by Marco Allegrini Giulio Greco

Group members
Ali Raza Kazmi (Group Leader) Mukarram Javaid M.Saad Malik Sohail

In recent years, authorities and market regulators in several countries considered corporate governance and disclosure as two key inseparable instruments for investor protection and the functioning of the capital markets

Dominant shareholders may seek to maximize their own utility and expropriate wealth from other investors as well as from other stakeholders, such as the employees They are also likely to forgo profitable investments for the sake of private benefits

The role of independent directors appear to be crucial to guarantee the outsider investors interests. A possible threat to the effectiveness of the independent directors monitoring activity is that the presence of large controlling shareholders and strong board leaders might cause bias in the nomination process

The empirical setting of the study is provided by the Italian stock market. This market is less developed and plays a minor role than the U.S. and the British markets do. Italy is among those Countries in which corporations typically have controlling owners . Empirical research finds that Italian firms make lower dividend payouts as the voting rights of the largest shareholder increase.

In the Italian setting, large controlling shareholders dominate boards and can influence the directors nomination process, as well as the board and the committees agenda

There was a higher level of voluntary

disclosure in firms with larger boards. There was a positive impact of both the board and the audit committee meeting frequency on disclosure The overall results suggest the presence of a complementary relationship between governance and disclosure

The separation of ownership and control results in conflict of interests between management and shareholders Dominant shareholders represent their own interests, which may not be coincident with those of minority investors. They can therefore try to maximize their own welfare and expropriate wealth from other investors as well as from other stakeholders, i.e. the employees

Corporate governance and voluntary disclosure are two control mechanisms used to protect investors and to reduce agency conflicts.

powerful board leaders can set the boards and the committees agenda, influencing their decision control activity. This is a threat to a primary line of defence, that outside shareholders can employ in protecting their rights against the influence and power of large controlling shareholders This situation may produce calls for additional external control mechanisms such as voluntarily disclosed information

Board independence

A stronger independent representation in the board is positively related to the level of voluntarily disclosed information and the following hypothesis is formulated. HP1 :there is a positive correlation between the proportion of independent directors in the board and the level of voluntary disclosure.

An important factor perceived to affect the board effectiveness is the size. large boards could be less effective than smaller boards in mitigating agency conflicts. In large boards the benefits of increased monitoring capacities are outweighed by coordination problems and slower decisionmaking

CEO duality signals the absence of separation between

decision control and decision management. Concentration of power reduces board monitoring effectiveness , which in turn can result in lack of transparency and high information. Firms with CEO duality are therefore more likely to be associated with poorer disclosure

The nomination committee can play an important role in

presence of large controlling shareholders there is a positive association between the presence of the audit, nomination and compensation committees, composed by a majority of independent directors, and the level of voluntary disclosure.

 Sample includes all non-nancial companies listed on

the Italian Stock Exchange in 2007. Financial, banking and insurance companies were not considered because of their specic disclosure requirements and accounting regulations. The initial sample included 186 industrial and services rms. They excluded a company listed but suspended from trading by the Italian Stock Exchange Authority since December 2006. they also excluded from the sample four companies due to special accounting regulations: Alitalia, a state-owned airline company in a situation of bankruptcy, and three companies owning soccer clubs.

They downloaded the 2007 annual reports from the

Italian Stock Exchange website and from the corporate websites and gathered data on governance by downloading the annual corporate governance reports, available on the Italian Stock Exchange site and on the corporate websites. We were unable to nd 4 corporate governance reports. The nal sample consists of 177 companies.

A dependent variable is what you measure in the

experiment and what is affected during the experiment. The dependent variable responds to the independent variable. It is called dependent because it "depends" on the independent variable. The level of voluntary disclosure by companies Measurement: = __The total number of items disclosed___ The maximum possible number obtainable

An independent variable is the variable you have control

over, what you can choose and manipulate. It is usually what you think will affect the dependent variable.
Firm size (Natural logarithm of total sales) Leverage (Total book value of debt to total assets ratio at

the end of the year 2007) Protability (Return on assets) Board size (Total number of directors in the board)

Ownership diffusion (Total percentage of ordinary

shares owned by shareholders who posses less than 2% of the share capital) Board composition (Proportion of independent directors over the total number of directors) Board activity (Number of meetings of the board in the year 2007) Audit committee activity (Number of meetings of the audit committee in the year 2007)

Multivariate analysis is based on the statistical principle of multivariate statistics, which involves observation and analysis of more than one statistical variable at a time. In design and analysis, the technique is used to perform trade studies across multiple dimensions while taking into account the effects of all variables on the responses of interest.

Employ the ordinary least squares (OLS)

estimates to test the relationship between voluntary disclosure and the explanatory variables.

Empirical findings are consistent with the view

that internal and external monitoring complement in mitigating agency conflicts and information asymmetry among different types of shareholders. Both the boards and the audit committees diligence are positively associated with voluntary disclosure. We do not find any significant relationship between the presence of a L.I.D. and board composition with disclosure

In the sample taken audit committees are always

composed by a majority of independent directors and their diligence is found to be positively correlated with the level of voluntary disclosure. It is also observe that, where the risk of collusion between large controlling shareholders and independent directors is high, diligence could provide a more substantial proxy for decision control effectiveness, than structural variables based on the formal status.

The results also indicate that firms with larger

boards show greater transparency for outside shareholders. Empirical research found that ownership concentration and insider shareholders representation is associated with smaller and less independent boards The larger boards could contribute to mitigate agency conflicts among different types of shareholders by giving more minority shareholders representation opportunities and improved control environment

The empirical analysis displays that CEO

Duality has a slightly significant negative correlation with disclosure. Although the level of significance is low, we can observe that this structural variable has a relevant impact both on the board and on the committees activity. Powerful board leaders can influence the monitoring activity, by setting the boards and the committees agenda

We found that the audit committee meeting frequency

is positively correlated with the disclosure of projected and risk information. This information is very useful in helping the outside shareholders to assess their investments and take decisions. These results support the view that there is a complementary relationship between governance and disclosure in an agency setting featured by the presence of large controlling shareholders.

This study investigates the interplay between

governance and voluntary disclosure in an agency setting, featured by conflicts of interests and information asymmetry between large controlling shareholders and minority outsider shareholders.

An voluntary disclosure index on seven

corporate governance variables and other control variables (firm size, leverage, profitability, listing status). The governance variables cover both the board structure and functioning. The setting is provided by the Italian Stock Market, characterized by concentrated ownership and high insider shareholders representation in the boards.

Found that board size and diligence show a

positive relationship with voluntary disclosure. The audit committee meeting frequency also show a positive impact on the amount of information voluntarily disclosed. We also find that board committees, board composition and the presence of a L.I.D. have no relationship with voluntary disclosure, whilst CEO duality shows a negative impact with a poor level of significance

The results of this study might be of interest to

policy makers and regulators. Findings could provide support to the calls to extent disclosure requirements in this agency setting. By extending compulsory disclosure, the possibilities to extract private benefits for large controlling shareholders could be limited. This situation is more likely to be related to mitigated agency conflicts in the governance activity.

The results in the study are consistent with an

agency theory-based explanation of the complementary relationship with governance and disclosure, in a setting featured by large controlling shareholders. The results are consistent with the notion that policy makers could achieve improvements in governance practices, by reducing the possibilities of private control exploitation through the extension of compulsory disclosure.

Thank yolu