The Relative Value Relevance of Shareholder versus Stakeholder Corporate Governance Disclosure Policy Reforms in South Africa

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: South Africa (SA) has pursued distinctive corporate governance (CG) disclosure policy reforms in the form of the King Reports, which require firms to disclose a set of recommended good CG practices on both shareholders and stakeholders. This paper investigates the effect of the new shareholder and stakeholder CG disclosure rules on firm value, as well as the relative value relevance of disclosing good CG practices on shareholders versus stakeholders.Research Findings/Insights: Using a sample of 169 SA listed firms from 2002 to 2007, we find that disclosing good CG practices on both shareholders and stakeholders impacts positively on firm value, with the latter evidence providing new explicit support for the resource dependence theory. However, we provide additional new evidence, which suggests that disclosing shareholder CG practices contributes significantly more to firm value than stakeholder ones. Our results are robust to controlling for different types of endogeneities.Theoretical/Academic Implications: The paper generally contributes to the literature on the association between disclosure of CG practices and firm value by specifically modelling the relationship within a unique institutional and CG environment. Specifically, we make two new contributions to the extant literature. First, we show how stakeholder CG disclosure practices impact on firm value. Second, we provide evidence on the relative value relevance of disclosing shareholder and stakeholder CG practices.Practical/Policy Implications: Our results have important policy and regulatory implications, especially for authorities in other developing countries facing socio-economic problems that are currently contemplating or pursuing CG disclosure policy reforms. Since our evidence indicates that additional value can be created for firms that provide more transparent information on stakeholder CG practices, it provides authorities in other emerging countries currently planning or pursing CG reforms with a strong motivation to formally extend CG disclosure rules to cover both shareholder and stakeholder provisions.

The king reports, independent non-executive directors and firm valuation on the Johannesburg stock exchange

“…This began with the publication of the first King Report (King I) in 1994(King Report, 2002Ntim et al, 2011b). The recommendations of King I were mainly influenced by those of the UK's Cadbury Report of 1992 (Mangena and Chamisa, 2008;Ntim and Osei, 2011).…”

“…Some of the advantages that can be obtained for the use of panel data include having both time-series and cross-sectional observations, more degrees of freedom and less multi-collinearity among the variables (Wooldridge, 2002;Gujarati, 2003). Second, an examination of five-year data with both cross-sectional and time-series characteristics may help in discovering whether the observed cross-sectional association between the presence of INEDs and firm valuation is robust over-time (Agrawal and Knoeber, 1996;Ntim et al, 2011b). This can facilitate direct comparisons to be drawn with the results of past studies (Laing and Weir, 1999;Bozec, 2005;Kyereboah-Coleman, 2007).…”

“…Due to the mixed theoretical predictions, we hypothesise that gearing (GEAR), capital expenditure (CAPEX) and firm size (LNTA) will correlate either negatively or positively to firm value. Third, firms that are cross-listed on international stock markets are more likely to have greater access to funds and investment opportunities (Ntim, 2009;Ntim et al, 2011b), and therefore may be valued more highly by the stock market. Thus, our prediction is that cross-listing (CROSLIST) will correlate positively to firm value.…”

“…As a result, King King II recommended that the board should preferably consist of a majority of NEDs (Armstrong et al, 2006;West, 2009). Thirdly, a majority of the NEDs should also be independent (i.e., INEDs) of management so that shareholders interests (including minority interests) can be better protected (King Report, 2002;Ntim et al, 2011b). Fourthly, and to ensure balance of power and authority in company decision-making, the chairman of the board should be an INED (King Report, 2002;Mangena and Chamisa, 2008).…”

“…A broader objective of the King Reports has been to raise CG standards in SA firms (Armstrong et al, 2006;Ntim et al, 2011a). A more specific aim of the reforms, however, has been to improve firm valuation by enhancing the independence and monitoring capacity of SA boards of directors (Kakabadse and Korac-Kakabadse, 2002;Ntim et al, 2011b). A major proxy for corporate boards' independence and monitoring capacity is the proportion of outside directors (INEDs) (Fama, 1980;Fama and Jensen, 1983a, b;Lipton and Lorsch, 1992;Jensen, 1993).…”