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The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance

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Abstract

Prior literature shows that financial disclosures and corporate governance both impact firm performance. This paper documents an important topic that has been overlooked in the prior literature, their joint effect, because the two mechanisms could be independent, substitutive, or complementary in their impact on firm performance. We find a substitutive relation based on data from 2005 to 2013 for a sample of US biotech firms, but only for firms with products in advanced stages of development, because their disclosures are trustworthy about the firms’ future performance. We do not find such effect for firms with early-stage products, that would take years to convert to profits, and whose product-related disclosures are speculative at best. This paper shows that informative and reliable voluntary disclosures have similar value-increasing effect as corporate governance and that the marginal effect of trustworthy disclosures is decreasing in governance. To the extent that the two mechanisms are costly, firms can partly substitute one for the other.

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Notes

  1. If a product has not entered the clinical trial stage, this category is omitted.

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Acknowledgements

We thank the editor (Cheng-Few Lee), two anonymous reviewers, Lynn Li, Eddie Riedl, Raffaella Santolini, Anup Srivastava, and Hussein Warsame for helpful feedback.

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Authors and Affiliations

  1. Haskayne School of Business, University of Calgary, Scurfield Hall 224, 2500 University Dr NW, Calgary, AB T2N 1N4, Canada

    Luminita Enache

  2. Faculty of Business and Law, University of Portsmouth, Room 6.22 Richmond Building, Portland Street, Portsmouth, PO1 3DE, UK

    Khaled Hussainey

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Appendices

Appendix 1: Product disclosure index

The disclosure index is constructed for each biotechnology product by hand-collecting relevant information from annual reports (Business section of Form 10-K). Information is derived for the following five categories: product specifications, target disease, clinical trials, future development plans, and market information. The procedure for assigning scores in each category is tabulated (with a detailed example) in the Appendix 1.

C.1. Measurement of product disclosure index

I. Product specifications

1. How does the product work? (3 points = three sentences; 2 = two sentences; 1 = one sentence; 0 = none)

2a. Why is it better than previous products? (2 = name mentioned; 1 = no name mentioned; 0 = no discussion)

2b. Why is it better than competing products? (2 = name mentioned; 1 = no name mentioned; 0 = no discussion)

3. What is the chemical/biological structure? (2 = chemical compound; 1 = general discussion; 0 = not mentioned)

Subtotal I = total scores of (1 + max(2a, 2b) + 3)

II. Target disease

1. What kind of diseases does the product treat? (2 = disease name mentioned; 1 = disease name not mentioned; 0 = no discussion)

2. What are other possible uses of the drug? (2 = disease name mentioned; 1 = disease name not mentioned; 0 = no discussion)

Subtotal II = total scores of (1 + 2)

III. Clinical trials

1. Number of patients (1 = given; 0 = absent)

2. Patients information (with what diseases) (1 = given; 0 = absent)

3. Doses (amounts) used in the clinical trial (1 = given; 0 = absent)

4. Method used in the clinical trial (1 = given; 0 = absent)

5. Treatment schedule (duration or frequency) (1 = given; 0 = absent)

6. Trial results [detailed = pro and cons + numbers (3); general = numbers (2); brief = no numbers (1); none (0)]

Subtotal III = total scores of (1 + 2 + 3 + 4 + 5 + 6)

IV. Future plans

1a. Is there any plan to try the product on new diseases? (2 = disease name mentioned; 1 = no name mentioned; 0 = no discussion)

1b. Is there any plan to try the product with other products? (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

2. Future plan for clinical trials

2a. Planned date (1 = mentioned; 0 = not mentioned)

2b. Number of patients for the planned trial (1 = mentioned; 0 = not mentioned)

2c. Patient information for the planned trial (what disease) (1 = mentioned; 0 = not mentioned)

2d. Duration (1 = mentioned; 0 = not mentioned)

2e. Method (1 = mentioned; 0 = not mentioned)

3. Possible alliance (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

Subtotal IV = total scores of (max(1a, 1b) + 2a + 2b + 2c + 2d + 2e + 3)

V. Market information

1. Number of patients affected by the disease (1 = mentioned; 0 = not mentioned)

2. Number of incidents (market size) (1 = mentioned; 0 = not mentioned)

Subtotal V = total scores of scores (1 + 2)

Overall disclosure score = sum of Subtotals I–V

Scaled disclosure score = overall disclosure score divided by 30 for products either in or beyond the clinical trials phase; by 22 for the products that did not reach clinical trials

C.2. An example of the measurement of product disclosure index

Company

MAXYGEN

Product

MAXY-G34

Development stage

Phase II

Disclosure index (information is drawn from the Business section, Part I, of Form 10-K)

Score contents

I. Product specifications

 

1. How does the product work? (3 = three sentences; 2 = two sentences; 1 = one sentence; 0 = none)

1. Helps the body make blood cells

2a. Why is it better than previous products? (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

2. MAXY-G34 reduces the duration of neutropenia when compared with the currently marketed products (Neulasta and Neupogen)

2b. Why is it better than competing products? (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

2. MAXY-G34 protects patients from chemotherapy and radiation therapy–related infections, shortens the duration of hospital stays, and helps keep patients on schedule for their cancer treatments

3. What is the chemical structure in addition to its chemical name? (2 = name mentioned; 0 = not mentioned)

0. Not mentioned

Subtotal I = total scores of (1 + max(2a, 2b) + 3)

3, out of a maximum of 7

II. Target diseases

 

1. What kind of diseases does the product treat? (2 = disease name mentioned; 1 = disease name not mentioned; 0 = not mentioned)

2. Neutropenia

2. What are the other possible uses? (2 = disease name mentioned; 1 = disease name not mentioned; 0 = not mentioned)

0. Not mentioned

Subtotal II = total scores of (1 + 2)

2, out of a maximum of 4

III. Clinical trials

 

1. Number of patients (1 = mentioned; 0 = not mentioned)

1. 47

2. Patients information (with what disease) (1 = name mentioned; 0 = not mentioned)

1. Patients with breast cancer who have failed at least one potentially curative treatment regimen

3. Doses (amounts) used in the clinical trial (1 = mentioned; 0 = not mentioned)

1. 5–100 µg/kg was given

4. Method (via what kind of media) used in the clinical trial (1 = mentioned; 0 = not mentioned)

1. Subcutaneous injection

5. Treatment schedule (duration or frequency) (1 = given; 0 = absent)

1. Single dose MAXY-G34 therapy being administered per 3-week chemotherapy cycle with each patient receiving six cycles of docetaxel

6. Results (3 = detailed discussion; 2 = general discussion; 1 = brief discussion; 0 = no discussion)

2. Results of the Phase I clinical trial indicate that the drug MAXY-G34 was generally safe and well tolerated through the study

Subtotal III = total scores of (1 + 2 + 3 + 4 + 5 + 6)

7, out of a maximum of 8

IV. Future development plans

 

1a. Is there any plan to try the product on new diseases? (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

2. Hemophilia

1b. Is there any plan to try the product with other products? (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

0. Not mentioned

2. Future plan for clinical trials

 

2a. Planned date (1 = mentioned; 0 = not mentioned)

1. 2008

2b. Number of patients for the planned trial (what disease) (1 = mentioned; 0 = not mentioned)

0. Not mentioned

2c. Patient information for the planned trial (what disease) (1 = mentioned; 0 = not mentioned)

1. Breast cancer patients

2d. Duration (1 = mentioned; 0 = not mentioned)

0. Not mentioned

2e. Method (1 = mentioned; 0 = not mentioned)

0. Not mentioned

3. Alliance (2 = name mentioned; 1 = no name mentioned; 0 = not mentioned)

2. Entered into a strategic alliance with Roche

Subtotal IV = total scores of [max(1a, 1b) + 2a + 2b + 2c + 2d + 2e + 3)

6, out of a maximum of 9

V. Market information

 

1. Number of patients affected by the disease (1 = mentioned; 0 = not mentioned)

0. Not mentioned

2. Number of incidents (market size) (1 = mentioned; 0 = not mentioned)

0. Not mentioned

Subtotal V = total scores of (1 + 2)

0, out of a maximum of 2

Overall disclosure score = sum of subtotals I–V

18, out of a maximum of 30

Scaled disclosure score= overall disclosure score divided by 30 because MAXY-G34 is in clinical trials phase

0.60, out of a maximum of 1.00

Appendix 2: Definitions of variables

Variable name

Variable description

Definition

TQ

Tobin’s Q

(Short-term debt + long-term debt + market value of equity)/total asset and MTBV as market value of equity/total equity

Discl-Index

Disclosure index

Overall disclosure index as defined in Appendix 1

Precl discl-Index

Preclinical disclosure index

Average disclosure index related to products in an early stage of development (not yet human/clinical trials)

Technical Discl-Index

Technical disclosure index

Average disclosure index related to the technical information (product specifications + target disease + clinical trials)

Market Discl-Index

Market disclosure index

Average disclosure index related to the market information (future plans + market information)

Totalprod

Total number of products

Total number of products in development per firm/year

Comp1

The first component with an eigenvalue > 1 from the principal component analysis.

The first component with an eigenvalue of 1.4 is represented by the proportion of independent directors on the board

Comp2

The second component with an eigenvalue > 1 from the principal component analysis.

The second component with an eigenvalue of 1.4 is represented by the proportion of independent directors on the board

Comp3

The third component with an eigenvalue > 1 from the principal component analysis.

The third component with an eigenvalue of 1.07 is represented by the proportion of independent directors on the board

Data from Compustat annual

FirmSize

Market value of total assets

Market Value of Equity (Price {PRCC_F} × Number of Shares Outstanding {CSHO}) + Total Debt [long-term debt (DLTT) + short-term debt (DLC)]

TQ

Tobin’s Q

The market value of equity plus the book value of total debt divided by the book value of total assets (mvce + lt + esopt)/at).

Accruals

Accruals

[Change in Current Assets (ACT)—Change in Cash (CHE)—Change in Current Liabilities (LCT)—Change in Tax Payable (TXP)—Depreciation and Amortization (DP)], scaled by average Total Assets for the year

Leverage

Financial leverage

Total Debt [long-term debt (DLTT) + short-term debt (DLC)]/Market Value of Equity (Price {PRCC_F} × Number of Shares Outstanding {CSHO})

ListYear

Listing year

First year in which a firm’s data are available in Compustat is the listing year

FirmAge

Firm age

Difference between ListYear and current year, expressed in years

LogFirmSize

Log of market value of total assets

Natural logarithm of FirmSize

Loss

Profitability

A dummy variable equal to 1 if the ratio of earnings before extraordinary items (IB) to average Total Assets for the year is greater than 0, and 0 otherwise

  1. All variables with prefix “L.” in the tables imply lagged variables

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Enache, L., Hussainey, K. The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance. Rev Quant Finan Acc 54, 413–445 (2020). https://doi.org/10.1007/s11156-019-00794-8

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  • DOI: https://doi.org/10.1007/s11156-019-00794-8

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