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Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report

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Abstract

We investigate the role played by a firm’s corporate governance framework in the decision to voluntarily disclose forward-looking information in the published financial reports of Australian companies in 2000 and 2002. With respect to the year 2000, the corporate governance category, audit quality, consisting of the presence and independence of the audit committee, its meeting frequency, the use of a big 6 auditor and the auditor’s independence, is positively associated with the disclosure of forward-looking information. The corporate governance category, board committees, consisting of the appointment and independence of a compensation committee and the creation of a nomination committee, and the overall efficacy of the corporate governance system are also positively associated with the disclosure of forward-looking information. However, corporate disclosure does not seem to be driven by the same factors in 2002 since in that year none of the governance categories is significantly associated with the firm’s decision to publish forward-looking information in financial reports.

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Notes

  1. Following a merger with the Sydney Futures Exchange, the Australian Stock Exchange changed its name in December 2006 to ASX Limited, operating under the brand Australian Securities Exchange.

  2. Some researchers have pointed out that a firm’s voluntary disclosure policy is related to both corporate governance and management incentives (Core 2001; Bushman and Smith 2001). Unfortunately, data on management incentives was not publicly available at the time of our study and hence we leave an examination of firms’ simultaneous choice of disclosure, corporate governance structure and management incentives to a future study.

  3. The Corporations Act 2001 became the new Federal Corporations Law commencing on 15 July 2001. Its enactment is the result of Commonwealth, State and Territory cooperation to fix the problematic constitutionality of the previous Corporations Law scheme identified by the High Court. As a result, corporate annual reports for the year 2000 would have been prepared in accordance with the provisions of the Corporations Law, however the Corporations Act 2001 would apply to the 2002 financial reports.

  4. Section 314 of the Company Law Review Act (CLRA) allows companies and other registered bodies to send either a full traditional annual report or a concise report (containing a profit and loss statement, balance sheet, statement of cash flows and a D&A) to its members.

  5. Revised Guidance by the Group of 100 for the Review of Operations, CLERP 9 changes to the Corporations Law with respect to audit independence, and the ASX Corporate Governance Council’s Best Practice Recommendations were all released in 2003. S299A Operating and Financial Review requirements were introduced in the Corporations Law in 2004.

  6. These entities are excluded on the basis that they are not expected to be forecasters, as they have more volatile earnings (Kent and Ung 2003). Listed trusts are also subject to additional mandatory accounting requirements that may affect their accounting policy and disclosure decisions.

  7. With respect to the notion of institutional investment, further elucidation is required. First, the ASX defines an investment institution as follows:

    those bodies with large investable funds, for example, pension funds, insurance and assurance companies.

    Within an Australian setting, a publicly listed institutional investor will fall within one of the following three industry groupings of banks, investment and financial services and insurance. On a practical level, the above guidelines will not capture all possible institutional investors, necessitating that further rules of classification be applied in order that non-institutional investors be accurately identified. As a general rule, an entity will not be considered an institutional investor where it is a:

    • private company within Australia or overseas; or

    • foreign corporation within an industry dissimilar to the Australian industry groupings of banks, insurance, investment and financial services.

  8. The use of audit committees is included in the measure of audit quality (rather than board committees), given the close relationship observed between these two aspects of corporate governance. Indeed, the Cadbury Committee (1992) maintains that an audit committee should provide a structure within which external auditors can affirm their independence, as well as strengthening the internal audit function. Further, Abbott and Parker (2001) argue that an active and independent audit committee is more inclined to demand higher audit quality.

  9. The second set of proxies for the control variables also incorporates the debt-to-total assets (LEVG) and book-to-market ratios (INFO). However, the log of total assets is used to reflect firm size (SIZE), whereas the earnings per share ratio is substituted to capture firm performance (PERFORM). The final set of surrogates applied to determine the robustness of the original regression results, does not introduce any new measures. It consists of the log of sales (SIZE), earnings-per-share (PERFORM), earnings–price ratio (INFO) and debt-to-total assets (LEVG).

  10. The results are rerun with all continuous variables standardized. The results stay essentially unchanged.

  11. Non-parametric tests are undertaken for these variables because tests indicate that in some cases, the assumptions of normality are violated. However, the results reported do not differ materially from those of parametric tests.

  12. It should be noted that, as our variable is constructed dichotomously as an observation above or below the mean, some firms may have been classified in the “stronger” governance group in 2000 and the “weaker” governance group in 2002, even though their corporate governance score had improved between the two periods.

  13. The Spearman correlation coefficients (not reported) reveal that, although several statistically significant correlations are discovered between some of the variables, none of these is highly correlated.

  14. The Spearman correlation coefficients (not reported ) reveal that there are no significant correlations exhibited between the variables are below 0.5, apart from that exhibited between AUDIT and COMMEE, which is calculated to be 0.551.

  15. The results remain largely unaltered when alternative specifications of the control variables are used.

  16. It is also possible that the corporate collapses, together with world events such as terrorist attacks, led to increased uncertainty across global capital markets between 2000 and 2002. This greater level of uncertainty could have impacted on the willingness of companies to disclose information about the future. This provides an alternative explanation for the failure to find an increase in disclosure in spite of stronger corporate governance in 2002. We thank an anonymous reviewer for raising this possibility.

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Acknowledgements

We gratefully acknowledge the helpful comments of two anonymous reviewers, Keryn Chalmers, Stephen Cox, Christine Jubb, Brendan O’Connell, Chris Ryan, John Sweeting, the referees at Journal of Management and Governance, and participants at the 2006 Annual conference of the Accounting and Finance Association of Australia and New Zealand (AFAANZ), Wellington, New Zealand.

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  1. School of Accountancy, Queensland University of Technology, Brisbane, Australia

    Madonna O’Sullivan & Majella Percy

  2. Department of Accounting, Finance and Economics, Griffith Business School, Brisbane, Australia

    Jenny Stewart

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  1. Madonna O’Sullivan
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Correspondence to Jenny Stewart.

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O’Sullivan, M., Percy, M. & Stewart, J. Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report. J Manage Governance 12, 5–35 (2008). https://doi.org/10.1007/s10997-007-9039-0

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