Journal of Business & Economic Studies, Vol. 15, No.

2, Fall 2009 Managerial Ownership, Corporate Governance, and Voluntary Disclosure H. Young Baek*, Nova Southeastern University Darlene R. Johnson, Nova Southeastern University Joung W. Kim, Nova Southeastern University Abstract Corporate governance involves various activities that can reduce agency costs. This study found that managerial ownership levels and other types of governance mechanisms in place affect the level and type of corporate discretionary disclosure. These factors, when combined, suggest a complex and interactive corporate governance structure. This study found, for firms with low levels of managerial ownership, a negative relationship between the level of managerial ownership and the level of discretionary disclosure. In addition, firms with a high percentage of outside directors are more likely to disclose board and management processes information, but no other type of discretionary information. Findings also indicate that firms in industries with frequent merger and acquisition activities and with managerial levels of 5% or higher are more likely to disclose ownership structure and investor relations information. Key Words: Agency Theory, Corporate Governance, Discretionary Disclosure, Managerial Ownership, Executive Compensation, Block Ownership, Institutional Ownership, Outside Directors JEL Classification: D40 INTRODUCTION With increased corporate disclosure, firms experience a reduction in cost of equity capital (Botosan, 1997; Botosan & Harris, 2000; Botosan & Plumlee, 2002) as well as the cost of debt (Sengupta, 1998). Healy, Hutton, and Palepu (1999) found a beneficial increase in the firms stock liquidity and performance. Although these prior studies suggest that more disclosure leads to firm value increase, they do not explain why such results are various in those studies. Corporate managers disclosure policies are influenced by their firms ownership structure and governance systems. This study examined the joint effect of ownership structure and governance on the level of the various types of information disclosure. This study contributes to the literature by showing a relationship between managerial ownership and the level of discretionary disclosure. Moreover, the study established the level of corporate governance as a mediating variable that interacts with managerial ownership and the type of information disclosed. THEORY AND RESEARCH An agency relationship is created when shareholders delegate decision-making authority to managers. Agency problems exist when the principal and the agent have conflicting goals. These conflicts of interests become more pronounced when monitoring the agents activities are difficult and costly for the principal (Eisenhardt, 1989). Verrecchia (2001) summarized three

44

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009 main solutions for the agency problem: (a) discretionary-based actions taken by the agent to mitigate the agency problem, (b) association-based actions taken by the principal (corporate governance) to reduce the agency costs, and (c) efficiency-based actions that occurred naturally in the competitive capital markets. Discretionary-based actions refer the ways management works to solve the agency problem. Managers initiate to disclose more, and the increased firm disclosure to the owners decreases agency costs by allowing the owners to monitor managerial behaviors. Healy and Palepu (2001) documented that corporate governance taken by principals, or third parties that work in the principals favor, mitigates agency conflicts. Naturally occurring free market and efficiency-based actions are the result of competitive capital and labor markets. In practice, these actions are employed simultaneously by firms to control agency costs. Under certain conditions, the effects of these actions are complementary. We adopted a framework by which to examine these complementary relations among the disclosure levels, the level of managerial ownership, and corporate governance structure. Figure 1 illustrates the relationship among these actions to the agency problem.

Figure 1. Relationships Among Corporate Governance Mechanisms

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009

Disclosure and Agency Cost Holmstrom (1979) suggested that part of the agency problem is caused by a lack of information available to investors; and, accordingly, firms that provide disclosure (additional information) about their activities improve the joint well-being of the agent and the principal. Other research (Diamond & Verrecchia, 1991, Healy & Palepu, 1993; Kim & Verrecchia, 2001; Verrecchia, 1983; Zhang, 2001) suggested that managers with superior knowledge of firm performance can increase disclosure to non-management investors and reduce agency costs, and, concomitantly, increase firm value. Empirical research also appeared to support this view (Botosan & Harris, 2000; Botosan & Plumlee, 2002; Healy, Hutton, & Palepu, 1999; Lang & Lundholm, 1996; Leuz & Verrecchia, 2000; Sengupta, 1998; Welker, 1995). Managerial Ownership Jensen and Meckling (1976) posited that a higher level of managerial ownership aligns the interests of managers and shareholders, lowering agency costs and increasing firm value. Stulz (1988), however, provided a model of firm value that at first increases as inside managerial ownership increases, and then decreases as managerial ownership becomes concentrated since high managerial ownership serves as insulation from external takeovers resulting in management entrenchment. Mehran (1995), Ang, Cole, and Lin (2000) and Singh and Davidson (2003) found support for Jensen and Mecklings (1976) view of inside managerial ownership. Mehran found a positive linear relationship between top management ownership and Tobins Q. Ang, Cole and Lin, and Singh and Davidson found that as managerial ownership increases, agency costs decrease, using asset utilization as a proxy. We expanded upon this belief that increased managerial ownership leads to increased value, by examining the effect of the level of managerial ownership on the level and type of discretionary disclosure. Executive Compensation Equity-based executive compensation plans mitigate the agency problem by rewarding managers consistent with financial returns earned by equity holders (Kerr & Bettis, 1987). This equity-based incentive plan is intended to align both managers and investors interests (Healy & Palepu, 1993). Since equity-based incentives are used widely by public companies, we investigated the relationship between the equity-based executive compensation and disclosure level. Monitoring by the Board of Directors The board of directors ability to monitor management activities is an additional corporate governance mechanism employed in varying degrees. One of the most important roles played by a firms board is oversight and control of management for investors (Fama, 1980). While directors are elected by the shareholders, management plays a significant role in the selection of its directors. Rosenstein and Wyatt (1990) found a significant and positive share-

46

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009 price reaction when outside directors are appointed to the board. Board characteristics including size, ratio of outsiders to insiders, ownership position of board members, and leadership help mitigate the agency problem (Howton, Howton, & Olson 2001). These board characteristics indirectly measure the degree of the board independence from management (Dalton, Daily, Johnson, & Ellstrand, 1999). Monitoring by Large Blockholders Large block holders have the ability to partake in a successful takeover because of their voting power; and they also have a significant vested interest in monitoring the actions of management. The presence of large blockholders provides the firm with a monitoring mechanism (Shleifer & Vishny, 1986). Providing additional support for this theory, Barclay and Holderness (1989) found positive stock returns around the announcement of large blockownership acquisitions. Shleifer and Vishny discovered that 456 of the Fortune 500 companies have at least one shareholder who owns at least 5% of the firm. With this type of vested interest by large block-owners, large blockholders can be expected to remain stable over time (Shleifer & Vishny). Barclay and Holderness (1989) found that once a firm has a large block-owner, the firm usually has those same blockholders five-years later. Singh and Davidson (2003), however, did not find that large outside block-ownership has any significant effect in reducing agency costs, using selling, general, and administrative expenses as a proxy for agency costs. Monitoring by Institutional Owners Shleifer and Vishny (1986) argued that it is cost effective for institutional owners with a large vested interest to monitor the actions of the management, although no empirical evidence supported this theory. Bushee and Noe (2000) stated that institutional ownership is attracted to firms with higher disclosure levels; however, this institutional ownership is short term in their investment horizon, and hence does not invest in monitoring management for the long-term good of investors. In this study, we investigated the relation between institutional ownership and disclosure levels. Loss of Corporate Control Jensen and Ruback (1983) theorized that as corporate control activities increase (i.e., when managers have to compete for the right to manage a firm), firm performance should increase. However, Agrawal and Knoebers (1996) finding of a negative relationship between firm performance and the initiation of a change in corporate control suggests that poor performance may lead to increased takeover activity. Accordingly, we examined the level of corporate control as a mechanism for mitigating agency costs. DATA AND METHODOLOGY Sample and Data Sources The Standard and Poors (S&P) Transparency and Disclosure Survey data, which covered 460 companies included in the S&P 500 index, were used as a data source. The S&P

47

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009 data covered those same 460 companies in the index for the periods June 30, 2000, and September 30, 2000. Companies that may have had some regulatory inquiries regarding their public filing were excluded from the data set, as were companies with incomplete information. To control for endogeneity, we separated the time periods used to measure the level of disclosure activity and the other variables. This separation resulted in the loss of 33 companies primarily due to missing financial and ownership data. With these reductions, the final sample contained 374 firms. Durnev and Kim (2005) ascertained that the S&Ps global rankings are correlated positively with the corporate governance scores compiled by Credit Lyonnais Securities Asia. The S&P survey covers the inclusion of 98 different disclosure attributes based on what is disclosed in a firms annual reports and standard regulatory filings in the corporate year 2000. Each attribute is evaluated on a binary basis with one point given for each disclosure attribute that is present, and a zero point otherwise. Each yes (included) answer in the survey earns a score of one. The data are sub-categorized into three key areas of discretionary disclosure activities: (a) Ownership structure and investor relations, (b) financial transparency and information disclosure, and (c) board and management structure, and processes. The first area of ownership structure and investor relations is based on 28 questions that include the following: Does the company in its annual accounts disclose the number of issued and outstanding shares disclosed? Does the company in its annual accounts disclose the number and identity of shareholders holding more than 3%? Does the company in its annual account disclose the top 10 shareholders? Does the company in its annual accounts disclose Corporate Governance Charter or Code of Best Practices? The second area is financial transparency and information disclosure. This includes 35 questions such as: Does the company in its annual accounts disclose a detailed earnings forecast? Does the company in its annual accounts disclose a segment analysis (broken down by business line)? Does the company in its annual accounts disclose the ownership structure of its affiliates? The third area of transparency is board and management structure and process. There are 35 questions on this area such as: Does the company in its annual accounts disclose a list of board member names? Does the company in its annual accounts disclose classification of directors as an executive or an outside director? Does the company in its annual accounts disclose the specifics on performancerelated pay for managers? Firm performance (PERFORM) is measured by the ratio of the firms market value to book V value, using COMPUSTAT: Q = , where V = EQUITY + LTD + STD+PFD+CV, Asset EQUITY = market value of equity, LTD = book value of long-term debt, STD = book value of 48

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009 short-term debt, PFD = preferred stock at liquidating value, CV = book value of convertible debt and convertible preferred stock, and ASSET= book value of total assets. Debt level (DEBT) is measured by the ratio of book value of debt to the sum of book value of debt plus market value of equity. Data on managerial ownership (OWN) and equitybased executive compensation (EXCOMP), for five highly-paid managers of each firm, come from the ExecuComp database. SEC proxy statements are the sources for the percentage of outside (i.e., non-officer) directors on the board (ODIR), the percentage of equity that is held by any individual holding 5% or more of stock (BLOCK), and the percentage of equity held by institutions (INST). To measure the level of corporate control activities (CORP) a firm is experiencing, we calculate the percentage of firms acquired or merged over the last four years within that firms two-digit SIC code. This method is similar to Agrawal and Knoeber (1996). We started from the firms that were delisted from the S&P 500 during the 4-year period from 1997 to 2000. Of the 158 firms that were delisted in this 4-year period, 120 firms from 36 different two digit industries were delisted due to merger or acquisition. We followed Agrawal and Knoeber (1996) and Palepu (1986) by creating a dummy variable (REG) to control for railroad or public utility (i.e., 2-digit SIC codes 40, 48, or 49), and banking, finance, or insurance firms (2 digit SIC codes 60-63) in the regulatory environment. To control for firm size (SIZE), we use the logarithm of sales similar to Durnev and Kim (2005). The Model If firms with lower levels of managerial ownership have larger agency costs, they will have more to gain from a high discretionary disclosure policy, ceteris paribus. Gelb (1996, 2000) also found that firms with low levels of managerial ownership provide more informative disclosure in annual and quarterly reports. We also expected to find a negative relationship between the level of managerial ownership and firm discretionary disclosure. H1o: There is a non-negative relationship between a firms level of managerial ownership and its overall disclosure score. H1a: There is a negative relationship between a firms level of managerial ownership and its overall disclosure score. We also proposed similar hypotheses for rankings in disclosure scores in subgroups: (a) Ownership structure and investor relations disclosure, (b) financial transparency and information disclosure, and (c) board and management structure disclosure. Corresponding hypotheses were labeled as H2, H3, and H4, respectively. We expected to find a positive relationship between all control variables because corporate governance mechanisms work to reduce agency costs through the use of discretionary disclosure. Hypotheses were tested using the following regression model: DISC t = 0 + 1OWN + 2 EXCOMP + 3ODIR + 4 BLOCK + 5 INST + 6 CORP

+ 7 REG + 8 DEBT + 9 PERF + 10 SIZE + t

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
where OWN denotes the managerial ownership; EXCOMP, the equity-based executive compensation; ODIR, the proportion of outside directors; BLOCK, block ownership; INST, institutional ownership; CORP, level of corporate control activities; REG, a regulation dummy; DEBT, level of debt; PERF, firm performance; and SIZE, firm size. RESULTS Descriptive Statistics Table 1 gives a breakdown of the sample by the 2-digit SIC. Table 2 provides the descriptive statistics for our variables. Mean overall disclosure score is 70.5% and the median overall score is 70.4%. The minimum overall disclosure score is 58.1% and the highest score is 81.4%. In the sub-rankings, the Ownership Structure and Investor Rights receive the lowest mean score of 52.0% and the Board and Management Structure and Processes receives the highest mean score of 78.5%. Table 1. Composition of Sample by 2-Digit Sic Codes
Industry Basic Industry Petroleum Construction Food/Tobacco Textiles/Trades Consumer Durables Leisure Capital Goods Transportation Utilities Finance/Real Estate Services Other TOTAL 2-digit SIC Code 8, 10, 12, 14, 24, 26, 28, 33 13, 29 15, 16, 17, 32 20, 21, 54 22, 23, 51, 53, 56, 59 30, 36, 37, 50, 55, 57 27, 58, 70, 79 34, 36, 37, 50, 55, 57 40, 41, 42, 44, 45, 47 48, 49 60, 61, 62, 63, 65, 67 70, 73, 75, 80, 82, 83, 87, 96 99 Frequency 56 19 7 23 33 67 18 59 9 48 80 39 2 460 Percent 12.2 4.1 1.5 5.0 7.2 14.6 3.9 12.8 2.0 10.4 17.4 8.5 0.4 100%

Note. Industries by 2 digit SIC Code as defined by Durnev & Kim (2005).

While Agrawal and Knoeber (1996) found an average market-to-book value of 1.14 (median = 0.93), we found that our average market-to-book value was 2.47 (median =1.46). This difference in market-to-book value appears to be related also to the different samples. Agrawal and Knoebers research was based on 400 large U.S. firms; this research used companies contained within the S&P 500 index. S&P has a financial test that requires four consecutive

50

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
quarters of positive earnings. This financial viability requirement may explain the higher profitability of the research sample. Table 2. Descriptive Statistics
Variable DISC
1

N 460 460 460 460 456 456 430 422 425 460 455 408 456 456

Minimum 55.79 30.77 60.00 54.29 .00 .28 40.00 .00 .00 .00 .00 .11 214.50 398.30

Median 70.47 51.85 77.14 80.00 .00 56.82 83.33 2.70 13.70 6.10 18.39 1.46 5,684.50 7,968.25

Maximum 81.63 82.14 94.29 91.43 43.29 99.48 100.00 100.0 84.1 25.00 95.65 29.07 206,083.00 902,210.00

Mean 70.56 51.79 77.29 78.55 1.88 54.86 82.28 7.61 15.59 5.83 24.44 2.47 11,857.29 32,104.40

Std. Dev. 4.09 8.13 6.24 4.87 5.39 26.98 9.39 13.26 13.45 4.32 22.08 2.87 21,564.49 88,680.94

DISOWN2 DISFIN3 DISMAN4 OWN5 EXCOMP6 ODIR7 BLOCK8 INST9 CORP10 DEBT11 PERFORM12 SIZES13 SIZEA14

Valid N (listwise) = 374. 1 The overall percentage score for S&P Transparency and Disclosure Survey. 2 The percentage score for S&P ownership structure and investor relations disclosure. 3 The percentage score for S&P financial transparency and information disclosure. 4 The percentage score for S&P board and management structure and processes disclosure. 5 The percentage of managerial ownership for the top five managers of the firm. 6 The percentage of total salary that is equity based for the top managers of the firm. 7 The percentage of outside directors that comprise the board of directors. 8 The percentage of shares held by block owners reported in proxy statements. 9 The percentage of shares held by institutions. 10 The percentage of firms merged or acquired in the firms 2-digit industry. 11 The level of debt measured by the book value of debt divided by the book value of debt plus market value of equity. 12 Market to book ratio. 13 Firms annual sales in millions. 14 Firm asset size in millions.

The mean managerial ownership level was 1.9% with more than half the sample firms showing no managerial ownership. Although these figures are slightly lower than prior mean managerial ownership level of 3.99% and a median level of 1.09% found by Chen, Hexter, and Hu (1993), the differences can be explained by the sample selection. To be included in the S&P 500, the firm must have at least 50% of common equity afloat. Prior research on Fortune 50051

Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
sized companies showed managerial ownership levels that were in excess of 50%, and our S&P 500 firms by definition have lower levels of managerial ownership. Table 3. Descriptive Statistics for Sample Firms Stratified by the Level of Managerial Ownership
None (0%) Overall Disclosure Score Ownership Structure Score Financial Transparency Score Management Process Score Level of Debt Market to Book Ratio Size by Sales ($M) Size by Asset ($M) Managerial Ownership Number of Firms in Group 71.13 52.29 77.41 79.61 23.4 2.18 13,732.92 25,428.48 0 244 Low (.001-.5%) 70.62 52.73 76.12 79.08 20.9 2.25 6,966.39 8,675.70 0.22 32 Medium (.5-1.8%) 68.78 50.50 75.21 76.61 21.4 2.94 5,209.41 7,883.91 1.16 32 Higher (1.8-7%) 68.97 50.22 76.54 76.02 15.5 4.22 8,672.09 21,954.90 4.10 33 Highest (>7%) 68.94 51.79 77.14 74.29 10.6 3.29 6,484.79 9,749.69 17.15 31

Note. All scores are the mean level for that range of ownership. Highest Level represents firms with managerial ownership greater than 7.0%. Higher Level represents firms with managerial ownership from 1.8% to 7.0%. Medium Level represents firms with managerial ownership from .5% to 1.8%. Low Level represents firms with managerial ownership from .001% to .5%. None represents firms with no managerial ownership.

Table 3 provides descriptive statistics stratified by the level of managerial ownership. The Highest group represents the firms with managerial ownership levels greater than 7.0%; the Higher group has managerial ownership level between 1.8% and 7.0%; the Medium group between .5% and 1.8%; the Low group between .001% and .5% and the None group represents less than .001% of managerial ownership. Examining these descriptive statistics, we noted that firms with management ownership levels in the Low and None groups (those with ownership levels below .5%) have on average higher overall, ownership and board and management process disclosure scores than firms in the top three groups. These higher average scores across overall, board and management process are consistent with the hypothesis that firms with higher agency costs, (i.e., firms with lower levels of managerial ownership), increase their use of discretionary disclosure to help reduce agency costs. Table 4 presents the Pearson correlation coefficients among total and subgroup disclosure scores and level of managerial ownership. All four disclosure scores are highly pair-wise

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
correlated at 1% significance level except for between ownership disclosure and financial disclosure. There is a significant negative correlation between managerial ownership and overall disclosure, and between managerial ownership and board and management process disclosure. There is no significant correlation between ownership and ownership structure and investor relations disclosure and between ownership and financial transparency and information disclosure. The selective correlations between different types of disclosure and managerial ownership suggest that the level of managerial ownership has a relationship on the types and content of information disclosed. Table 4. Pearson Correlations Between Disclosure Scores and Level of Managerial Ownership
DISOWN .666**
0

DISC1 DISOWN2 DISFIN3 DISMAN4

Pearson Corr.
Sig. (2-tailed)

DISFIN .678**
0

DISMAN .602**
0

OWN5 -.135**
0.009

Pearson Corr.
Sig. (2-tailed)

0.088
0.088

.142**
0.006

-0.017
0.748

Pearson Corr.
Sig. (2-tailed)

.187**
0

-0.007
0.899

Pearson Corr.
Sig. (2-tailed)

-.285**
0

** Correlation is significant at the 0.01 level (2-tailed). 1 The overall percentage score for all S&P Transparency and Disclosure Survey. 2 The percentage score for S&P ownership structure and investor relations disclosure. 3 The percentage score for S&P financial transparency and information disclosure. 4 The percentage score for S&P board and management structure and processes disclosure. 5 The percentage of managerial ownership for the top five managers of the firm

Regression Results Table 5 summarizes the results of four OLS regressions of disclosure scores. All four regression models have at least one significant non-zero relationship between disclosure scores and the independent variables (F statistics at least 4.343; Adj. R2 from .082 to .199). In regression [1], the percentage of outside directors is positively and significantly (t = 2.084) related to overall disclosure score, and the level of institutional ownership is positively and significantly related (t = 2.646) to overall disclosure score. The level of debt is positively related with overall disclosure score while market-to-book ratio is negatively related with overall score. Moreover, no significant relationship is found between the level of managerial ownership and overall firm disclosure level (t statistic = -.898). The second regression of ownership structure and investor relations disclosure score shows results similar to regression [1]. The difference is the percentage of outside directors is not significant any more, and block ownership is now positively related to ownership disclosure

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
score. In addition, institutional ownership is also positively related with ownership disclosure score but managerial ownership is not related with ownership disclosure score. The third regression of financial transparency and information disclosure shows an interesting contrast. Leverage and the regulation dummy are the only independent variables that are significantly related to the financial transparency and information disclosure score. Managerial ownership is not related to financial transparency score either. The fourth regression of management and board processes disclosure shows the level of managerial ownership has a significant negative relationship with management process disclosure score (t = -2.350). Furthermore, the percentage of outside directors is positively related to the management process disclosure score, but there is a significant negative relationship between block ownership and management process disclosure. After finding a negative relationship between managerial ownership and the disclosure of board and management processes, this study examined the relationships when the samples are grouped by the level of managerial ownership. Low managerial ownership is defined as less than 5% of ownership, and high ownership as 5% or higher. These ownership divisions are based on prior research by Chen, Hexter, and Hu (1993), which found that firm value improves when management ownership is between 0% and 5-7%, and lowers as inside ownership rises above 12%. By dividing the sample according to Chen, Hexter, and Hu, the sample is not evenly split (332 and 41 in Low and High groups, respectively). This uneven split is caused by a significant number of firms having no or low managerial ownership in our sample of S&P 500 firms. Table 6 summarizes the results of regressions according to these two sub-groupings. We found significant negative relationships between managerial ownership and overall disclosure, ownership structure and investor relations disclosure and board and management processes disclosure for firms with low levels of managerial ownership. These findings suggest that the relationship between managerial ownership and disclosure varies with the level of managerial ownership. The results also support our hypothesis that as managerial ownership levels increase and thus agency costs decrease, the level of disclosure decreases. These findings are consistent with the findings by Gelb (2000). Furthermore, there is a significant positive relationship between percentage of outside directors and disclosure of board and management processes for the low ownership group. However, block ownership and institutional ownership both have a positive relationship with the disclosure of ownership structure and investor relations for low ownership firms.

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
Table 5. Results of Regression Tests of Managerial Ownership on Firm Disclosure Scores
[1] DISCa (Constant) OWN
1

[2] DISOWNb 45.190***

(9.204)

[3] DISFINc 69.240***

(17.776)

[4] DISMANd 67.822***

(24.158)

62.106***
(25.316)

-.042
(-.898)

-.062
(-.660)

.063
(.841)

-.127***
(-2.350)

EXCOMP2 ODIR3 BLOCK4 INST

5

.013
(1.544)

.025
(1.516)

.017
(1.337)

-.002
(-.193)

.047**
(2.084)

.052
(1.155)

.025
(.705)

.069***
(2.666)

.008
(.431)

.106***
(2.746)

-.014
(-.441)

-.046**
(-2.086)

.040***
(2.646)

.160***
(5.264)

-.035
(-1.456)

.020
(1.146)

CORP6 REG7 DEBT8 PERFORM SIZE10

9

.055
(1.083)

.076
(.743)

.082
(1.013)

.007
(.127)

.195
(.348)

-2.267**
(-2.024)

1.966**
(2.212)

.235
(.367)

.036***
(2.832)

.068***
(2.701)

.044**
(2.198)

.006
(.428)

-.247***
(-2.909)

-.328*
(-1.931)

-.148
(-1.098)

-.269***
(-2.767)

.315*
(1.703)

-.333
(-.898)

.456
(1.551)

.683***
(3.221)

Observations R2 Adj. R2 F

374 .181 .159 8.047***

374 .161 .138 6.977***

374 .107 .082 4.343***

374 .220 .199 10.290***

***, ** and * denotes statistical significant at the .01, .05 and .10 levels, respectively. t statistic is in parentheses. a The overall percentage score for S&P Transparency and Disclosure Survey. b The percentage score for S&P ownership structure and investor relations disclosure. c The percentage score for S&P financial transparency and information disclosure. d The percentage score for S&P board and management structure and processes disclosure. 1 The percentage of managerial ownership for the top five managers of the firm. 2 The percentage of total salary that is equity based for the top managers of the firm. 3 The percentage of outside directors that comprise the board of directors. 4 The percentage of shares held by block owners from proxy statements. 5 The percentage of shares held by institutions. 6 The percentage of firms merged or acquired in the firms 2 digit industry. 7 A dummy variable set to one if the firm is in a highly regulated utility or finance industry. 8 The level of debt measured by the book value of debt divided by the book value of debt plus market value of equity. 9 Market to book ratio. 10 Logarithm of firms annual sales.

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
Table 6. Regression Results by Level of Managerial Ownership
DISCa
(Constant) 66.782***
(24.548)

Managerial ownership less than 5% . DISOWNb DISFINc DISMANd

52.747***
(9.469)

DISCa
45.862***
(7.459)

Greater than or equal to 5% DISOWNb DISFINc

22.467**
(2.523)

. DISMANd
56.026***
(5.800)

73.154***
(16.871)

70.912***
(23.671)

53.670***
(4.879)

OWN

-.689***
(-2.897)

-1.017**
(-2.088)

-.355
(-.936)

-.775***
(-2.958)

.059
(.580)

.143
(.973)

-.055
(-.304)

.108
(.673)

EXCOMP2 ODIR3 BLOCK4 INST5 CORP6 REG7 DEBT8 PERFORM9 SIZE10

Observations R2 Adj. R2 F

.012
(1.366)

.024
(1.348)

.013
(.918)

.002
(.186)

.011
(.486)

.024
(.714)

.029
(.696)

-.018
(-.496)

.014
(.529)

-.003
(-.054)

-.014
(-.353)

.060**
(2.130)

.124**
(2.631)

.163**
(2.394)

.173**
(2.048)

.042
(.570)

.018
(.861)

.125***
(2.928)

-.013
(-.385)

-.035
(-1.535)

-.012
(-.250)

.038
(.527)

.019
(.215)

-.080
(-1.027)

.027*
(1.674)

.141***
(4.306)

-.046*
(-1.804)

.008
(.468)

.087*
(1.731)

.175**
(2.414)

.006
(.064)

.101
(1.277)

.027
(.509)

-.006
(-.059)

.108
(1.293)

-.035
(-.606)

.306
(1.526)

1.115***
(3.837)

-.469
(-1.305)

.456
(1.447)

.159
(.274)

-2.307*
(-1.943)

2.029**
(2.195)

.133
(.208)

-.785
(-.417)

-4.944*
(-1.815)

1.404
(.417)

-.226
(-.076)

.039***
(2.997)

.072***
(2.703)

.047**
(2.273)

.009
(.659)

.025
(.506)

.073
(1.042)

.038
(.433)

-.024
(-.314)

-.228*
(-2.575)

-.297
(-1.642)

-.117
(-.830)

-.271***
(-2.781)

-.227
(-.843)

-.409
(-1.051)

-.224
(-.466)

-.069
(-.164)

.153
(.794) 332 .153 .127 5.836***

-.573
(-1.451) 332 .158 .132 6.033***

.409
(1.331) 332 .117 .090 4.286***

.460**
(2.165) 332 .163 .137 6.271***

1.322*
(2.015) 41 .581 .445 4.292***

.845
(.890) 41 .657 .546 5.932***

1.346
(1.147) 41 .268 .032 1.135

1.729
(1.678) 41 .352 .142 1.681

***, ** and * denotes statistical significant at the .01, .05 and .10 levels, respectively. t statistic is in parentheses. a The overall percentage score for S&P Transparency and Disclosure Survey. b The percentage score for S&P ownership structure and investor relations disclosure. c The percentage score for S&P financial transparency and information disclosure. d The percentage score for S&P board and management structure and processes disclosure. 1 The percentage of managerial ownership for the top five managers of the firm. 2 The percentage of total salary that is equity based for the top managers of the firm. 3 The percentage of outside directors that comprise the board of directors. 4 The percentage of shares held by block owners from proxy statements. 5 The percentage of shares held by institutions. 6 The percentage of firms merged or acquired in the firms 2 digit industry. 7 A dummy variable set to one if the firm is in a highly regulated utility or finance industry. 8 The level of debt measured by the book value of debt divided by the book value of debt plus market value of equity. 9 Market to book ratio. 10 Logarithm of firms annual sales.

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
Moving to firms with high levels of managerial ownership (5% or higher), we found no significant relationship between management ownership and any type of disclosure activities. Positive relationships, however, are found between outside director percentage and overall, ownership structure and investor relations, and financial disclosures. There is a positive relationship between institutional ownership and the overall and ownership-related disclosures. The level of corporate control activities is positively related to ownership structure disclosure, suggesting that managers with significant ownership that operate within an industry with high levels of mergers and acquisitions engage in higher levels of investor relations disclosure; perhaps this additional level of disclosure is to encourage shareholders to hold their stock and prevent an unwanted takeover from occurring (i.e., to protect their managerial interests). The relationship between managerial ownership and the level of disclosure was explored by examining interaction effects between managerial ownership and various corporate governance mechanisms. Specifically, we inquired whether there are any combination effects when the level of managerial ownership is combined with corporate governance mechanisms like equity-based executive compensation, outside directors, block ownership, institutional ownership, and market for corporate control. The following dummy interaction variables were included in the regressions for higher than median values: Management ownership (OWN) times HIEXCOMP, a dummy variable that takes 1 if EXCOMP is greater than its median and 0 otherwise, OWN times HIODIR, a dummy variable for ODIR greater than its median, OWN times HIBLOCK, a dummy for BLOCK greater than its median, OWN times HIINST, a dummy variable for INST greater than its median, and OWN times HICORP, a dummy for CORP greater than its median. Table 7s first regression shows little difference from the first regression of Table 5. Overall disclosure level does not seem to be affected by managerial ownership or its interaction with any corporate governance device, but positively by outside directors, institutional ownership and leverage, and negatively by market-to-book ratio. In the second regression of ownership-related disclosure, firms, in the industries with frequent takeover activities, the results suggest that managerial ownership is positively related to ownership structure and investor relations disclosure. This finding indicates that high corporate control activity acts as a moderating effect on the negative relationship between managerial ownership and investor relations disclosure. In regression [4] of Table 7, managerial ownership is negatively related to the disclosure of management and board process that is consistent with an earlier result reported in Table 5. However, for firms with above median block ownership, the combined effect of the interaction dummy and managerial ownership, which has a negative relationship between managerial ownership and management and board process disclosure, the positive significant relationship of the interaction variable suggests that these variables act opposite each other, and may cancel each effect on disclosure (i.e., OWN coefficient is -2.816 and OWN*HIBLOCK coefficient is 2.754).

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
Table 7. Results of Regressions With Interaction Variables
(Constant) OWN1 EXCOMP2 ODIR3 BLOCK4 INST5 CORP6 REG7 DEBT8 PERFORM9 SIZE10 OWN*HIEXCOMP11 OWN*HIODIR12 OWN*HIBLOCK13 OWN*HIINST14 OWN*HICORP15 [1] DISCa 62.045***
(24.537)

[2] DISOWNb 46.255***

(9.178)

[3] DISFINc 69.671***

(17.373)

[4] DISMANd 66.331***

(23.169)

-1.769
(-1.289)

-1.702
(-.622)

-.992
(-.456)

-2.816*
(-1.813)

.013
(1.506)

.027
(1.593)

.015
(1.114)

.000
(-.040)

.051**
(2.130)

.051
(1.064)

.015
(.401)

.093***
(3.385)

.007
(.357)

.105***
(2.676)

-.013
(-.428)

-.049**
(-2.215)

.039**
(2.461)

.155***
(4.899)

-.040
(-1.595)

.026
(1.430)

.046
(.879)

.030
(.289)

.097
(1.178)

.002
(.026)

.133
(.235)

-2.551**
(-2.264)

2.088**
(2.329)

.163
(.255)

.036***
(2.845)

.069***
(2.711)

.044**
(2.204)

.007
(.467)

-.240***
(-2.811)

-.322*
(-1.894)

-.138
(-1.021)

-.263***
(-2.717)

.292
(1.555)

-.410
(-1.095)

.505*
(1.694)

.629***
(2.956)

.016
(.200)

-.042
(-.260)

.013
(.099)

.060
(.650)

-.078
(-.727)

-.077
(-.362)

.131
(.773)

-.299**
(-2.465)

1.719
(1.253)

1.584
(.579)

1.020
(.469)

2.754*
(1.773)

.020
(.220)

-.058
(-.324)

.173
(1.220)

-.067
(-.661)

.035
(.371)

.366**
(1.964)

-.161
(-1.086)

-.039
(-.366)

Observations 374 374 374 374 R2 .187 .174 .115 .242 Adj. R2 .153 .139 .078 .211 F 5.496*** 5.029*** 3.105*** 7.649*** ***, ** and * denotes statistical significant at the .01, .05 and .10 levels, respectively. t statistic is in parentheses. a The overall percentage score for S&P Transparency and Disclosure Survey. b The percentage score for S&P ownership structure and investor relations disclosure. c The percentage score for S&P financial transparency and information disclosure. d The percentage score for S&P board and management structure and processes disclosure. 1 The percentage of managerial ownership for the top five managers of the firm. 2 The percentage of total salary that is equity based for the top managers of the firm. 3 The percentage of outside directors that comprise the board of directors. 4 The percentage of shares held by block owners from proxy statements. 5 The percentage of shares held by institutions. 6 The percentage of firms merged or acquired in the firms 2 digit industry. 7 A dummy variable set to one if the firm is in a highly regulated utility or finance industry. 8 The level of debt measured by the book value of debt divided by the book value of debt plus market value of equity. 9 Market to book ratio. 10 Logarithm of firms annual sales. 11 OWN multiplied by the dummy variable set to one if EXCOMP is greater than its median value and zero otherwise. 12 OWN multiplied by the dummy variable set to one if ODIR is greater than its median value and zero otherwise. 13 OWN multiplied by the dummy variable set to one if BLOCK is greater than its median value and zero otherwise. 14 OWN multiplied by the dummy variable set to one if INST is greater than its median value and zero otherwise. 15 OWN multiplied by the dummy variable set to one if CORP is greater than its median value and zero otherwise.

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
CONCLUSIONS In this study we analyzed the relationship between the level of managerial ownership and the level of discretionary disclosure, controlling for other corporate governance mechanisms, regulation, firm size, capital structure and performance. The research responded to the questions of why some firms choose to engage in discretionary disclosure and of what type of information they choose to disclosure. For firms with level of managerial ownership below 5%, a negative relationship between the level of managerial ownership and the level of disclosure was found. Once ownership levels increase past 5%, the relationship virtually becomes neutral. This finding provides support for the theory that the level of managerial ownership influences the level of discretionary disclosure activities of the firm. Furthermore, the research indicated that the presence of other corporate governance mechanisms also affects the level of disclosure and the effect of managerial ownership on disclosure. An increase in outside directorship increases the level of some type of disclosure across all levels of managerial ownership. The research results supported the notion that the type of corporate governance mechanism in place dictates what type of information is disclosed. The firms do not just disclose any information but selectively choose to disclose information that is advantageous to the firm, indicating significant relationships between the level of outside directors and overall disclosure, and between the level of outside directors and the reporting of board and management process disclosure. For firms using a large number of outside directors as a corporate governance mechanism, it makes sense that they would want to disclose this type of information to outside investors. Another example of selective disclosure was found for firms with 5% or higher managerial ownership and in the industries with frequent takeover activities. These firms exhibit a significant increase in the level of ownership structure and investor relations disclosure. For firms with these levels of managerial ownership, the threat of takeover has a significant economic impact upon the managerial wealth, and the increased discretionary disclosure suggests that these firms are interested in keeping their investors informed and willing to help prevent acquisitions. However, for firms with a lower level of managerial ownership, the threat of takeover does not have as a significant economic impact, and these firms do not show a significant increase in investor relations disclosure. This is another example of selective disclosure where the level and type of information disclosed is influenced by managerial ownership as well as corporate governance mechanisms. The results of this study suggest that level of managerial ownership and other corporate governance mechanisms are interrelated. Prior theoretical research (Diamond & Verrecchia, 1991; Verrecchia, 2001; Zhang, 2001) has provided motivational models for firm discretionary information based on disclosure reducing the information asymmetry component of capital costs with empirical evidence supporting this view. However, this study found the level of discretionary financial transparency and information disclosure is not correlated to the level of discretionary disclosure of ownership structure and investor relations disclosure. In addition, the research results suggest that the level of financial and information disclosure is not related to

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Journal of Business & Economic Studies, Vol. 15, No. 2, Fall 2009
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