Journal of International Accounting,

Auditing & Taxation 10 (2001) 139 –156

A study of the relationship between corporate governance

structures and the extent of voluntary disclosure
Simon S.M. Ho*, Kar Shun Wong
School of Accountancy, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong

Abstract
The primary objective of this study is to test a theoretical framework relating four major corporate
governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong.
These corporate governance attributes are the proportion of independent directors to total number of
directors on the board, the existence of a voluntary audit committee, the existence of dominant
personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a
weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the
existence of an audit committee is significantly and positively related to the extent of voluntary
disclosure, while the percentage of family members on the board is negatively related to the extent of
voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East
Asia for implementing the two new board governance requirements on audit committee and family
control. © 2001 Elsevier Science Inc. All rights reserved.

Keywords: Corporate disclosure; Corporate governance; Voluntary disclosure; Hong Kong

1. Introduction

It is commonly agreed that the recent Asian financial crisis was not only the result of a loss
in investor confidence but, more importantly, of a lack of effective corporate governance and
transparency in many of Asia’s financial markets and individual firms1. Over the last several
years, most East Asian economies have been actively reviewing and improving their
regulatory frameworks, in particular, corporate governance, transparency and disclosure.

* Corresponding author. Fax: ⫹(852) 2603-6604.

E-mail address: simon @baf.msmail.cuhk.edu.hk (S.S.M. Ho).
The helps given by the two anonymous reviewers and the Editors are gratefully acknowledged.

1061-9518/01/$ – see front matter © 2001 Elsevier Science Inc. All rights reserved.
PII: S 1 0 6 1 - 9 5 1 8 ( 0 1 ) 0 0 0 4 1 - 6
140 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

However, the simple adoption of more International Accounting Standards (IAS) is not
sufficient to resolve the transparency problem in these countries. Whether the quality of the
actual corporate disclosures satisfies investors’ information needs is more central.
Mandatory disclosure rules ensure equal access to basic information (Lev 1992), but this
information has to be augmented by firms’ voluntary disclosures and information production
by intermediaries. There are major market incentives to disclose information voluntarily and
managers’ attitudes to voluntary disclosure change according to the perceived relationship of
the costs and benefits involved (e.g., see Gray, Radebaugh and Roberts 1990; Healy and
Palepu 1995). Voluntary disclosure and its determinants have been identified as an important
research area in financial reporting since the 1970s. Previous studies on the determinants of
voluntary disclosure have been done mainly in the U.S. and other developed countries (e.g.,
Malone, Fries and Jones 1993; Schadewitz 1994; Raffournier 1995; Lang and Lundholm
1996).
Some studies have examined institutional mechanisms (i.e., corporate governance) that
may influence voluntary disclosure practice. Corporate governance attributes examined in
these studies include ownership structure (e.g., Craswell and Taylor 1992; Mckinnon and
Dalimunthe 1993; Hossain, Tan and Adams 1994; Raffournier 1995), the proportion or
existence of independent directors (e.g., Forker, 1992; Malone, Fries and Jones 1993), the
appointment of a nonexecutive director as chairman, (e.g., Forker 1992), and the existence
of an audit committee (e.g., Forker 1992).
However, previous research only studied the effect of one single corporate governance
attribute and very few of them examine different governance attributes in a single study. The
findings of these studies also may not be applicable to Eastern economies which have
different regulatory and cultural environments. Examining the relationship between corpo-
rate governance attributes and corporate disclosure behavior in Hong Kong, with its unique
regulatory (relatively nonstringent disclosure requirements compared to U.K. and U.S.) and
corporate ownership environment (most listed firms are family- or individual-controlled),
could provide valuable input to a debate that is increasingly becoming international.
The main objective of this study is therefore to test the relationship between a set of
corporate governance factors (see Fig. 1) and the extent of voluntary disclosure provided by
listed firms in Hong Kong. Under the implicit assumption of information theory and agency
theory, the study hypothesizes that improved monitoring on the board of directors leads to
more voluntary disclosures.
The importance or potential contributions of this current study are several. First, the
current study examines several corporate governance mechanisms in a single model assum-
ing different mechanisms may offset or interact each other. Second, prior studies did not test
the impact of family control and the current study showed that the proportion of family
members on a board is significantly related to the extent of voluntary disclosure. Third, the
Hong Kong data allows a fuller and more powerful approach to analysis as there is
considerable variation in the measures of the explanatory and dependent variables. Last but
not the least, as the study found that the audit committee and family control are significant
governance variables, it provides empirical evidence to policy makers and regulators in East
Asia for implementing such new board governance requirements.
The remainder of this paper is organized as follows. Section 2 introduces the corporate
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 141

Fig. 1. The research framework & variables used.

disclosure and corporate governance environment in Hong Kong and discusses the specific
hypotheses of this study. Section 3 outlines the research design and study sample. Section 4
discusses the results of the hypothesis tests. Section 5 summarizes the findings and discusses
the implications of the results.

2. Background and hypothesis development

2.1. Corporate disclosure

Since Hong Kong was a British colony before July 1997, its financial reporting system is
largely influenced by British accounting practices. The mandatory disclosure requirements in
Hong Kong are stipulated by the Hong Kong Companies Ordinance, the Securities and
Futures Commission (SFC) Ordinance, Listing Rules (Appendix 7A), Listing Agreements,
142 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

and the Securities Ordinances promulgated by the Stock Exchange of Hong Kong (SEHK)
(recently renamed as the Hong Kong Exchange and Clearing, HKEx), and the Statements of
Standard Accounting Practice (SSAPs) issued by the Hong Kong Society of Accountants
(HKSA).
Overall, the scope of disclosure requirements in Hong Kong is much narrower and less
specific than that in the U.S. and U.K. (Eccles and Mavrinac 1995). For instance, only
interim (midyear) and year-end reports are provided. Disclosure rules governing insider
dealings, related party transactions, and directors’ interests and remuneration are much less
stringent than in the U.S. Since the Listing Rules and HK SSAPs have guidance status only,
they provide Hong Kong companies with more flexibility in reporting and disclosure.
Consequently, firms’ disclosure choices are also more likely to reflect voluntary responses to
market forces.
Conformity with the Listing Rules and accounting standards by Hong Kong firms is very
high in general (Tai et al. 1990; HKSA 1997). The only area that has a comparatively low
standard of compliance is on the disclosure of related party transactions (HKICS 1998) due
most likely to a high proportion of family-controlled listed firms. The Judges’ Report of the
HKMA Best Annual Report Award 1994 (HKMA 1995) noted that many Hong Kong
companies made only the minimum disclosures required by the accounting standards and
statutory provisions. In addition, the quality and quantity of information disclosed in annual
reports varied quite substantially. Listed companies have been advised to disclose more
information voluntarily (SCMP 1998). However, to avoid the danger of over-regulation, the
SEHK hopes to encourage a culture of voluntary disclosure among listed companies. The
SEHK believes that the quality of a company’s disclosures will be reflected in its stock price
and its future ability to raise share capital (HKICS 1998). Nevertheless, disclosure require-
ments in Hong Kong are reviewed regularly. For instance, the new Securities and Futures
Bill, to be enacted in late 2001 by the SFC, will introduce additional disclosure requirements
to further combat market misconduct and empower investors (SFC, 2000).

2.2. Corporate governance

Corporate governance is viewed as effectively delineating the rights and responsibilities

of each group of stakeholders in the company. Transparency is one major indicator of the
standard of corporate governance in an economy. In 1993 and 1994, to improve transparency
and accountability, the SEHK and the HKSA set up a Corporate Governance Working Group
(CGWG) respectively prescribing a number of recommended practices (HKSA 1997). These
practices included: separation of CEO and board chairman, a requirement of at least two
(independent) nonexecutive directors, limitation of family members on the board to no more
than 50%, and a requirement for two board committees to be composed mainly of nonex-
ecutive directors (an audit committee and a remuneration committee). An additional require-
ment to appoint at least two nonexecutive directors became effective at the beginning of
1995. The establishment of an audit committee is always voluntary in Hong Kong. In 1998,
the Code of Best Practice was also revised by the SEHK which requires listed firms to
disclose in their interim and annual reports the reason for the establishment or nonestab-
lishment of audit committees for accounting periods beginning January 1, 1999.
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 143

While separation of ownership and control is the predominant form of corporate gover-
nance in the U.S. and U.K., family share control is prevalent in Hong Kong and most other
East Asian countries (La Porta et al. 1999). The first report of the HKSA’s CGWG confirmed
that over half of Hong Kong listed companies are majority-controlled by a family or an
individual (HKSA 1997). The ten wealthiest families in Hong Kong owned 46.8% of the
total market capitalization of the SEHK in 1996 (HKSA 1997). Many of these family
members appoint themselves as board directors and senior executives of the firms and always
vote collectively.

2.3. Hypotheses development

An objective of this study is to determine how corporate governance mechanisms affect

a firm’s disclosure behaviors. Four corporate governance variables are examined in the
current study2. These are the percentage of independent nonexecutive directors, the existence
of an audit committee, the existence of dominant personalities, and the percentage of family
members on the board.
Jensen and Meckling’s (1976) positive agency theory provides a framework linking
disclosure behavior to corporate governance. Corporate governance mechanisms are intro-
duced to control the agency problem and ensure that managers act in the interests of
shareholders. In theory, the impact of internal governance mechanisms on corporate disclo-
sures may be complementary or substitutive. If it is complementary, agency theory predicts
that a greater extent of disclosures is expected since the adoption of more governance
mechanisms will strengthen the internal control of companies and provide an “intensive
monitoring package” for a firm to reduce opportunistic behaviors and information asymmetry
(Leftwich, Watts and Zimmerman 1981; Welker 1995). Managers are not likely to withhold
information for their own benefits under such an intensive-monitoring environment, which
lead to improvement in disclosure comprehensiveness and quality of financial statements. On
the other hand, if the relationship is substitutive, companies will not provide more disclosures
for more governance mechanisms since one corporate governance mechanism may substitute
another one. If information asymmetry in a firm can be reduced because of the existing
“internal monitoring packages,” the need for install additional governance devices is smaller.
These apparently conflicting viewpoints on the impact of corporate governance have not
been totally resolved. In spite of this theoretical ambiguity, Hill (1999) argues that no one
single mechanism is a governance panacea and suggests that “it is desirable to have a system
of overlapping checks and balances.” Therefore, the hypotheses about the effect of internal
governance mechanisms in the current study are mainly predictions of a positive association.

2.3.1. The proportion of independent nonexecutive directors on board

One major role of boards is its control functions (Pound 1995). Outside (independent)
nonexecutive directors (IND) are perceived as a tool for monitoring management behavior
(Rosenstein and Wyatt 1990), resulting in more voluntary disclosure of corporate informa-
tion. Both Lefwich et al. (1981) and Fama and Jensen (1983) argued that the larger the
proportion of INDs on the board, the more effective it will be in monitoring managerial
opportunism, and companies can be expected to have more voluntary disclosures. Forker
144 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

(1992) found that a higher percentage of IND on boards enhanced the monitoring of the
financial disclosure quality and reduced the benefits of withholding information. It is
hypothesized that:
H1: Companies with a higher proportion of independent nonexecutive directors are more
likely to have a higher extent of voluntary disclosure.
Although SEHK requirements emphasize the number rather than the proportion of IND to
total directors, the use of a proportion was used in the current study. Independent directors
may not exert sufficient monitoring power if their numbers only account for a small
proportion of board membership.3

2.3.2. The existence of an audit committee

The functions of an audit committee include ensuring the quality of financial accounting
and control system (Collier 1993). Since an audit committee consists mainly of nonexecutive
directors, it has influence to reduce the amount of information withheld. Agency theory
predicts the establishment of audit committees as a means of attenuating agency costs. Forker
(1992) argued that the existence of audit committees may improve internal control and thus
regarded it as an effective monitoring device for improving disclosure quality. He found a
positive but weak relationship between the disclosure of the audit committee and the quality
of share-option disclosure for U.K. companies. McMullen (1996) provides support for the
association between the presence of an audit committee and more reliable financial reporting.
It is therefore hypothesized that:
H2: Companies that have an audit committee are more likely to have a higher extent of
voluntary disclosure.

2.3.3. The existence of dominant personalities

Firms that have one individual who serves as both chairman and chief executive officer/
managing director (CEO duality) are considered to be more managerially dominated (Molz
1988). The person who occupies both roles would tend to withhold unfavorable information
to outsiders. Fama and Jensen (1983) argued that any adverse consequences could be
eliminated by market discipline. But Forker (1992) asserts that a dominant personality in
both roles poses a threat to monitoring quality and is detrimental to the quality of disclosure.
He found a significant negative relationship between the existence of a dominant personality
and the quality of share-option disclosure. Hence, it is hypothesized that:
H3: Companies which appoint a dominant chief executive officer as board chairman are
more likely to have a lower extent of voluntary disclosure.

2.3.4. The percentage of family members on the board

Agency theory argues that in a diffused ownership environment, firms will disclose more
information to reduce agency costs and information asymmetry. In a more concentrated
ownership situation, the impact on voluntary disclosure is more complicated and the argu-
ment can be made in either direction. Jensen and Meckling (1976) indicate that since
managers pursue their own interest, higher management shareholding would imply a larger
sharing of the loss, and ultimately, a lower possibility that management would lower
corporate value.
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 145

In contrast to the convergence-of-interests hypothesis, the management entrenchment

hypothesis suggests that under very high concentration of ownership, conflicts of interest are
not between managers and shareholders, but between large and small shareholders (Shleifer
and Vishny 1997). When ownership control is high enough to ensure its position, manage-
ment has the incentive to behave against the interests of other smaller shareholders because
of its strong voting power to appoint someone it trusts to be CEO, directors and/or board
chairman (Morck, Shleifer and Vishny 1988). Besides expropriating minority interests
directly, these controlling shareholders can enrich themselves through connected party
transactions in which profits are transferred to other companies they control.
In Hong Kong, since family ownership is often high enough to secure a controlling
position, it is generally believed that the management entrenchment hypothesis should apply.
Corporate boards in Hong Kong are sometimes viewed by international investors simply a
mean to approve the wishes of the family shareholders. Family members’ total shareholding
was not used in the current study to measure family control since such data were not
available in Hong Kong. Instead, the number of family members on the board of directors
was used as a surrogate for family control. On the basis of the management entrenchment
hypothesis, it is hypothesized that:
H4: Companies with a higher proportion of family members sitting on the board are more
likely to have a lower extent of voluntary disclosure.

2.3.5. Other control variables

A review of the literature on voluntary disclosure led to the decision to include five control
variables in the multiple regression models for testing the main hypotheses. These are firm
size (Chow and Wong-Boren 1987), assets-in-place (Hossain et al., 1994), financial leverage
(Bradbury 1992), profitability (Meek et al. 1995) and industry type (Meek et al. 1995).

3. Data collection and research design

3.1. Survey

A questionnaire survey of the 610 chief financial officers (CFOs) of all listed firms in
Hong Kong was conducted to determine the existence of an audit committee in their firms.
Another version of the questionnaire was sent to 535 financial analysts from all investment
or brokerage firms in Hong Kong in late 1997 and early 1998. The purpose of this survey was
to determine users’ perceptions of the usefulness of various voluntary disclosure items. After
two mailings, 98 CFOs and 92 financial analysts returned the survey resulting in response
rates of 17% and 18%, respectively4. For both respondent groups, the responses to all
Likert-scale questions from the last 20 questionnaires returned were compared to the results
of the first 20 questionnaires returned in order to check for any nonresponse bias. This
technique, introduced by Oppenheim (1966), indicated no significant difference (alpha ⫽
0.05) between those companies who responded earlier and those who responded later. Thus,
assuming that the later respondents were similar to the nonrespondents, there was no
indication of a visible nonresponse bias in the data. To further confirm any nonresponse bias,
146 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

Table 1
Industrial Breakdown of Responding Firms
Industry Type Number Percentage
Manufacturing 23 23.46
Conglomerate 12 12.20
Banking & finance 12 12.20
Property & construction 11 11.20
Retail/trade 9 9.18
Others 9 9.18
Hotel, catering & entertainment 8 8.16
Communication & media 5 5.10
Transport & storage 5 5.10
Utilities 3 3.10
Chinese H share 1 1.02
98 100.00

additional t tests showed that there was no significant difference in all continuous-scale
independent variables and the dependent variable between early and late respondents.
Furthermore, the returned reply slips from 58 CFOs and 45 analysts who declined to
complete the questionnaire indicated that over 97.5% of the nonrespondents did not complete
the questionnaires due to company policy not to entertain research questionnaires or lack of
time5. Table 1 provides demographic information concerning the CFO respondents.

3.2. The measurement of voluntary disclosure

Most previous studies (conducted outside Hong Kong) on determinants of voluntary

disclosure have developed disclosure indices to examine the association with firm-specific
characteristics (see e.g., Meek et al. 1995). However, most of the studies did not take into
account users’ perceptions of the importance or usefulness of the disclosure items. In the
current study, the extent of voluntary disclosure was measured by using an importance-
adjusted relative disclosure index (RDI). It was derived by first compiling from previous
literature and annual reports in Hong Kong a comprehensive list of voluntary disclosure
items that companies have provided. The list was then checked against a mandatory
disclosure checklist prepared by a Big-5 accounting firm (Ernst & Young) in Hong Kong.
Items mandated to be disclosed by Hong Kong listed companies were eliminated. The
remaining 35 items were included in a survey questionnaire and the sample of analyst users
was asked to rate the importance of each item on a 5-point scale. After standardizing the
responses to a zero mean and unit variance, a total of 20 of the 35 items with a minimum
importance score of 3.5 were identified as the base for measuring the RDI.
The RDI was then computed for each sample companies as a ratio of the absolute
disclosure score to the maximum possible disclosure score. The absolute disclosure score for
each company is the total number of items of the 20 most important items disclosed
voluntarily in the annual report. This method of calculating RDI alleviates the concern that
a company may be penalized for not disclosing that is considered irrelevant (e.g., cost of
good sold is not relevant to banks). Since only the items which were perceived by analyst
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 147

users as most important were used in computing the RDI, no further subjective weighting
was applied6. The use of disclosure indices is not novel, although the incorporation of users’
perceptions of importance is an extension.

3.3. Measurement of independent variables

Data on all but one of the independent variables were collected from the annual reports of
the responding preparer firms. Data on the existence of an audit committee was collected
directly from the companies through a postal survey. The proportion of independent non-
executive directors to total number of directors (INDs) is the number of INDs on the board
divided by the total number of directors on the board. The percentage of family members on
board (PFM) is measured as a ratio of family board members to the total number of directors.
The SEHK requires that companies must disclose the relationship or related board members
in the annual report. Further, a binary scheme was used to denote the existence of an audit
committee and dominant personality. These dummy variables were coded ‘1⬘ to indicate
existence and ‘0⬘ to indicate nonexistence. Since the current study uses data from 1997 it
should better reflect firms’ voluntary adoption of audit committees in response to market
forces.

3.4. Measurement of the control variables

Firm size (LSIZE) is measured by the log (base 10) of total assets, leverage (LEV) is
measured by the ratio of total debt to the equity value of the firm, assets-in-place (AIP) is
measured by the ratio of net book value of fixed assets to total assets, and profitability
(PROFIT) is measured by the return on capital employed. The average of three years
(1994 –97) of data were used to calculate all these measures. Lastly, industry type is based
on the SEHK codes of classification of listed companies with some modifications. Listed
companies are classified as conglomerate (IT1), manufacturing (IT2), banking and finance
(IT3), or others (IT4).

4. Analysis and discussion of results

4.1. Descriptive statistics and bivariate analysis

Table 2 shows the distribution of the dependent variable (i.e., extent of voluntary
disclosure measured by RDI). The average relative disclosure index of the sample companies
was 0.29, with a range of 0.05 to 0.85. Thus, there were large variations in voluntary
disclosure practices among the sample companies in Hong Kong. This result is also consis-
tent with the literature that companies in Hong Kong have great flexibility in their voluntary
disclosure choices. In addition, the relative low voluntary disclosure ratio implies that
analysts in Hong Kong may search for information outside of annual reports (e.g., via
investor relations department).
Table 2 shows that the average ratio of IND to total directors on board was 0.34 and the
148 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

Table 2
Summary Statistics of Continuous Variables (N ⫽ 98)
Mean Min Max Std. Dev.
Dependent Variables
RDI Extent of voluntary disclosures (measured by RDI) 0.29 0.05 0.85 0.15

Independent Variables
IND The ratio of INDs to total directors on board 0.34 0.08 0.80 0.14
PFM The percentage of family members on board 32.10 0.00 77.00 5.71
LSIZE Firm size (total assets in HK$m) 49928 169 3087850 329050
LEV Leverage ratio (total liabilities to total equity) 1.86 0.01 2.90 2.95
AIP Assets-in-place (fixed assets to total assets) 0.35 0.00 0.87 0.38
PROFIT Profitability (return on equity as a percentage) 0.08 ⫺1.11 0.95 0.25

average number of IND is 2.45. On the other hand, the average percentage of family
members sitting on the board was 32.1%. Table 3 shows that in 29% of the sample
companies the chairman was also the managing director/chief executive officer, and 23.5%
of the companies reported having an independent audit committee.
Table 4 shows that the items most likely to be voluntarily disclosed were the future
prospects of the company (75%), the description of company products and services (60%),
China business review (59%), and sales and marketing network (56%). However, none of the
responding companies disclosed a cash flow forecast and only one percentage of the
companies disclosed information relating to cost of goods sold. The results again indicate
that there was a wide variation in the disclosure of these important items in Hong Kong.
The bivariate analysis in Table 5 shows the highest correlation was between LSIZE (firms
in the banking and finance industry) and leverage (LEV) (R2⫽0.576). This should not be a
concern until they exceed 0.8. These results also appear to suggest that no serious multi-
collinearity among the independent variables exist.
From Table 5 it can be observed that leverage, the percentage of family members on the
board and firm size were significantly correlated with the extent of voluntary disclosure at the
0.05 level with the predicted sign. The presence of the expected bivariate relationship is
encouraging as the bivariate findings provide a basis for interpreting the results of the
multivariate analysis of the extent of voluntary disclosure.

Table 3
Summary Statistics of Nominal Independent Variables (N ⫽ 98)
Percentage of firms in the sample
AC The existence of an audit committee 23.5
DP The existence of dominant personality 29.0
IT Industry type: Conglomerate 27.6
Banking and finance 12.0
Manufacturing 24.5
Others 36.0
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 149

Table 4
The Distribution of the 20 Most Important Voluntary Disclosure Items Perceived by Financial Analysts
Voluntary disclosures item Analysts’ Percentage of
Importance Score companies disclosing
Future prospects of the company 4.04 75.0
Description of company products and services 3.70 60.2
China business review 3.93 59.3
Sales and marketing network 3.64 55.9
Acquisition and disposal activities 3.97 45.6
Details of investments in China & overseas 3.66 42.0
Corporate stretegy and impact 3.74 41.0
Discussion of factors affecting future financial 4.08 34.4
results
A large variety of financial ratios 3.59 32.0
Bank loans, mortgages and their uses 3.92 18.2
Capital expenditure commitments for future 3.88 16.1
years
Financial position & contribution of subsidiaries 3.92 15.1
& associated companies
Financial summary for more than 5 years 3.56 14.0
Main product market share 4.01 9.6
Stock price information and analysis 3.63 5.3
Details of operating expenses 3.65 5.3
Product contribution margin 3.80 5.3
Aging of debtors’ balance 3.67 2.2
Cost of goods sold 3.65 1.0
Cash flow forecast 3.82 0.0

4.2. Multiple regression models and assumption testings

Multiple regressions were estimated using the set of four corporate governance factors and
five other firm-specific attributes as independent variables. The possible existence of mul-
ticollinearity was tested in this study using several methods. As mentioned earlier, low
coefficients in the correlation matrix suggest that the problem of multicollinearity was

Table 5
Correlation Analysis
RDI IND PFM LSIZE LEV AIP PROFIT
RDI 1.000
IND 0.152 1.000
PFM ⫺0.230* 0.046 1.000
LSIZE 0.423** 0.199* ⫺0.060 1.000
LEV 0.242* 0.228 ⫺0.142 0.576** 1.000
AIP 0.007 ⫺0.029 0.101 ⫺0.018 ⫺0.029 1.000
PROFIIT 0.113 0.081 ⫺0.085 0.082 0.101 0.082 1.000
*significant at 5% level
**significant at 1% level
150 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

Table 6
Multiple Regression Results of the Relationship between Corporate Governance and Other Specific
Characteristics with the Extent of Voluntary Disclosures
R2 ⫽ 0.42
Adjusted R2 ⫽ 0.314
F Significance ⫽ 0.000
Durbin-Watson Test ⫽ 1.9698
Number of significant coefficients ⫽ 5
N ⫽ 98

Explanatory Variable Coefficient Std Error Beta t-values Significance

Constant ⫺0.0497 ⫺0.484 0.629
IND 0.112 0.111 1.012 0.315
AC 0.08057 0.040 2.001 0.049*
DP 0.003984 0.031 0.127 0.899
PFM ⫺0.190 0.080 ⫺2.373 0.020*
LSIZE 0.08771 0.026 3.387 0.001*
LEV ⫺0.00416 0.006 ⫺0.688 0.493
AIP 0.01885 0.040 0.462 0.638
PROFIT 0.03582 0.055 0.648 0.519
IT1 0.07427 0.039 1.912 0.060
IT2 0.120 0.040 2.986 0.004*
IT3 ⫺0.0123 0.057 ⫺0.216 0.829
*significant at 5% level
IND ⫽ independent non-executive directors
AC ⫽ audit committee
DP ⫽ dominant personality
PFM ⫽ percentage of family members on board
LSIZE ⫽ firm size
LEV ⫽ financial leverage
AIP ⫽ asset-in-place
PROFIT ⫽ profitability
IT1 ⫽ industry type 1
IT2 ⫽ industry type 2
IT3 ⫽ industry type 3

minimal. However, a certain degree of multicollinearity can still exist even when none of the
bivariate correlation coefficients is very large, since one independent variable may be an
approximate linear function of a set of several independent variables. Another effective
means of testing multicollinearity is to compute the Variance Inflation Factor (VIF). The
largest VIF factor observed for the full model was 2.5 (LSIZE) and the VIFs of all other
independent variables were below 2.0. Thus, these results further support the lack of presence
of multicollinearity in the research model. The results of the regression analysis can,
therefore, be interpreted with a greater degree of confidence.

4.3. Results of hypotheses testing

Table 6 presents the R2 (coefficient of determination), F-ratio, beta coefficients and

 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 151

t-statistics for the model and summarizes the multiple regression results of Y (the extent of
voluntary disclosure) on the explanatory variables. The table indicates R2 of 0.42 (F⫽3.45,
p ⫽ 0.000), which shows that a moderate percentage (42%) of the variation in Y can be
explained by variations in the whole set of independent variables (adjusted R2 ⫽ 0.31). At
the 0.05 level of significance, the hypothesis that all explanatory variable coefficients are
simultaneously equal to zero is rejected.
Only five independent variables entered the equation with a regression coefficient that was
significant at the 0.05 level in the regression model. These variables include: audit commit-
tee, firm size, percentage of family members on the board and two industry dummy variables.
In addition, the directions of the signs of all significant coefficients in the regression model
are in agreement with the hypotheses. On the other hand, the ratio of independent directors
to total directors on board, family ownership control, profitability, asset-in-place, and
leverage are insignificant.
The most significant corporate governance variable is the percentage of family members
on board (PFM) with a p-value of 0.02. This provides support for the Hypothesis 4 that the
more family members on the board, the less likely that a firm has a higher extent of voluntary
disclosure. The next most significant variable is the existence of an audit committee, which
has a p-value of 0.049. Thus, Hypothesis 2 that companies that have an audit committee are
likely to have a higher extent of voluntary disclosure is also supported. In addition, large
firms tend to have more voluntary disclosure (p ⬍ 0.01). This result supports numerous
previous empirical studies which show that large firms disclose more information. This could
occur because large firms need more financing capital than smaller firms.

4.4. Discussion of findings

A comparison of the findings of the current study with previous related studies can be
found in Table 7. Hypothesis 1 which states that companies with a higher ratio of indepen-
dent nonexecutive directors to total directors on board would more likely have a higher
extent of voluntary disclosure was not supported. This finding is not consistent with the
findings of Forker (1992) and Chen and Jaggi’s (1998) which found that the proportion of
independent nonexecutive directors on board was positively related to the quality/extent of
financial disclosure. Chen and Jaggi’s disclosure index score includes both mandatory and
voluntary disclosure items but the index score adopted in this study includes only the
voluntary disclosure items perceived as most important by analysts. Thus, a possible
explanation of this result is that while IND in Hong Kong are likely to ensure that the
company has complied with mandatory disclosure requirements, they are still not actively
pressing the company to disclose more nonmandatory information. Also, there are questions
about the independence of so-called ‘independent’ nonexecutive directors in Hong Kong and
their effectiveness as a monitoring device as many of them are appointed by the CEO or the
board chairman.
Hypothesis 2 which states that companies which have an audit committee are more likely
to have a higher extent of voluntary disclosure was supported. This result is encouraging
since a previous study by Forker (1992) only found a weak relationship between the
existence of an audit committee and the quality (extent) of disclosure. An important
 152
Table 7
Summary of Literature Relating Corporate Governance Attributes to Corporate Disclosure

S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156
Previous Studies Current Study
Corporate Governance Author(s) Findings (significant unless Corporate Governance Hypothesized Findings
Attributes otherwise stated) Attributes Directions (Significant
unless
otherwise
stated)
Proportion on Existence Leftwich, Watt & Interim Reporting Disclosure (⫹) Proportion of Independent ⫹ Not significant
of Independent Zimmerman Directors
Directors (1981)
Forker (1992) Share Options Disclosure (⫹)
Malone, Fries & Disclosure Quality (⫺)
Jones (1993)
Not significant
Chen & Jaggi Extent of Financial Disclosure
(1998) (including Mandatory) (⫹)
Existence of Audit Forker (1992) Share Option Disclosure (⫹) Existence of Audit ⫹ ⫹
Committee Weak Significant Committee
Existence of Dominant Forker (1992) Share Option Disclosure (⫺) Existence of Dominant ⫺ Not significant
Personalities Millstein (1992) Personalities
Outside Ownership Ruland, Tung & Disclosure of Managers’ Profit Proportion of Family ⫺ ⫺
George (1990) Forecasts (⫹) Members on Board
Ownership Diffusion McKinnon & Segmental Information (⫹)
Dalimunthe
(1993)
No. of Shareholders Malone, Fries & Extent of Disclosure (⫹)
Jones (1993)
Separation of Craswell & Disclosure Reserve Information
Ownership & Control Taylor (1992) (⫹) n.s.
Ownership Diffusion Raffocunier Extent of Voluntary Disclosure
(1995) (⫺) n.s.
Ownership Hossain, Tan & Extent of Voluntary Disclosure
Concentration Adams (1994) (⫺)
*Ecxept Chen & Jaggi (1998), which examines comprehensiveness of disclosure (mandatory ⫹ voluntary), all other studies focus on the extent or existence
of voluntary disclosures.
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 153

implication of this finding is that it may be appropriate for regulatory authorities to require
listed companies in Hong Kong to establish an audit committee in order to secure more
corporate transparency.
Hypothesis 3 states that firms with the existence of a dominant personality are more likely
to have a lower extent of disclosure. Although the hypothesized direction was correct, the
hypothesis was not supported at the 5% significance level. This result is not consistent with
that of Forker (1992) who found a significant negative relationship between a dominant
personality and quality (extent) of disclosure. A possible reason is a person who serves as
both board chairman and CEO of a company in Hong Kong is likely to be a substantial
shareholder, so it does not matter whether or not the two jobs are separated.
Hypothesis 4, which states that companies with a higher proportion of family members on
the board are more likely to have a lower extent of voluntary disclosure, was supported. Chen
and Jaggi (1998) also found that the relationship between independent nonexecutive directors
and total financial disclosure (mandatory and voluntary) was weaker for family-controlled
firms. Although the situation where family members dominate the board is not as common
in Hong Kong as one might expect, these findings might have implications for other Asian
countries where it is common for family members to dominate the board. The recommen-
dation by the HKSA Second Report of Corporate Governance that family members should
not make up more than half of the board membership seems valid and should be maintained.
Boards composed of a wider membership would help strengthen the transparency of the
company.

5. Summary and conclusion

In recent years, regulatory bodies have promulgated new corporate governance require-
ments in order to enhance corporate transparency. In Asia the recent financial crisis has
underlined the need for more evidence on the corporate governance and transparency issues.
There has been little research relating voluntary disclosure to specific corporate governance
attributes. This study uses Hong Kong data to analyze whether firms disclose more voluntary
information when they are family-controlled, have an audit committee, have independent
board directors, and have a duality of board chairman/CEO.
There are several important implications of this study. The results provide empirical
evidence to support Hong Kong regulatory bodies’ certain new requirements on board
composition, that is, the formation of an audit committee and the family members should not
make up more than half of the board membership. These results may also help other East
Asia reformers, policy makers and regulators to improve market transparency in their
countries by introducing similar new requirements. In particular, the vast majority of listed
companies in East Asia economies are owned and controlled by families. It is essential to
have a higher degree of minority investors’ protection via more such corporate governance
devices.
There are two major limitations of this study. First, the main focus of this study is on the
extent of voluntary disclosures. However, such disclosures do not mean that they are credible
or reflecting the true state of affairs of the company. Also, more disclosures do not
154 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156

necessarily imply more quality disclosures. Second, although the study found the expected
relationship between corporate governance variables and disclosures, it is not certain whether
the results were due to the hypothesized causality. Therefore, the findings should be
interpreted with care because of these limitations. Future studies in this area should address
these specific issues directly.

Notes
1. Transparency refers to “a process by which information about existing conditions,
decisions and actions is made accessible, visible and understandable (Working Group
on International Financial Crisis, 1998). Operationally, it is referred to voluntary
disclosure in addition to the already mandated disclosure.
2. Some corporate governance and firm-specific variables which had been considered
initially during the research planning process were finally excluded. For example,
using the services of a Big-5/non-Big-5 audit firm was excluded because nearly all
listed companies are audited by Big-5 firms in Hong Kong. Family’s share ownership,
directors’ share ownership and independent nonexecutives’ share ownership were not
used due to the lack of exact and direct share ownership data publicly available in
Hong Kong.
3. On the other hand, one may argue that even one or two IND can also exert influence
if they are vocal on a particular issue. Therefore, besides proportion of IND to total
directors, the current study also used the number of IND in a supplementary test.
However, since the result of the supplementary test did not differ from the model
using the proportion of IND, only the findings on the proportion of IND are presented.
4. Fifty-five completed preparer questionnaires and 42 completed user questionnaires
were returned within two weeks of the first mailing. The researcher sent follow-up
letters to all targeted firms to remind those who had not responded in the first mailing,
along with an additional copy of the questionnaire and a reply envelope. The
follow-up reminder emphasized the importance of the research, its practical focus and
in addition, requested them to give the reason (s) by returning the bottom slip of the
letter if they decided not to return the questionnaire. A further 43 completed preparer
questionnaires and 50 completed user questionnaires were received within two weeks
of the second mailing. Data collection was completed about ten weeks after the initial
distribution of the questionnaires.
5. It is well known that Hong Kong firms are very conservative and generally unwilling
to allow studies by outsiders (Redding and Pugh, 1986). Thus, although the response
rate of this study is not high compared with similar studies in other countries, this rate
can be considered satisfactory for a company survey conducted in Hong Kong.
6. Assuming the maximum possible disclosure score for a firm is 18 (i.e., two others are
irrelevant to its business) and the firm did disclose 12 out of the 18 items in is annual
report, then the RDI ⫽ 12/18 ⫽ 0.67.
 S.S.M. Ho, K.S. Wong / Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 155

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