Corporate Governance, Regulatory Reforms, Firm Characteristics and Voluntary Disclosure in Saudi Arabia

Abstract

Disclosure is identified as one of the challenges facing the implementation of corporate governance, especially in developing countries. Corporate governance is a crucial issue currently being addressed widely by regulators and capital market participants around the world. Corporate governance codes aim to improve the governance of a company, including transparency; thus, voluntary disclosure has been examined by numerous academics in order to emphasise the importance of accountability and transparency that, in turn, increase the confidence of investors and creditors in the financial markets of emerging economies. The current study aims to contribute to the corporate disclosure and corporate governance literature by providing empirical evidence of the relationship between voluntary disclosure and corporate governance in an emerging capital market, namely, Saudi Arabia. The sample consists of 120 non-financial listed companies in the Saudi Stock Exchange from 2016 to 2018 that witnessed remarkable initiatives to enhance transparency and corporate governance. Furthermore, the study employs a theoretical framework based mainly on the economic approach and agency theory. This study aims to evaluate the extent of voluntary disclosure and its categories in the Saudi annual reports. A self-constructed index containing 67 items is developed to measure the level of voluntary disclosure and how it develops over time. The study finds that voluntary disclosure in Saudi Arabian firms is still in its infancy, with an average disclosure of 53%. However, it is improving over the years. The categories of voluntary disclosure evolved during the sample period, except that the voluntary disclosure of financial information decreased in 2017, although there was an uptrend the following year. Saudi Arabia reformed its corporate governance code in 2017. This study aims to provide insights by exploring the extent of corporate governance disclosure practices before and after the reforms in order to understand whether there are improvements in corporate governance practices. A corporate governance index is applied to measure corporate governance practices in Saudi Arabia, and results indicate a consistent improvement in such practices following the reforms. This study is crucial, as there is a lack of empirical evidence concerning the evaluation of the corporate governance reform in 2017. This research also aims to investigate the drivers behind voluntary disclosure practices, specifically the influence of board characteristics, ownership structure, regulatory guidelines, and firm characteristics. This study presents evidence suggesting that the board characteristics, ownership structure, regulatory measures, and firm characteristics influence voluntary disclosure to reduce agency conflicts and increase accountability towards shareholders. The study finds that board diversity, multiple directorships, IFRS adoption, privatisation, and firm size have positive relationships with voluntary disclosure. Agency theory postulates that these corporate governance measures may affect the transparency of the companies and increase the quantity of voluntary disclosure information. This study contributes significantly to our understanding of voluntary disclosure and corporate governance practices in the context of Saudi Arabian firms. The findings of this study will have important policy implications as Saudi market regulators continue to improve the disclosure and corporate governance environment and transparency level in order to attract more local and foreign investment.