Abstract
We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Baginski et al. (2000) find that voluntarily disclosed causal attributions are more likely to be made in management earnings forecasts when forecast news is bad (relative to good), and that the type of attribution made is more likely to be external (internal) for bad (good) news forecast.
Our result also supports the finding in Cheng et al. (2006) that firms can trade off the negative effects of weaker shareholder rights on their cost of capital by adopting more transparent disclosure policies.
Kim et al. 2005) examine the relationship between the controlling shareholder’s cash flow rights and the funds transfer in the internal capital market within Korean business groups (chaebols). They find that the funds allocation in the firms where controlling shareholders have high cash flow rights is better aligned with the investment opportunities and therefore, more efficient than in the firms where they have low cash flow rights. Thus, the chaebol ownership structure distorts the allocation of internal funds in such a way as to benefit the controlling shareholders.
In other words, if minority shareholders purchased the shares after the control existed, the stock price should be discounted to reflect the expected expropriation by the controlling owner.
Specifically, high managerial control is associated with lower firm values when the management group is also the largest blockholder. When a larger non-management blockholder is present, high managerial control does not affect firm value.
In contrast, Gelb and Siegel (2000) find that firms with high levels of intangible assets are more likely to emphasize dividend increases and stock repurchases (which are generally perceived as signaling favorable investment opportunities), instead of traditional accounting disclosures, as a means of overcoming adverse selection. The intuition is that because intangible assets are difficult to measure, cash distributions may be viewed as a more credible means of signaling firm value to investors.
Specifically, Francis et al. (2005) defined the industry dependence on external finance as:
$$\hbox{EXTFIN}=\frac{\Sigma ( \hbox{CAPEX}_{it}-\hbox{CFO}_{it})} {\Sigma \hbox{CAPEX}_{it}}$$where CAPEX = capital expenditure for firm i in year t and CFO = cash flow from operations for firm i in year t.
Francis et al. (2005) assume that their measure of US industry dependence on external finance is intrinsic and hold across all countries. For example, if their measure suggests that the US pharmaceutical industry has higher dependence on external finance than that of the US tobacco industry, this relationship hold across all countries. In contrast, our firm-specific measure of external finance needs based on actual realizations of external finance (FINANCE) is a more direct measure of the firm-level’s dependence on external finance.
References
Ajinkya, B., Bhoraj, S., & Sengupta, P. (2005). The association between outside directors, institutional investors and the properties of management earnings forecasts. Journal of Accounting Research, 43, 343–376.
Baginski, P., Hassell, J., & Hillison, W. (2000) Voluntary causal disclosures: Tendencies and capital market reaction. Review of Quantitative Finance and Accounting, 15(4), 371–389.
Bamber, L., & Cheon, Y. (1998). Discretionary management earnings forecast disclosure: Antecedents and outcomes associated with forecast venue and forecast specificity choices. Journal of Accounting Research, 36, 167–190
Bushee, B., & Noe, C. (2000). Corporate disclosure practices, institutional investors and stock return volatility. Journal of Accounting Research, 38, 171–202.
Bushman, R., Piotroski, J., & Smith, A. (2004). What determines corporate transparency? Journal of Accounting Research, 42(2), 207–252.
Cheng, A., Collins, D., & Huang, H. (2006). Shareholder rights, financial disclosure and the cost of equity capital. Review of Quantitative Finance and Accounting, 27(2), 175–204.
Claessens, S., Djankov, S., & Lang, L. (2000). The separation of ownership and control in East Asian Corporations. Journal of Financial Economics, 58, 81–112.
Claessens, S., Djankov, S., Fan, J., & Lang, L. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57, 2741–2771.
Denis, D., Denis, K., & Sarin, A. (1997). Ownership structure and top executive turnover. Journal of Financial Economics, 45, 193–221.
Eng, L., & Mak, Y. (2003). Corporate governance and voluntary disclosures. Journal of Accounting and Public Policy, 22, 325–345.
Fan, J. P. H., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33, 401–425.
Francis, J. R., Khurana, I. K., & Pereira, R. (2005). Disclosure incentives and effects on cost of capital around the world. The Accounting Review, 80(4), 1125–1162.
Frankel, R., McNichols, M., & Wilson, P. (1995) Discretionary disclosure and external financing. The Accounting Review, 70(1), 135–150.
Gelb, D. (2000). Managerial ownership and accounting disclosures: An empirical study. Review of Quantitative Finance and Accounting, 15(2), 169–185.
Gelb, D., & Siegel, P. (2000). Intangible assets and corporate signaling. Review of Quantitative Finance and Accounting, 15(4), 307–323.
Grossman, S., & Hart, O. (1988). One-share, one-vote, and the market for corporate control. Journal of Financial Economics, 20, 175–202.
Gul, F., & Leung, S. (2004). Board leadership, outside directors’ expertise and voluntary corporate disclosures. Journal of Accounting and Public Policy, 23, 351–379.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, September, 405–440.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(3), 305–360.
Kang, J., & Shivdasani, A. (1995). Firm performance, corporate governance and top executive turnover in Japan. Journal of Financial Economics, 38, 29–58.
Kim, B., Jung, K., & Kim, I. (2005). Internal funds allocation and the ownership structure: Evidence from Korean business groups. Review of Quantitative Finance and Accounting, 25(1), 33–53.
La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471–518.
Lang, M., & Lundholm, R. (1993). Cross-sectional determinants of analysts ratings of corporate disclosures. Journal of Accounting Research, 31, 246–271.
Lang, L., & Lundholm, R. (2000). Voluntary disclosure during equity offerings: Reducing information asymmetry or hyping the stock? Contemporary Accounting Research, 17(4), 623–662.
Lins, K. (2003). Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis, 38(1), 159–184.
Nagar, V., Nanda, D., & Wysocki, P. (2003). Discretionary disclosure and stock based incentives. Journal of Accounting and Economics, 34, 283–309.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783.
Swanson, Z., & Singer, R. (2002). Are investor reactions to R&D influenced by the corporate headquarter’s location? Review of Quantitative Finance and Accounting, 18(1), 5–19.
Verrecchia, R. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194.
Acknowledgements
We appreciate helpful comments from Cheng-Few Lee (the editor), an anonymous referee, Steve Taylor, Y.H. Tong, T.J. Wong and the seminar participants at Nanyang Technological University, University of New South Wales and the 2006 Pacific Basin Finance Economics and Accounting Conference.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Lee, KW. Corporate voluntary disclosure and the separation of cash flow rights from control rights. Rev Quant Finan Acc 28, 393–416 (2007). https://doi.org/10.1007/s11156-007-0020-4
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11156-007-0020-4