industry composition
Firms Observations
Base sample (NZX provided data, Fiscal 2001-2005) 146 630
Eliminations
1. Financials 25 95
2. Overseas 2 9
3. Unavailable voluntary disclosure information 3 39
4. Unavailable ownership structure information 0 20
Final usable sample 116 467
Table I.
Sample selection
procedure
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1
:
0
9
2
4
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a
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a
r
y
2
0
1
6
(
P
T
)
V
a
r
i
a
b
l
e
s
C
o
d
e
M
e
a
n
M
e
d
i
a
n
M
a
x
i
m
u
m
M
i
n
i
m
u
m
S
t
d
d
e
v
.
O
b
s
.
V
o
l
u
n
t
a
r
y
d
i
s
c
l
o
s
u
r
e
S
D
S
C
O
R
E
0
.
2
6
9
6
0
.
2
6
1
9
0
.
7
0
2
4
0
.
0
0
0
0
0
.
1
2
6
9
4
6
7
H
e
r
?
n
d
a
h
l
i
n
d
e
x
H
0
.
1
7
9
8
0
.
1
2
2
5
0
.
7
8
0
9
0
.
0
0
0
0
0
.
1
6
7
8
4
6
7
N
e
t
p
r
o
?
t
a
f
t
e
r
t
a
x
(
i
n
$
0
0
0
)
P
E
R
1
1
6
,
6
6
2
3
,
0
4
4
9
1
6
,
0
0
0
2
1
,
4
0
8
,
7
8
2
1
.
2
4
0
0
0
4
6
7
C
a
p
i
t
a
l
i
n
t
e
n
s
i
t
y
C
A
P
_
I
N
T
E
N
0
.
3
3
0
1
0
.
2
6
2
7
0
.
9
5
9
6
0
.
0
0
0
0
0
.
2
9
2
0
4
6
7
N
a
t
u
r
a
l
l
o
g
o
f
t
o
t
a
l
a
s
s
e
t
s
S
I
Z
E
1
7
.
8
9
1
1
1
7
.
9
1
5
7
2
2
.
9
1
7
4
1
1
.
0
9
7
4
2
.
1
7
6
5
4
6
7
D
e
b
t
t
o
a
s
s
e
t
s
r
a
t
i
o
L
E
V
E
R
A
G
E
0
.
4
2
6
2
0
.
3
6
8
4
1
3
.
8
6
3
6
0
.
0
0
4
3
0
.
6
7
7
8
4
6
7
Table III.
Descriptive statistics
Disclosures in
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t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
S
D
S
C
O
R
E
1
.
0
0
0
0
H
0
.
0
8
5
8
1
.
0
0
0
0
H
2
0
.
0
8
0
2
0
.
9
4
4
8
1
.
0
0
0
0
H
*
M
D
U
M
2
0
.
0
9
2
2
0
.
2
0
4
4
0
.
1
8
7
5
2
0
.
0
9
2
9
1
.
0
0
0
0
H
*
O
T
H
D
U
M
0
.
0
6
8
0
0
.
3
1
0
5
0
.
2
8
4
6
2
0
.
0
6
9
1
2
0
.
1
4
5
5
1
.
0
0
0
0
H
2
*
G
D
U
M
0
.
1
5
6
4
0
.
3
6
8
7
0
.
3
7
6
9
0
.
9
8
4
9
2
0
.
0
8
6
2
2
0
.
0
6
4
1
1
.
0
0
0
0
H
2
*
M
D
U
M
2
0
.
0
3
4
3
0
.
3
0
6
8
0
.
3
4
7
1
2
0
.
0
4
9
0
0
.
8
7
8
1
2
0
.
0
7
6
8
2
0
.
0
4
5
5
1
.
0
0
0
0
H
2
*
O
T
H
D
U
M
0
.
0
6
1
0
0
.
3
4
8
6
0
.
3
7
4
6
2
0
.
0
4
8
0
2
0
.
1
0
1
1
0
.
9
1
6
6
2
0
.
0
4
4
5
2
0
.
0
5
3
3
1
.
0
0
0
0
P
E
R
0
.
1
3
5
2
2
0
.
0
1
9
7
2
0
.
0
2
7
0
0
.
0
1
7
1
2
0
.
0
2
5
1
2
0
.
0
6
6
8
0
.
0
1
6
0
2
0
.
0
1
3
3
2
0
.
0
6
3
4
1
.
0
0
0
0
C
A
P
_
I
N
T
E
N
0
.
4
4
3
4
0
.
2
2
2
5
0
.
2
5
5
4
0
.
2
2
8
3
2
0
.
2
5
4
4
0
.
1
1
2
0
0
.
1
9
2
9
2
0
.
1
5
1
2
0
.
0
9
1
9
0
.
0
2
7
4
1
.
0
0
0
0
S
I
Z
E
0
.
7
2
5
5
*
0
.
1
3
7
1
0
.
1
1
7
4
0
.
1
1
5
5
2
0
.
2
1
6
7
0
.
1
3
5
2
0
.
1
1
5
2
2
0
.
0
9
8
1
0
.
1
1
1
5
0
.
1
3
1
5
0
.
4
3
1
7
1
.
0
0
0
0
L
E
V
E
R
A
G
E
0
.
0
0
1
9
2
0
.
0
6
5
4
2
0
.
0
5
7
2
2
0
.
0
3
5
3
2
0
.
0
4
8
9
2
0
.
0
5
6
0
2
0
.
0
3
2
3
2
0
.
0
4
5
8
2
0
.
0
3
1
6
0
.
0
0
7
2
2
0
.
0
1
5
6
2
0
.
0
8
8
7
1
.
0
0
0
0
N
o
t
e
s
:
1
¼
S
D
S
C
O
R
E
;
2
¼
H
;
3
¼
H
2
;
4
¼
H
*
G
D
U
M
;
5
¼
H
*
M
D
U
M
;
6
¼
H
*
O
T
H
D
U
M
;
7
¼
H
2
*
G
D
U
M
;
8
¼
H
2
*
M
D
U
M
;
9
¼
H
2
*
O
T
H
D
U
M
;
1
0
¼
P
E
R
;
1
1
¼
C
A
P
_
I
N
T
E
N
;
1
2
¼
S
I
Z
E
;
1
3
¼
L
E
V
E
R
A
G
E
;
S
D
S
C
O
R
E
¼
s
c
a
l
e
d
D
S
C
O
R
E
i
n
d
e
x
;
^
H
¼
t
h
e
?
t
t
e
d
v
a
l
u
e
o
f
t
h
e
H
e
r
?
n
d
a
h
l
i
n
d
e
x
;
F
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
?
n
a
n
c
i
a
l
i
n
s
t
i
t
u
t
i
o
n
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
G
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
g
o
v
e
r
n
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
M
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
m
a
n
a
g
e
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
(
d
i
r
e
c
t
o
r
s
,
e
x
e
c
u
t
i
v
e
s
a
n
d
/
o
r
c
o
m
p
a
n
i
e
s
’
f
a
m
i
l
y
f
o
u
n
d
e
r
s
)
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
O
T
H
D
U
M
¼
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
o
t
h
e
r
c
o
m
p
a
n
i
e
s
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
P
E
R
¼
n
e
t
p
r
o
?
t
a
f
t
e
r
t
a
x
a
t
t
h
e
e
n
d
o
f
c
u
r
r
e
n
t
?
n
a
n
c
i
a
l
y
e
a
r
;
C
A
P
_
I
N
T
E
N
¼
c
a
p
i
t
a
l
i
n
t
e
n
s
i
t
y
c
a
l
c
u
l
a
t
e
d
a
s
r
a
t
i
o
o
f
?
x
a
s
s
e
t
s
t
o
t
o
t
a
l
a
s
s
e
t
s
;
S
I
Z
E
¼
n
a
t
u
r
a
l
l
o
g
a
r
i
t
h
m
o
f
t
o
t
a
l
a
s
s
e
t
s
a
t
t
h
e
e
n
d
o
f
?
n
a
n
c
i
a
l
y
e
a
r
s
;
L
E
V
E
R
A
G
E
¼
l
e
v
e
r
a
g
e
r
a
t
i
o
c
a
l
c
u
l
a
t
e
d
a
s
t
o
t
a
l
l
i
a
b
i
l
i
t
y
d
i
v
i
d
e
d
b
y
t
o
t
a
l
a
s
s
e
t
s
a
t
t
h
e
e
n
d
o
f
?
n
a
n
c
i
a
l
y
e
a
r
s
Table IV.
Correlation matrix
ARJ
22,3
288
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Correlation results in Table IV show that ?rm size (SIZE) and Capital intensity
(CAP_INTEN) are signi?cantly positively correlated with disclosure scores
(SDSCORE) (correlation coef?cients of 0.73 and 0.43 respectively), indicating that
large companies and capital-intensive companies tend to disclose more. Apart from
these two variables, other explanatory variables have no obvious correlation with
SDCORE. The correlations among explanatory variables show that signi?cant
multicollinearity exists between the Her?ndahl index (H) and its squared value (H
2
)
(correlation coef?cient of 0.94). The correlation coef?cients among the interaction
terms (H
*
GDUM, H
*
MDUM and H
*
OTHDUM) and their counterparts (H
2
*
GDUM,
H
2
*
MDUM and H
2
*
OTHDUM) are notably high because of the variable
construction procedure. Multicollinearity biases the t-statistics downwards (Gujarati,
2006) and hence it is not much of a concern if regression analysis results show
suf?ciently large t-statistics to justify rejecting the null hypotheses. Table V reports
the shareholding percentage and voluntary disclosure levels for four types of
ownership concentration and reveals that governmental shareholders have
signi?cantly large shareholding and higher voluntary disclosure level compared to
other ownership groups. Table VI shows the mean SDSCORE by four sub-categories
used in constructing SDSCORE. Result reveals that companies are more likely to
disclose background information such as corporate objectives and managerial efforts
made to achieve such objectives, whereas they are less likely to provide quantitative
information on historical operation. This is different from the voluntary disclosure
observed in other equity markets where ?ve-year summary of historical results is
commonly presented in companies’ annual reports (Botosan, 1997).
Background
information
Ten- or ?ve-year summary
of historical results
Key non-
?nancial
statistics
Projected
information
Management
discussion and
analysis
0.0749 0.0315 0.0543 0.0503 0.0511
Note: SDSCORE = scaled DSCORE index
Table VI.
Mean SDSCORE by
sub-categories for sample
listed companies during
2001-2005
Financial
shareholding
Governmental
shareholding
Managerial
shareholding
Other-company
shareholding
Shareholding percentage of four types of ownership structures
Mean 54.3599 77.5144 52.0914 64.5915
Median 56.4495 77.2800 52.2200 62.8800
Std dev. 22.3607 8.5653 18.5387 15.7519
SDSCORE of four types of ownership structures
Mean 0.2705 0.3841 0.2429 0.2888
Median 0.2738 0.4405 0.2262 0.2738
Std dev. 0.1233 0.1268 0.1228 0.1251
Observations 226 23 153 65
Note: SDSCORE = scaled DSCORE index
Table V.
Shareholding percentage
and voluntary disclosure
level of four types of
ownership structures
Disclosures in
New Zealand
289
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
4.2 Substantive empirical results
We employ un-balanced panel data analysis for the regression analysis and report
panel data results. Table VII shows the results of regression equation (1) for entire
sample observations. Ownership concentration (
^
H) has a signi?cant positive effect
(p ¼ 0:017) on voluntary disclosure level (SDSCORE) after controlling ?rm
pro?tability, capital intensity, size and leverage. Except for leverage, all other
control variables are related to the voluntary disclosure level at better than the 1
percent level of signi?cance. The positive effect of ownership concentration on
voluntary disclosure scores seems to support the ef?cient monitoring hypothesis
rather than the entrenchment hypothesis. However, treating ownership concentration
as a whole may fail to provide suf?cient information to infer disclosure motivations,
because of the disparity in the monitoring costs incurred and incompatible monitoring
power held by different types of dominant shareholders. To address this possibility
equation (2) is estimated, and the results are reported in Table VIII.
In Table VIII, the results of regression equation (2) are presented for:
.
the full sample;
.
?rm-year observations in the high concentration group; and
.
?rm-year observations in the low concentration group.
Results reveal that for the full sample, none of the slope dummy variables
was statistically signi?cant. This may be attributed to the fact that monitoring effects
of controlling shareholders varies with the level of ownership concentration, and
those effects are non-linear in essence. For the high concentration group, the
coef?cient capturing ?nancial institutions controlled ownership structure (
^
H
*
FDUM)
is signi?cantly negatively related to the voluntary disclosure scores
(coef?cient ¼ 25.35, t-statistic ¼ 24.72, signi?cant at better than the 1 percent
level). This ?nding suggests that controlling ?nancial institutions might discourage
managers from making more voluntary disclosures, thus supporting hypothesis H1a.
Furthermore, unreported results reveal that this trend becomes much more pronounced
in the recent period (2004-2005) compared with earlier periods (2001-2002). For
example, the coef?cient on (
^
H
*
FDUM) is statistically insigni?cant over the 2001-2002
period (t-statistic ¼ 20.61), while it is signi?cantly negative in the latter period,
SDSCORE
it
¼ a
0
þa
1
^
H
it
þa
2
PER
it
þa
3
CAP_INTEN
it
þa
4
SIZE
it
þa
5
LEVERAGE
it
þ1
it
(1)
Intercept
^
H PER CAP_INTEN SIZE LEVERAGE R
2
adjusted F-statistics Obs.
20.52
* * *
0.20
*
0.00
* *
0.05
* *
0.04
* *
0.01 0.57 35.81
* *
467
(221.44) (2.40) (2.93) (5.93) (33.13) (6.98)
Notes:
*
and
* *
denote statistical signi?cance at the 5 and 1 per cent level respectively. SDSCORE =
scaled DSCORE index;
^
H = the ?tted value of the Her?ndahl index; FDUM = 1 when ownership
concentration appears to be ?nancial institution controlling, and 0 otherwise; GDUM = 1 when
ownership concentration appears to be government controlling, and 0 otherwise; MDUM = 1 when
ownership concentration appears to be management controlling (directors, executives and/or
companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership concentration appears
to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at the end of current
?nancial year; CAP_INTEN = capital intensity calculated as ratio of ?x assets to total assets;
SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage ratio
calculated as total liability divided by total assets at the end of ?nancial years
Table VII.
Regression results of the
impact of different
classes of ownership
concentration on
voluntary disclosure
practices – equation (1)
ARJ
22,3
290
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
0
9
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Table VIII.
Regression results of the
impact of different
classes of ownership
concentration on
voluntary disclosure
practices – equation (2)
S
D
S
C
O
R
E
i
t
¼
b
0
þ
b
i
t
F
D
U
M
2
þ
b
2
G
D
U
M
i
t
þ
b
3
M
D
U
M
i
t
þ
b
4
^
H
i
t
*
F
D
U
M
i
t
þ
b
5
^
H
i
t
*
G
D
U
M
i
t
þ
b
6
^
H
i
t
*
M
D
U
M
i
t
þ
b
7
^
H
i
t
*
O
T
H
D
U
M
i
t
þ
b
8
P
E
R
i
t
þ
b
9
C
A
P
_
I
N
T
E
N
i
t
þ
b
1
0
S
I
Z
E
i
t
þ
b
1
1
L
E
V
E
R
A
G
E
i
t
þ
1
i
t
i
¼
1
;
2
;
:
:
:
;
4
6
7
t
¼
1
;
2
;
:
:
:
;
5
H
i
g
h
o
w
n
e
r
s
h
i
p
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a
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a
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s
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o
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f
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c
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n
t
t
-
s
t
a
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t
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d
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s
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f
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c
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p
t
?
2
1
.
1
8
2
3
.
4
8
*
*
*
?
2
0
.
5
3
2
1
.
8
4
*
F
D
U
M
?
1
.
8
0
6
.
0
5
?
2
0
.
4
4
2
1
.
8
6
*
G
D
U
M
?
2
1
.
2
2
2
1
.
1
4
?
0
.
8
3
1
.
3
0
M
D
U
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?
0
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3
5
1
.
1
3
?
2
0
.
3
8
2
1
.
4
9
^
H
*
F
D
U
M
2
2
5
.
3
5
2
4
.
7
2
*
*
*
þ
0
.
0
3
0
.
1
9
^
H
*
G
D
U
M
þ
1
0
.
7
8
2
.
1
7
*
*
2
2
8
.
0
8
2
2
.
1
6
*
*
^
H
*
M
D
U
M
þ
2
.
5
3
7
.
0
7
*
*
*
2
2
0
.
3
0
2
0
.
4
2
^
H
*
O
T
H
D
U
M
?
4
.
1
1
2
.
4
3
*
*
*
?
2
2
.
8
6
2
2
.
0
3
*
*
P
E
R
þ
0
.
0
0
0
.
9
4
þ
0
.
0
0
7
.
5
2
*
*
*
C
A
P
_
I
N
T
E
N
þ
0
.
0
9
8
.
5
8
*
*
*
þ
2
0
.
0
0
2
0
.
0
3
S
I
Z
E
þ
0
.
0
3
2
0
.
1
6
*
*
*
þ
0
.
0
6
1
3
.
2
6
*
*
*
L
E
V
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R
A
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E
?
0
.
0
1
8
.
3
0
*
*
*
?
2
0
.
0
2
2
1
.
9
9
*
*
R
2
a
d
j
u
s
t
e
d
0
.
6
3
0
.
6
4
F
-
s
t
a
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t
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c
s
2
2
.
5
9
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1
2
.
7
3
*
*
*
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b
s
e
r
v
a
t
i
o
n
s
3
0
5
1
6
2
N
o
t
e
s
:
S
D
S
C
O
R
E
=
s
c
a
l
e
d
D
S
C
O
R
E
i
n
d
e
x
;
^
H
¼
t
h
e
?
t
t
e
d
v
a
l
u
e
o
f
t
h
e
H
e
r
?
n
d
a
h
l
i
n
d
e
x
;
F
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
?
n
a
n
c
i
a
l
i
n
s
t
i
t
u
t
i
o
n
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
G
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
a
p
p
e
a
r
s
t
o
b
e
g
o
v
e
r
n
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
M
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
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o
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a
p
p
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a
r
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o
b
e
m
a
n
a
g
e
m
e
n
t
c
o
n
t
r
o
l
l
i
n
g
(
d
i
r
e
c
t
o
r
s
,
e
x
e
c
u
t
i
v
e
s
a
n
d
/
o
r
c
o
m
p
a
n
i
e
s
’
f
a
m
i
l
y
f
o
u
n
d
e
r
s
)
,
a
n
d
0
o
t
h
e
r
w
i
s
e
;
O
T
H
D
U
M
=
1
w
h
e
n
o
w
n
e
r
s
h
i
p
c
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e
n
t
r
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a
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,
a
n
d
0
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w
i
s
e
;
P
E
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¼
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p
r
o
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t
a
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a
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;
C
A
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_
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=
c
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t
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s
;
S
I
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¼
n
a
t
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r
a
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l
o
g
a
r
i
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m
o
f
t
o
t
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n
a
n
c
i
a
l
y
e
a
r
s
;
L
E
V
E
R
A
G
E
¼
l
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v
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r
a
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r
a
t
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o
c
a
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c
u
l
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s
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2004-2005 (t-statistic ¼ 28.25). This result implies that ?nancial institution-controlled
governance regimes present potential threats to information asymmetry owing to their
constraining function on corporate voluntary disclosure practices. This trend has
become more severe in recent years.
The slope dummies (
^
H
*
GDUM and
^
H
*
MDUM) show a signi?cantly positive
relationship to voluntary disclosure scores at high ownership concentration levels. The
marginal effect on voluntary disclosure scores when ownership concentration is
government-controlled (
^
H
*
GDUM) is 10.78, and is signi?cant at the 5 percent level
(two-tailed test). Similarly, the marginal effect of managerial ownership concentration
is unequivocally positive. The corresponding coef?cient on
^
H
*
MDUM is 2.53
(t-statistic ¼ 7.07, signi?cant at better than the 1 per cent level). These results provide
supportive evidence for H2a and H3a.
In contrast, analysis for the “less concentrated group” show a positive relationship
between ?nancial institutions-controlled ownership variable and voluntary disclosure
level although this relation is not signi?cant, suggesting that the negative impact of
concentrated ownership characterized as ?nancial institution-controlled on voluntary
disclosure levels is attenuated when their voting rights are reduced. However, a
negative impact of governmental control on the relationship between ownership
concentration and disclosure level is reported (coef?cient ¼ 28.08, t-statistic ¼ 22.16,
signi?cant at the 5 percent level). This suggests that ?rms’ disclosure levels decrease
with a reduction in governmental shareholdings. Thus, H2b is supported. Regarding
managerial-controlled ownership structures, the signi?cant positive effect on
voluntary disclosure levels detected under high ownership concentrations changes
to a negative sign in less concentrated group analysis, the coef?cient, however, is not
statistically signi?cant.
Regarding the control variables, ?rm performance (PER) measured by net pro?t is
positively related to voluntary disclosure levels for total sample observations,
suggesting that pro?table companies tend to disclose more. Capital intensity
(CAP_INTEN), ?rm size (SIZE) and leverage (LEVERAGE) have signi?cantly positive
effects on voluntary disclosure levels. However, ?rm performance has no signi?cant
relationship with disclosure level when ownership concentration level is high
(t-statistics 0.94), and capital intensity is not an explanatory variable for disclosure
under low ownership concentration structures (t-statistic ¼ 20.03). In addition, it is
noteworthy that leverage has a positive effect on the disclosure level (t-statistic ¼ 8.30)
at high ownership concentration levels, while it has a negative effect on disclosure level
(t-statistic ¼ 21.99) at low ownership concentration levels. This indicates that
debtors, like banks, may be concerned about expropriation by concentrated
shareholders and, therefore, demand more corporate disclosures to protect their own
investment in the same companies; while at lower concentration level such concerns
are attenuated. Ten industry sectors are controlled during the analyses (industry
coef?cients are not reported for the sake of brevity). All reported adjusted R
2
s are over
55 percent, and all F-statistics are signi?cant at better than the 1 percent level.
Therefore, the general ?tness of the model seems satisfactory.
We detected heteroskedasticity and autocorrelation during our data analysis. To
tackle both heteroskedasticity and autocorrelation, we employ the variants of the Panel
Corrected Standard Error (PCSE) methodology to estimate ef?cient estimators robust
to both cross-sectional heteroskedasticity and serial correlation in the disturbances
(Beck and Katz, 1995). Meanwhile, the ?xed period effect in panel data analysis is
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controlled for the possible impact of regulations during the focused time-period
2001-2005.
4.3 Non-linear relationship between ownership concentration and voluntary disclosures
To address non-linearity in accounting research, researchers often formulated the
quadratic relationships by using the primary variable of interest and its squared value
in the speci?cation, so we estimate equation (3) to test the hypothesized non-linearity
between ownership structure and voluntary disclosure levels. We present the results in
Table IX.
Table IX shows the coef?cients of
^
H
*
FDUM is 3.61, while coef?cient of
^
H
2
*
FDUM
is 212.85. Both these coef?cients are statistically signi?cant at better than the 1
percent level. Taking derivatives with respect to
^
H, the slope of the plot of voluntary
disclosure level against ownership concentration being ?nancial institution-controlled
ownership structure (
^
H) is 3.61-2
*
12.58
* ^
H. This implies a positive slope from 0 to 0.14
SDSCORE
it
¼ b
0
þb
1
FDUM
it
þb
2
GDUM
it
þb
3
MDUM
it
þb
4
^
H
it
*
FDUM
it
þb
5
^
H
it
*
GDUM
it
þb
6
^
H
it
*
MDUM
it
þb
7
^
H
it
*
OTHDUM
it
þb
8
^
H
it
*
FDUM
it
þb
9
^
H
it
*
GDUM
it
þ
b
10
^
H
it
*
MDUM
it
þb
11
^
H
it
*
OTHDUM
it
þb
12
PER
it
þb
13
CAP_INTEN
it
þb
14
SIZE
it
þb
15
LEVERAGE
it
þ1
it
i ¼ 1; 2; :::; 467 t ¼ 1; 2; :::; 467(3)
Variables Predicted sign Coef?cient t-statistics
Intercept ? 3.49
* * *
3.80
FDUM ? 24.14
* * *
24.41
GDUM ? 1.04 0.30
MDUM ? 23.32
* * *
22.86
^
H
*
FDUM þ 3.61
* * *
5.74
^
H
*
GDUM 2 258.11 21.35
^
H
*
MDUM 2 27.90
* *
22.31
^
H
*
OTHDUM ? 245.55
* * *
24.25
^
H
2
*
FDUM 2 212.85
* * *
26.01
^
H
2
*
GDUM þ 169.98 1.37
^
H
2
*
MDUM þ 26.23
* * *
2.62
^
H
2
*
OTHDUM ? 131.12
* * *
4.31
PER þ 0.00
* * *
2.83
CAP_INTEN þ 0.06
* * *
4.62
SIZE þ 0.04
* * *
38.64
LEVERAGE þ 0.01
* * *
3.22
R
2
adjusted 0.60
F-statistics 26.39
* * *
Observations 467
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively.
SDSCORE ¼ scaled DSCORE index;
^
H = the ?tted value of the Her?ndahl index; FDUM = 1 when
ownership concentration appears to be ?nancial institution controlling, and 0 otherwise; GDUM = 1
when ownership concentration appears to be government controlling, and 0 otherwise; MDUM = 1
when ownership concentration appears to be management controlling (directors, executives and/or
companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership concentration appears
to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at the end of current
?nancial year; CAP_INTEN = capital intensity calculated as ratio of ?x assets to total assets;
SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage ratio
calculated as total liability divided by total assets at the end of ?nancial years
Table IX.
Non-linear relationship
between ownership
concentration and
voluntary disclosures
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?nancial institution-controlled ownership concentration level, followed by a negative
slope beyond that. Hence, the results lend support to hypotheses H1a and H1b. The
coef?cients of ownership concentration being controlled by managerial shareholdings
(
^
H
*
MDUM) and their squared variables (
^
H
2
*
MDUM) also provide supportive
evidence for the quadratic relationships predicted by hypotheses three (H3a and H3b).
The slope of the plot of voluntary disclosure level against ownership concentration
being management-controlled ownership structure (
^
H) is (27.90 þ 2
*
26.23
* ^
H). This
suggests that management-controlled ownership structure increases (decreases)
voluntary disclosure when ownership concentration level is higher (lower) than the
Her?ndahl index of 0.15. However, the coef?cients on
^
H
*
GDUM (258.11, t-statistic
21.35) and
^
H
2
*
GDUM (169.98, t-statistic 1.37) are not statistically signi?cant,
although the signs are as predicted. This implies a negative slope at low
government-controlled ownership concentration level, followed by a positive slope at
high ownership concentration level. Other control variables show the consistent
?ndings with predicted signs. The adjusted R
2
of the model is 0.60, and the F-statistic
is signi?cant at better than the 1 percent level.
4.4 Sensitivity analysis
A number of sensitivity analyses are performed and results are presented in
Tables X-XII.
First, instead of using the Her?ndahl index, regression analysis is conducted
employing total top-?ve largest shareholding (in percentage) as the measure of
ownership concentration. Table X presents results of estimating equation (2), while
Table XI reports the results of equation (3). The cut-off point for high/low ownership
concentration groups in Table X is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. Table X demonstrates that three
hypotheses at high ownership concentration level are well supported, while the
?ndings are inconclusive at low concentration group analysis. Results shown in
Table XI are pretty consistent with results shown in Table IX.
Second sensitivity analysis controls for the impact of board-related governance
variables on managerial propensity to make voluntary disclosures. A growing body of
empirical research examines the impact of corporate governance attributes such as
board structure on voluntary disclosure practices (Eng and Mak, 2003; Ho and Wong,
2001). An extended version of equation (3) incorporating four board-related variables is
estimated. Four board-related variables are the number of board meetings, board size,
board insider and CEO duality. Results are presented in Table XII. Findings reveal that
controlling for board governance variables does not change the ?ndings regarding
?nancial institution-controlled ownership structure. However, the coef?cients on
government- and management-controlled ownership structures become insigni?cant.
As the sample size in this sensitivity analysis is signi?cantly reduced (only 198
observations are usable for analysis) due to missing data on four board-related
variables in companies’ annual reports, the results of this sensitivity analysis should be
interpreted with caution.
Final sensitivity analysis uses two sub-disclosure indices (historical and projected
information) instead of the total disclosure score to measure the impact of ownership
concentration on such disclosures. Unreported results based on equation (1) shows that
ownership concentration as a whole has no signi?cant effect on any of these two
sub-disclosure scores. Regression results of equations (2) and (3) do not support the
hypothesised non-linear relationship between different ownership composition and
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disclosure of historical information. Interestingly, same regression analysis using
projecteddisclosures provide ?ndings consistent withour primaryresults. Furthermore,
managerial ownership is found to signi?cantly increase (decrease) companies’ projected
information disclosure at high (low) ownership concentration level.
5. Discussion
Although the primary regression analysis reveals a positive effect of concentrated
ownership on voluntary disclosure practices, interesting results emerge when
ownership structures are analysed in greater detail. Regression results support two
sub-hypotheses of hypothesis one. These results reveal that when ownership
concentration level was high, ?rm-year observations with ?nancial institution-
controlled ownership structure make fewer voluntary disclosures. Several potential
reasons for the reduced voluntary disclosure are:
High ownership concentration group Low ownership concentration group
Variables Predicted sign Predicted sign
Intercept ? 21.40 (23.40)
* * *
? 20.45 (22.62)
* * *
FDUM ? 2.28 (6.54)
* * *
? 20.54 (22.95)
* * *
GDUM ? 21.88 (21.20) ? 1.11 (1.56)
MDUM ? 0.48 (1.28) ? 20.48 (21.64)
*
C
^
O
*
FDUM 2 20.02 (-4.82)
* * *
þ 20.00 (20.04)
C
^
O
*
GDUM þ 0.05 (2.12)
* *
2 20.03 (22.28)
* *
C
^
O
*
MDUM þ 0.01 (7.12)
* * *
2 20.00 (20.38)
C
^
O
*
OTHDUM ? 0.02 (2.57)
* * *
? 20.01 (23.07)
* * *
PER þ 0.00 (1.02) þ 0.00 (15.17)
* * *
CAP_INTEN þ 0.09 (10.41)
* * *
þ 0.00(0.12)
SIZE þ 0.03 (18.46)
* * *
þ 0.06 (19.86)
* * *
LEVERAGE ? 0.01 (7.80)
* * *
? 20.02 (23.32)
* * *
R
2
adjusted 0.63 0.65
F-statistics 22.63
* * *
13.32
* * *
Observations 307 160
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively. Dependent
variable ¼ scaled DSCORE index; C
^
O = the ?tted value of ownership concentration, measured as the
total percentage of top ?ve largest shareholding; The cut-off point for high/low ownership
concentration groups in Panel A sensitivity analysis is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. FDUM = 1 when ownership concentration appears to be
?nancial institution controlling, and 0 otherwise; GDUM=1 when ownership concentration appears to
be government controlling, and 0 otherwise; MDUM = 1 when ownership concentration appears to be
management controlling (directors, executives and/or companies’ family founders), and 0 otherwise;
OTHDUM = 1 when ownership concentration appears to be other companies controlling, and 0
otherwise; PER ¼ net pro?t after tax at the end of current ?nancial year; CAP_INTEN = capital
intensity calculated as ratio of ?x assets to total assets; SIZE ¼ natural logarithm of total assets at the
end of ?nancial years; LEVERAGE ¼ leverage ratio calculated as total liability divided by total assets
at the end of ?nancial years. BM ¼ the number of board meetings, measured as total board meetings
attended by all board members in one ?nancial year; BS ¼ board size, measured as the number of
board members; BI ¼ board insider, measured as the ratio of executive directors to total number of
board members; CEOD ¼ CEO duality, measured as dummy variable, which is 1 if CEO and board
chairman are the same person, otherwise 0
Table X.
Sensitivity analysis using
top-?ve largest
shareholding (percentage)
as measure of ownership
concentration based on
equation (2)
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companies may have less incentive to make voluntary disclosures if
concentrated owners provide the bulk of the capital;
.
private information acquisition by ?nancial institutions could suppress portfolio
companies’ disclosure incentives;
.
the absence of ?nancial shareholder activism caused by the physical distance of
the majority of overseas ?nancial institutions from their investees in New
Zealand, means that ?nancial institutions’ monitoring on their investee
companies is ineffective, and the management is likely to be entrenched; and
.
the con?ict of interest and strategic alignment between management and
majority ?nancial shareholders motivate both parties’ cooperation in “covering
up” their expropriation of minority shareholders’ interests by reduced corporate
disclosure.
Variables Predicted sign Coef?cient t-statistics
Intercept ? 5.98
*
3.98
FDUM ? 26.84
*
24.49
GDUM ? 1.73 0.30
MDUM ? 25.38
*
22.84
C
^
O
*
FDUM þ 0.02
*
5.82
C
^
O
*
GDUM 2 20.30 21.35
C
^
O
*
MDUM 2 20.04
*
22.38
C
^
O
*
OTHDUM ? 20.24
*
24.27
C
^
O
2
*
FDUM 2 20.0002
*
26.01
C
^
O
2
*
GDUM þ 0.0028 1.37
C
^
O
2
*
MDUM þ 0.0004
*
2.62
C
^
O
2
*
OTHDUM ? 0.0022
*
4.31
PER þ 0.00
*
2.83
CAP_INTEN þ 0.06
*
4.62
SIZE þ 0.04
*
38.64
LEVERAGE þ 0.01
*
3.22
R
2
adjusted 0.60
F-statistics 26.39
*
Observations 467
Notes:
*
denotes statistical signi?cance at the 1 per cent level. Dependent variable ¼ scaled DSCORE
index; C
^
O = the ?tted value of ownership concentration, measured as the total percentage of top ?ve
largest shareholding; The cut-off point for high/low ownership concentration groups in Panel A
sensitivity analysis is 56.18 percent, which is the mean percentage of top-?ve largest shareholding in our
sample. FDUM = 1 when ownership concentration appears to be ?nancial institution controlling, and 0
otherwise; GDUM = 1 when ownership concentration appears to be government controlling, and 0
otherwise; MDUM = 1 when ownership concentration appears to be management controlling (directors,
executives and/or companies’ family founders), and 0 otherwise; OTHDUM = 1 when ownership
concentration appears to be other companies controlling, and 0 otherwise; PER ¼ net pro?t after tax at
the end of current ?nancial year; CAP_INTEN= capital intensity calculated as ratio of ?x assets to total
assets; SIZE ¼ natural logarithm of total assets at the end of ?nancial years; LEVERAGE ¼ leverage
ratio calculated as total liability divided by total assets at the end of ?nancial years. BM ¼ the number of
board meetings, measured as total board meetings attended by all board members in one ?nancial year;
BS ¼ board size, measured as the number of board members; BI ¼ board insider, measured as the ratio
of executive directors to total number of board members; CEOD ¼ CEO duality, measured as dummy
variable, which is 1 if CEO and board chairman are the same person, otherwise 0
Table XI.
Sensitivity analysis using
top-?ve largest
shareholding percentage
as the measure of
ownership concentration
based on equation (3)
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This is supportive of the large shareholders’ expropriation hypothesis. It would be
interesting to investigate in future research the validity of these claims of inef?cient
monitoring by ?nancial institutions. Complementary analysis shows that over the
2001-2002 time periods, ?nancial institutions-controlled ownership structure was not
an explanatory variable of the decreased voluntary disclosures at high ownership
concentration levels. This negative effect did not start until the 2004-2005 time period,
despite the fact that more governance regulation had taken place in 2003 and
ownership concentration severity in New Zealand listed companies gradually reduced
Variables Predicted sign Coef?cient t-statistics
Intercept ? 20.40
* * *
26.37
FDUM ? 20.04
* *
22.03
GDUM ? 20.18
*
21.78
MDUM ? 0.04 0.18
^
H
*
FDUM þ 0.27
* * *
2.66
^
H
*
GDUM 2 1.73 0.94
^
H
*
MDUM 2 20.85 20.35
^
H
*
OTHDUM ? 22.05
* * *
23.62
^
H
2
*
FDUM 2 22.55
* * *
23.30
^
H
2
*
GDUM þ 25.27 20.78
^
H
2
*
MDUM þ 2.07 0.28
^
H
2
*
OTHDUM ? 7.45
* * *
3.44
PER þ 0.00 1.60
CAP_INTEN þ 0.02 1.23
SIZE þ 0.05
* * *
16.11
LEVERAGE þ 20.00 20.03
BM þ 20.02
* * *
28.02
BS 2 20.03 20.66
BI 2 20.00
*
21.70
CEOD 2 20.07
* * *
24.02
R
2
adjusted 0.49
F-statistics 7.11
* * *
Observations 1.98
Notes:
* *
and
* * *
denote statistical signi?cance at the 5 and 1 per cent level respectively. Dependent
variable ¼ scaled DSCORE index; C
^
O = the ?tted value of ownership concentration, measured as the
total percentage of top ?ve largest shareholding; The cut-off point for high/low ownership
concentration groups in Panel A sensitivity analysis is 56.18 percent, which is the mean percentage of
top-?ve largest shareholding in our sample. FDUM = 1 when ownership concentration appears to be
?nancial institution controlling, and 0 otherwise; GDUM=1 when ownership concentration appears to
be government controlling, and 0 otherwise; MDUM = 1 when ownership concentration appears to be
management controlling (directors, executives and/or companies’ family founders), and 0 otherwise;
OTHDUM = 1 when ownership concentration appears to be other companies controlling, and 0
otherwise; PER ¼ net pro?t after tax at the end of current ?nancial year; CAP_INTEN = capital
intensity calculated as ratio of ?x assets to total assets; SIZE ¼ natural logarithm of total assets at the
end of ?nancial years; LEVERAGE ¼ leverage ratio calculated as total liability divided by total assets
at the end of ?nancial years. BM ¼ the number of board meetings, measured as total board meetings
attended by all board members in one ?nancial year; BS ¼ board size, measured as the number of
board members; BI ¼ board insider, measured as the ratio of executive directors to total number of
board members; CEOD ¼ CEO duality, measured as dummy variable, which is 1 if CEO and board
chairman are the same person, otherwise 0
Table XII.
Sensitivity analysis
incorporating board
variables in equation (3)
Disclosures in
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over recent years. Instead of becoming a good monitoring mechanism, ?nancial
shareholding at high ownership concentration levels seems to present inef?ciency in
information sharing, and to create a potential opportunity for management and large
shareholder entrenchment.
However, with a decrease in the ownership concentration level, the effect of ?nancial
institutions-controlled ownership concentration on voluntary disclosure became
positive, suggesting that:
.
large shareholders’ ability to expropriate minority shareholders lessened;
.
?nancial institution-provided capital was insuf?cient for company operations
and hence companies needed to increase voluntary disclosures to attract
prospective capital providers; and
.
with reduced voting rights in the companies, ?nancial institutions cannot ensure
the private bene?ts of controls and may realistically choose to encourage
companies to make more voluntary disclosures so that they can enjoy share price
appreciation bene?ts (Makhija and Patton, 2004).
This non-linear relationship, therefore, is evidence of the ef?cient-monitoring
hypothesis and the con?ict-of-interest (strategic-alignment) hypothesis at different
shareholding levels.
When concentrated ownership is governmental-controlled, the results show that
ownership concentration is positively (negatively) related to voluntary disclosure at its
high (low) levels. The ?ndings suggest that government-controlled ?rms may have
non-economic motivations, like a consideration for government’s social responsibility
and accountability, for releasing more information about the ?rms. The higher the
government shareholding, the higher are the incentives for government-controlled
?rms to communicate with society-at-large. Those companies may employ greater
voluntary disclosure as a means to legitimise and to live up to society’s expectations.
The ?ndings also indicate that governmental shareholders may provide better
monitoring on their invested companies’ governance by ensuring the provision of more
transparent information. The reported inverse relationship between ownership
concentration being governmental-controlled and the disclosure level at low ownership
concentration levels indicates a reduced bene?cial impact of governmental ownership.
Regarding managerial-controlled ownership structures, we ?nd strong evidence for
increased voluntary disclosures at high managerial ownership concentration levels,
supporting the alignment-of-interest hypothesis. In the ?nancial market, the increased
share price due to greater disclosure bene?ts controlling managerial shareholders.
This may generate a greater motivation towards discretionary disclosures by
managers. Moreover, when companies’ ownership concentration levels are high,
managerial shareholders can reap larger share price bene?ts (thanks to better
disclosure) than the potential costs incurred by minority shareholders’ competing for
?rms’ resources and public scrutiny from voluntary disclosure (Makhija and Patton,
2004). In contrast, when the general ownership concentration level is low, the
relationship between the managerial-controlled ownership structure and voluntary
disclosure level becomes negative. This negative relationship is consistent with the
proposition of Bhabra (2007) that at lower levels of insider stock ownership, the
positive forces that align the interests of managers with outsider shareholders are not
likely to be effective in countering a reduction in ?rm value due to management
entrenchment. Interestingly, other company-controlled ownership concentration is
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positively (negatively) related to voluntary disclosure level. However, we made no
attempt to interpret this ?nding because of a lack of well-established theories and small
sample size.
6. Conclusion
Although the ownership structure of ?rms has been recognised as an important
monitoring mechanism in the extant corporate governance literature, the theoretical
debate on the bene?cial effect of ownership concentration has been longstanding and
empirical evidence inconclusive. There are two competing propositions for the
monitoring of large shareholdings: namely the ef?cient monitoring hypothesis and the
entrenchment (con?ict-of-interest and strategic-alignment) hypothesis. This study
explores these two propositions in the New Zealand setting with its distinctively
corporate ownership structure. Froma voluntary disclosure perspective, effective large
shareholder monitoring should accelerate information sharing and enhance operational
transparency, while dysfunctional/sub-optimal large shareholding monitoring will
have a negative effect on voluntary disclosure levels.
Results suggest that the effect of ownership concentration on voluntary disclosure
is not monotonic, and different types of controlling shareholders affect corporate
disclosures differently. Firms with ?nancial institution-controlled ownership
structures disclose signi?cantly less (more) at high (low) ownership concentration
levels, suggesting the expropriation phenomenon is likely to dominate the ef?cient
monitoring by large shareholders with increasing ownership concentration controlled
by ?nancial institutions. However, ?rms with governmental and managerial-controlled
ownership structures report increased (reduced) voluntary disclosures at high (low)
ownership concentration levels. This indicates a positive monitoring effect of
governmental ownership and aligned interest of managerial ownership at high
ownership concentration levels.
These ?ndings strengthen the importance of differentiating ownership structures
into various classes to infer the real impact of differential controlling properties on
managerial disclosure decisions. In addition, the results reveal that the relationship
between ownership concentration and voluntary disclosure practices assumes a
non-linear pattern, re?ecting that the ef?ciency of large shareholders’ monitoring
varies with the level of ownership concentration. The ?ndings also shed light on the
ef?ciency of ownership concentration in terms of information sharing and
management monitoring in a country with little minority shareholder-protection,
and provide important implications for regulators, investors and companies. Given
that the majority of listed companies in New Zealand are ?nancial
institution-controlled, the inef?ciency of information sharing in such companies
presents a potential threat.
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Appendix. Check-list of the major elements of DSCORE
(1) Background information:
.
Statement of corporate goals or objectives;
.
General statement of corporate strategy is provided;
.
Competitive environment;
.
Description of organizational structure;
.
Principle products;
.
Principle markets; and
.
Actions taken during the year to achieve the corporate goal discussed.
Note: one point for each item and one additional point for quantitative data
(2) Ten- or ?ve-year summary of historical results:
.
Return-on-asset or suf?cient information to compute return-on-asset (i.e. net income,
tax rate, interest expense and total assets);
.
Net pro?t margin or suf?cient information to compute net pro?t margin (i.e. net
income, tax rate, interest expense and sales);
.
Asset turnover or suf?cient information to compute asset turnover (i.e. sales and total
assets);
.
Return-on-equity or suf?cient information to compute return-on-equity (i.e. net
income and stockholders’ equity);
.
Summary of sales and net income for most recent eight quarters; and
Disclosures in
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Comparison of main ?nancial performance indicators with budget or prospectus.
Note: one point for each item and two points for ten or more years
(3) Key non-?nancial statistics:
.
Number of employees;
.
Percentage of sales in products in last ?ve years;
.
Market share;
.
Units sold;
.
Production volume (through-put);
.
Unit selling price;
.
Growth in units sold;
.
Customer satisfaction; and
.
Regulation compliance.
Note: two points for each item
(4) Projected information:
.
Growth opportunity;
.
Cash ?ow forecast;
.
Capital expenditures and/or R&D expenditure forecast;
.
Pro?t forecast;
.
Sales forecast; and
.
Share price estimation.
Note: two points for each directional prediction and three points for a point estimate
(5) Management discussion and analysis:
.
Change in revenue;
.
Change in operating income;
.
Change in costs of goods sold;
.
Change in earnings before income tax, depreciation and amortisation (EBITDA);
.
Change in selling and administrative expenses;
.
Change in interest expense or interest income;
.
Change in net income;
.
Change in inventory;
.
Change in accounts receivable;
.
Change in capital expenditures or R&D; and
.
Change in market share.
Note: one point for each itemwith detailed explanation, and one additional point for explanation
with quantitative data.
Corresponding author
Haiyan Jiang can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
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