1 Introduction
Prior research shows that corporate governance (CG) mechanisms improve the quality and quantity of corporate reporting (e.g. Abdou et al.
2020; Grassa et al.
2020). The audit committee (AC) is considered as one of the main CG mechanisms upon which predicated stakeholders hope in constraining the behaviour of corporate managers (Gendron and Bédard
2006). In our paper, we investigate the impact of AC characteristics on the quality and quantity of forward-looking disclosure (FLD) in the chairman statement. The corporate board of directors (BODs) and its committees, such as AC, are relevant CG mechanisms that oversee managerial actions (Fama and Jensen
1983; Blue Ribbon Report
1999; Smith Report
2003; Lu and Boateng
2018; Jouida
2019). AC members have great control over the information to be disclosed in annual reports to protect shareholders’ interests (Li et al.
2008; Haji
2015; Abad and Bravo
2018).
AC plays a crucial role in fulfilling investors’ needs for clear, relevant, and complete information to reduce information asymmetry and agency cost and align the interests of both shareholders and managers (Samaha et al.
2015). As a result of increased concerns about CG and financial reporting after financial scandals that were witnessed around the world, regulators introduce rules and recommendations to enhance CG practice in general and AC effectiveness in particular to improve financial reporting and disclosure practice to protect shareholder interests (Dezoort et al.
2002; Abad and Bravo
2018; Sultana et al.
2019). We examine the impact of CG reforms on FLD on narrative disclosure practice in emerging economies, with a particular focus on Oman.
Oman provides a unique country context in which to examine the impact of AC characteristics on disclosure quality and quantity. It is the first country in the Middle East region to issue the CG code in 2002. The code was revised in 2016, giving ACs extended roles and responsibilities to perform their tasks through the fulfillment of two main functions, the managerial monitoring, as well as the resource provision function (Capital Market Authority (CMA)
2015). The CG code requires some specific characteristics on AC members, for instance, the majority of AC members are required to be independent, including the AC chair; moreover, at least one member of the AC should be an accounting or financial expert. These characteristics, such as AC independence, AC with financial expertise and AC with multiple directorships may be necessary for the AC members to better undertake their duties of overseeing financial reporting. These duties require a comprehensive knowledge of accounting standards, practices and procedures to aid AC members in overseeing financial reporting. This puts them in the right place to formulate corporate decision on behalf of the board, which are required to be on a timely basis (Pugliese et al.
2009), including decisions related to disclosure practice. However, research on the impact of different characteristics of AC directors on disclosure is scarce (Karamanou and Vafeas
2005; Chan et al.
2013; Wang and Hussainey
2013). Our study contributes to the literature by exploring how AC characteristics affect FLD practice.
The question of what factors affect corporate disclosure practice (quality and quantity) has been extensively examined in the literature. For instance, Hassan and Marston (
2019 p. 42) review disclosure studies and conclude that “Future research might also investigate the interactions between the different dimensions, the different time orientation and the different types of disclosure, their determinants and consequences, and how they compare. For example, how does the quality of concurrent voluntary disclosure compare to the quality of forward-looking voluntary disclosure?”. Prior literature uses disclosure quantity as a proxy for disclosure quality (e.g. Hussainey et al.
2003). In our paper, we test to see if FLD quantity is a good proxy for FLD quality. We also examine the impact of the characteristics of AC members (e.g. AC foreign members, AC female members, AC members with multiple directorships, AC members with share ownership and AC with financial and supervisory expertise) on FLD quality and quantity.
Our paper offers a number of contributions. First, we extend prior research by providing new evidence, using a unique hand-collected data, on how AC characteristics such as multiple AC directorships, AC female members and (AC with financial expertise) positively and (negatively) affect FLD quality. We emphasise how these characteristics provide ACs with specialised resources and comprehensive knowledge, and how these characteristics would enhance FLD. This paper is the first, to the best of our knowledge, to explore the impact of a comprehensive set of AC characteristics on the quality and quantity of FLD in the context of Oman.
Second, while we simply count the number of FLD statements as a proxy for disclosure quantity, we use Beattie et al. (
2004)’s methodology in measuring FLD quality. We analyse four quality dimensions: financial, quantitative, tone and time period orientations. We provide empirical evidence for the widely held, but heretofore empirically, undocumented in the Omani context, that disclosure quantity is not a good proxy for disclosure quality. We introduce new variables to the AC-disclosure literature in the Omani context, such as AC size, AC meetings frequency, AC independence, AC female members, AC multiple directorships, AC with financial expertise and AC foreign members. We also introduce a number of country-specific variables, such as royal members and relative (family) members on the board.
Third, we are the first, to the best of our knowledge, to study a unique sample period from 2014 to 2018, which allows us to analyse the impact of the revised CG code on disclosure practice in financial institutions. We also believe that these institutions are important and worthy of investigation, as these are the pillar of the economy and connected directly to Oman Vision 2040 (
2019).
Finally, the majority of the previous studies have used agency theory to explain the impact of AC characteristics on disclosure practice (e.g. Haji
2015; Abad and Bravo
2018). Adopting one theory might be quite restrictive in explanation of a practice; we believe that there is a need of a set of theories to explain the impact of AC characteristics on FLD quantity and quality. We are adopting agency, resource-dependence and social capital theories, which we believe are not competing but complementing each other.
The paper is organised as follows. Section
2 discusses the institutional context. Section
3 reviews the literature and develops the hypotheses. Section
4 discusses the methodology. Section
5 discusses the findings. Section
6 provides additional analyses and Section concludes.
2 Institutional background
In 2002, Oman was the first country in the Middle East and North Africa region, as well as in the emerging markets to issue the CG code (Baydoun et al.
2013). Different steps were taken by the Omani government to enhance financial reporting (Dry
2003). Moreover, the Omani government adopted many steps to improve the efficiency and effectiveness of the Muscat Securities Market (MSM) and the financial sector for developing the country’s economy. The Omani CG code identifies the characteristics of the BODs, AC, external auditors and internal control, executive management and the related party transactions. The CG code is revised in 2015 and published in 2016. The revised code identifies a principal responsibility of the AC as being the assessment of the integrity of internal controls and a company’s risk management framework (CMA
2015). The AC is also responsible for oversight and timely preparation of financial reports. The code recommends that an AC should have an independent chair, made up of non-executive directors (most of whom are independent) and has a minimum of three members (one of whom should have financial expertise). It also recommends that a minimum of four meetings should be held in a year. It also contains a recommendation that the board should be made up of only non-executive directors who have to be trained in special governance programmes to be able to provide greater protections for minority shareholders. The revised code emphasises the importance of the AC in overseeing and controlling the process of financial reporting and external auditing. The revised code also prevents AC chair from serving on different committees within a company (CMA
2015).
In Oman, the immaturity of legal system in terms of protecting the wealth of minority shareholders, and high level of ownership concentration contribute to weak CG effectiveness (Young et al.
2008; Hashim and Amrah
2016). Therefore, many agency conflicts found among majority and minority shareholders (Dry
2003; Hashim and Amrah
2016), thus weakening the Omani CG system (see for example CMA
2002 and revised CMA
2015). This leads to additional focus on mechanisms for internal and external monitoring, and stresses the importance of the AC in its oversight and control of financial reporting and external auditing processes, while also safeguarding the interests of minority shareholders. Thus, this study uses a comprehensive set of AC characteristics to examine their impact on FLD quality and quantity.
6 Empirical results
6.1 Descriptive statistics
Table
2 presents our descriptive statistics. The analysis shows a significant variation in the FLD. On average, Omani financial companies release about 13 sentences of forward-looking information in their chairman’ statement annually. The maximum number of FLD sentences is 40, with a minimum of 0. The results show how Omani financial institutions are encouraged to disclose FLD in their chairman’s statement. The result is similar to what has been found in Al Lawati and Hussainey (
2020).
Table 2
Descriptive statistics
Quality FLD | 0.71 | 0.15 | 0.00 | 1.00 |
Quantity FLD | 13.26 | 8.45 | 0.00 | 40.00 |
FinQaulity | 0.51 | 0.26 | 0.00 | 1.00 |
Tone | 0.86 | 0.18 | 0.00 | 1.00 |
TimeQuality | 0.65 | 0.25 | 0.00 | 1.00 |
QLYOrientation | 0.80 | 0.19 | 0.00 | 1.00 |
ACMeet | 4.77 | 1.56 | 0.00 | 12.00 |
ACSize | 3.39 | 0.59 | 2.00 | 6.00 |
ACInd(%) | 0.78 | 0.20 | 0.00 | 1.00 |
ACFem(%) | 0.02 | 0.08 | 0.00 | 0.33 |
ACMul(%) | 0.56 | 0.32 | 0.00 | 1.00 |
ACFor(%) | 0.32 | 0.31 | 0.00 | 1.00 |
ACFin(%) | 0.73 | 0.28 | 0.00 | 1.00 |
Big 4 | 0.89 | 0.31 | 0.00 | 1.00 |
TotalAsset (m) | 852.86 | 2,053.89 | 0.40 | 12,544.50 |
ROE% | 3.26 | 29.00 | − 251.20 | 37.41 |
LEV (TD/TA) | 16.34 | 21.72 | 0.00 | 69.58 |
Relatives | 0.46 | 0.50 | 0.00 | 1.00 |
Royal | 0.16 | 0.36 | 0.00 | 1.00 |
The overall result of the current study shows that the mean of FLD quality is 71%, with a minimum value of 0 and maximum of 100%. According to the attributes of FLD quality, we find that the chairman’s statement in Oman is dominated by non-financial, good, long-term and qualitative FLD, which is consistent with previous studies (e.g. Mousa and Elamir
2018; Al Lawati and Hussainey
2020), with an average of 51%, 86%, 65% and 80% respectively for each of the FLD quality dimension as follow: FinQaulity, Tone, TimeQuality and QLYOrientation. This indicates that Omani financial companies are moving forward towards disclosing high quality relevant information to help the shareholders in making appropriate decisions.
In terms of AC characteristics, we observe that on average, the proportion of financial and accounting expertise directors on ACs is 73%. In addition, the average values for ACFor, ACMul and ACFem are 32%, 56% and 2%, respectively. Interestingly, the ACs are highly independent, scoring an average of 78%, with some committees are totally independent, while others are not. Moreover, the average size of AC is 4 members, with up to a maximum of 6 members and a minimum of just 2 members. Furthermore, in relation to AC meetings frequency, there are on average of 5 AC meetings annually, with up to a maximum of 12 and surprisingly with a minimum of 0.
In terms of audit quality, almost 90% of the study sample are audited by one of the Big 4 audit firms. According to the sample classification between family and royal companies, almost half of the sample have relative members on the board and on average, 16% of our sampled companies have royal directors.
6.2 Correlation analysis
Table
3 shows that there is no correlation between the quantity and quality measures of FLD, which confirms the results of the previous study conducted by Alotaibi and Hussainey (
2016), who provide empirical evidence that disclosure quantity is not a proper proxy for disclosure quality. Moreover, we find a positive correlation between FLD quantity and AC meeting, auditor quality, company size, profitability, leverage and ruling members on the board. In addition, a negative association has been found between FLD quantity and relative members on the boards.
Table 3
Pearson correlation matrix
1. Quality FLD | 1 | | | | | | | | | | | | | | |
2. Quantity FLD | 0.014 | 1 | | | | | | | | | | | | | |
3. AC Meet | − 0.080 | .156* | 1 | | | | | | | | | | | | |
4. ACSize | 0.127 | 0.091 | − 0.031 | 1 | | | | | | | | | | | |
5. ACInd (%) | − 0.054 | 0.053 | − 0.022 | 0.012 | 1 | | | | | | | | | | |
6. ACFem (%) | 0.070 | 0.104 | 0.038 | − 0.046 | .172* | 1 | | | | | | | | | |
7. ACMul (%) | 0.051 | 0.107 | .190* | − 0.098 | − 163* | .147* | 1 | | | | | | | | |
8. ACFor (%) | 0.047 | − 0.058 | 0.030 | 0.022 | − 0.070 | − .148* | − .162* | 1 | | | | | | | |
9. ACFin (%) | − 0.075 | − 0.003 | − 0.001 | 0.080 | 0.050 | .153* | 0.028 | 0.029 | 1 | | | | | | |
10. Big 4 | − 0.047 | .332** | .229** | 0.043 | − 0.089 | 0.099 | .248** | 0.026 | 0.030 | 1 | | | | | |
11. LogAsset | .156* | .308** | .387** | 0.057 | − 0.009 | 0.044 | − 0.005 | − 0 016 | .163* | .449** | l | | | | |
12. ROE% | .282** | .184* | 0.099 | 0.100 | 0.043 | 0.032 | − 0.008 | 0.020 | − 0.010 | .369** | .334** | 1 | | | |
13. LEV (TO/TA) | 0.035 | .313** | 0.001 | 0 018 | 0.058 | 0.006 | .163* | 0.118 | .149* | .196** | .173* | 0.102 | 1 | | |
14. Relatives | − .178* | − .168* | − 0.146 | − 0.036 | − 0.024 | − 0.003 | 0.103 | − .279** | − .154* | 0.060 | − 0.095 | 0.109 | 0.016 | 1 | |
15. Royal | .174* | .162* | − 0.026 | 0 081 | .190* | 0.017 | − 0.091 | − 0.133 | 0.026 | .147* | 0.145 | 0.029 | − 0.132 | − .239** | 1 |
Moving to FLD quality, the results show a positive correlation between this variable and company size, profitability and ruling members on the board, while a negative correlation has been found between FLD quality and relative members on the board.
In addition, the correlation among all variables is below 0.8, suggesting that multicollinearity is not a problem (Gujarati and Porter
2009). This is confirmed by the variance inflation factors (VIF) as all variables have VIF less than 10 (Tabachnick and Fidell
2013).
6.3 Regression analysis
Table
4 reports the regression analysis. Model (1) examines the impact of the independent variables on the FLD quantity (Quantity FLD), while, Model (2) studies the influence on the FLD quality (Quality FLD). Both models are significant, with Prob > F values less than 0.01, indicating their validity.
Table 4
Multiple regression analysis
ACMeet | 0.176 | − 0.019*** |
ACSize | 0.989 | 0.027* |
ACInd | 0.774 | − 0.089* |
ACFem | 7.246 | 0.218* |
ACMul | 0.508 | 0.092*** |
ACFor | − 3.472* | 0.033 |
ACFin | − 3.643* | − 0.091*** |
Big4 | 5.152** | − 0.162*** |
LogAsset | 1.132 | 0.039*** |
ROE | 0.016 | 0.002*** |
LEVTDTA | 0.113*** | 0.000 |
Relatives | − 3.493*** | − 0.057*** |
Royal | 1.911 | 0.075*** |
_cons | 4.235 | 0.846 |
Industry dummies | Yes | Yes |
Years dummies | Yes | Yes |
No. of obs | 180 | 180 |
Prob > F | 0.000 | 0.000 |
R-squared | 0.278 | 0.282 |
6.3.1 AC independence
AC independence (ACInd) is shown to have a significant negative relationship with FLD quality at the 0.1 level, however, no association has been found with FLD quantity. We partially accept H1. The results are contradicting agency theory; however, they are in line with the findings of Li et al. (
2012), Al-Maghzom et al. (
2016) and Abad and Bravo (
2018) who report an insignificant association with disclosure practices. According to Haniffa and Cooke (
2002), a possible explanation for this result is that independent directors lack business knowledge to make certain effective actions. In terms of the disclosure process, independent directors may also prevent managers from disclosing verifiable information to prevent the risk of facing a greater accountability and reputation costs (Ajinkya et al.
2005). Therefore, independent directors can have incentives to withhold FLD to minimise these costs, as it is verifiable ex-post. Other possible justification could be that long-tenured independent directors may become closer to managers and, therefore, their monitoring role can be compromised (Vafeas
2003). This could be the case in the Omani context, companies try to hold the same independent members for many years, which could impair their monitoring role by becoming closer to management team. Moreover, in Oman, the independence of directors can be in form but not substantive. It is noted that a large ratio of independent members in listed companies are the main shareholders or executive directors of large shareholders (Al-Hadi et al.
2016). Additionally, the existence of relatives from second level and above as independent members is found in the top management of many companies. These cases may impede the role of independent directors in AC in monitoring and overseeing the processes of financial reporting and internal controls (Raweh et al.
2019).
6.3.2 AC with financial expertise
The study finds that AC members with financial expertise (ACFin) negatively affect FLD quality (at a significant level of 0.01) and quantity (at a significant level of 0.1). H2 has been accepted. The results are consistent with Li et al. (
2012) and Carrera et al. (
2017), who find the same effect on FRQ and Al-Maghzom et al. (
2016) and Buallay and Al-Ajmi (
2019) on the level of disclosure. However, the findings contradict the agency theory as well as Haji (
2015), Abad and Bravo (
2018) and Enache et al. (
2020). This could be explained by the possibility that these crucial directors prevent managers from disclosing verifiable information to avoid the risk of high legitimacy and public pressure costs (Ajinkya et al.
2005). Further Bruynseels and Cardinaels (
2014) suggest that this could be attributed to the connectedness of AC financial experts to the CEOs, which has an adverse effect on oversight quality, which is consistent with negative side of the social capital theory. Moreover, because of the Omani ACs are mostly made up of non-accounting financial experts, this might reduce the power of AC financial experts to influence FLD.
6.3.3 AC size
The analysis shows that there is a positive and significant impact of AC size (ACSize) on FLD quality at the 0.1 level, however, no impact has been found on the FLD quantity. The result partially accepts H3. The findings are also consistent with resource-dependence theory and with prior literature (Ahmad-Zaluki and Wan-Hussin
2010; Li et al.
2012; Haji
2015; Buallay and Al-Ajmi
2019; Raimo et al.
2020). That could be explained that large groups are able to share different knowledge and expertise about the potential benefits of releasing information towards values of a company (Allegrini and Greco
2013). In addition, large groups of ACs in Oman tend to be resourceful and are able to cover individual weaknesses, thus resulting in an enhanced monitoring role especially after considering the AC in Oman as the “keystones” of corporate financial governance following the occurrence of fraudulent financial reporting in recent years (CMA
2015).
6.3.4 AC meetings
We find that the frequency of AC meetings (ACMeet) is negatively influencing in determining the quality of FLD at a significant level of 0.01. However, it is shown to have insignificant association with FLD quantity. The results partially support H4. The results contradict the agency theory and observations by Li et al. (
2012), Haji (
2015) and Buallay and Al-Ajmi (
2019). The results, however, are in line with Mohamad et al. (
2012).
A reasonable explanation suggested by Baatwah et al. (
2015) is that AC members in Oman may be overcommitted by solving directors’ conflicts during meetings, such as related party transactions, and therefore commit less time to addressing their main roles related to FRQ, and external auditor reports. These members are thus less motivated to monitor, discuss and disclose relevant information to stakeholders. This would lead regulators to increasingly monitor the way these meetings are conducting in Oman, and there will be more encouragement from regulators to emphasise more voluntary information disclosures. This will help shareholders to obtain the benefit of information circulated at these meetings.
6.3.5 AC multiple directorship
Our analysis shows that ACs with multiple directorships (ACMul) positively affect FLD quality at a significant level of 0.01, however, no impact has been found on FLD quantity. Hence, we partially accept H5. The result suggests that these members can assist the board in taking the right decision on disclosing high level of FLD, which will be useful to investors in making informed investments decisions (Eulaiwi et al.
2016). Based on social capital theory and resource-dependence theory, which argue that due to the business connections, AC members could gain valuable experience (including governance experience) from serving on other boards, which provides them with the skills and motivations to seek greater assurances in the area of FRQ (Sultana et al.
2019). The results are in line with the agency and resource-dependence arguments as well as Yang and Krishnan (
2005), Eulaiwi et al. (
2016), Gebrayel et al. (
2018) and Al Lawati and Hussainey (
2020). Furthermore, Abdelbadie and Salama (
2019), Trinh et al. (
2020a) and Elnahass et al. (
2020) provide evidence that interlocked directors are very beneficial to companies in terms of the extended knowledge, wider channel networks and broader experience that these members gain from serving on different companies. They also state that these members perceived valuable by the stock markets and investors due to the reputational benefit they have.
The results have implications for nomination committees in Omani financial companies, suggesting that they need to appoint more of these members to ACs due to their positive effect on financial reporting, which can encourage foreign investment and restore confidence in the market through beneficial decisions.
6.3.6 AC female members
A positive impact has been found of AC female members (ACFem) on the FLD quality at a significant level of 0.1. However, no influence has been found on FLD quantity. H6 is accepted partially. The result is consistent with agency theory and with previous studies (Ammer and Ahmad-Zaluki
2017; Gull et al.
2018; Aribi et al.
2018; Bravo and Alcaide-Ruiz
2019). This could be because females have different capabilities than males due to the different socialisation processes for men and women (Srinidhi et al.
2011). Furthermore, female directors may often have to demonstrate remarkable skills to gain managerial positions and corporate-board membership (Bala et al.
2020). Moreover, women are found to be more ethical in their professional life and less likely to engage in immoral activities to gain monetary benefits than men (Kaplan et al.
2009), and hence improve FRQ. The contribution made by Omani women to economy and society has increased in recent years, which is reflected in the fact that the number of working women has been doubled and tripled in the public and private sectors respectively according to the National Centre for Statistics and Information (Bureau
2015). Bureau (
2015) also mentions that Omani women hold an increasing number of top government and business positions.
6.3.7 AC foreign members
Our analysis shows that AC foreign (ACFor) members negatively affect FLD quantity at a significant level of 0.1, however, no impact has been found on FLD quality. Hence, we partially accept H7. This could be because these members come from different settings, and thus might not be fully aware of the Omani system. Moreover, the time and energy spent on cross-border travels are likely to place excessive burden on foreign directors, potentially undermining their incentives and ability to effectively monitor senior management, hence, reducing FRQ (Masulis et al.
2007). In addition, Firoozi et al. (
2016) state that because of few numbers of foreign members serving on AC compared to the local directors, the former directors will have a slight influence in encouraging the boards to disclose high level of voluntary information. Board nomination committees should carefully consider the cost and benefit of hiring foreign members to achieve the best possible outcomes for shareholders by aligning the interests of BODs with shareholders’ interests, and ensuring the disclosure of all relevant information required for making beneficial decisions.
6.3.8 Control variables
Our analysis shows that company size (LogAsset), profitability (ROE) and leverage ratio (LEVTDTA) are shown to be positive and significant at the confidence level of 99% in relation to FLD practice, suggesting that large, profitable, and highly geared companies release more FLD. The results are consistent with Liu (
2015) and Elgammal et al. (
2018).
We also find a positive impact of auditing (Big4) on FLD quantity at a significant level of 0.05. This is consistent with Al-Hadi et al. (
2016) who find same effect on voluntary disclosure. However, a negative influence is found on the quality level of FLD at a significant level of 0.01. This could be due to recent international auditors’ high-profile scandals in Oman, such as KPMG and Moore Stephen. These international auditors could influence companies on withholding FLD to avoid the increase in legitimacy costs resulting from their failure in meeting what they have promised.
We also find that family directorship (Relatives) is an impediment to both the quality and quantity of FLD, as evidenced by the negative and statistically significant coefficients for this variable at the 0.01 level. The results are consistent with those of prior research (e.g. Ali et al.
2007; Al-Hadi et al.
2016; Eulaiwi et al.
2016). Moreover, our paper finds that companies with ruling family members (Royal) are positively affecting the quality of FLD at a significant level of 0.01, which contradicts the results of Al-Hadi et al. (
2016). Our result is consistent with previous studies (e.g. Dicko et al.
2020). We suggest that royal family members provide ACs with specific human capital and complement the knowledge and abilities of the other directors by having insider information, which leads to an improvement of disclosure quality by providing more FLD in Oman. To conclude, family and royal members are considered two-edged sword. It is a valuable resource for connected companies, but it comes at a cost of higher agency problems (Belghitar et al.
2019).
8 Conclusions
We examine the impact of AC characteristics on FLD over a 5 year period (2014–2018). This period relates to “before and after” significant policy updates to the CG code in which the AC function is being exercised. We find that AC characteristics affect FLD practices.
We find a significant positive relationship between AC interlocked members, AC size and AC female members and FLD quality. Conversely, the findings also suggest that AC independence, the frequency of AC meetings and ACs with financial expertise negatively affect FLD quality. It is also evident that FLD quantity is negatively affected by AC foreign and financial expertise.
These obtained insights contribute to expand previous CG and voluntary disclosure research in three significant ways. First, the study contributes to the body of knowledge by expanding the literature relating to AC characteristics and FLD, which provides a set of new characteristics (e.g. AC female members, foreign members on AC, AC share ownership, AC interlocked members and AC financial and supervisory expertise) that have been examined for the first time in the Middle East.
Second, using the theoretical framework as a basis for explaining how each attribute of AC members could affect the level of FLD, our paper contributes to the literature on AC- disclosure by theoretically justifying and empirically examining the implications of three theories–agency, resource-dependence and social capital–with respect to FLD in the financial sector, with its attendant heavy regulation and strict supervision. These theories combine fruitfully with valid arguments to explain such phenomena.
Third, we contribute to the methodology by measuring the quantity and quality of FLD in the Omani context. We follow Beattie et al.’s (
2004) quality framework in measuring the quality of FLD by considering four attributes: financial, quantitative, disclosure tone and time period orientations. Interestingly, we also add to the body of disclosure literature that there is no relationship between the quantity and the quality of FLD. Each measure represents its own meaning of disclosure; therefore, disclosure quantity should not be used as a proxy for quality. Furthermore, our study differs from the previous studies related to disclosure by conducting research on the financial sector rather than non-financial. Given that developed countries have formed the basis of most previous studies related to AC-disclosure, this research also extends this issue into developing countries, where different market structures and regulations exist.
A number of interesting implications can be drawn from the findings of this study for regulators and academics. For regulators, the findings suggest that the role of ACs can be extended to ensure the quality of voluntary disclosure, and not just the financial reporting process. Regulators in Oman should, therefore, base on the recent regulatory changes and encourage ACs to ensure the quality of the overall reporting process to include different aspects of FLD, such as financial orientation, tone orientation, time orientation and quantitative orientation. These findings also have direct implications for the selection of AC members with specific characteristics to improve FLD quality, as the disclosure of such information is a mechanism with which to reduce information asymmetry in capital markets and to work towards the Oman Vision 2040 strategy.
Contrary to the commonly held view that an AC’s function is to detect financial reporting misstatements, this study’s findings show, for accounting academics and educators, that the role of the AC extends to FLD. This implies that ACs can play an integral role in recent calls for comprehensive corporate reporting. In terms of theoretical implications, the findings seem to support the grounds of agency, resource-dependence and social capital theories in regulatory reform settings. Agency theory suggests that the AC function offers a monitoring role that can potentially enhance the quality of corporate reporting, with resource-dependence theory suggesting that different AC characteristics bring specific and valuable resources to a firm and contribute to disclosure strategies. Social capital theory suggests that the business connections of AC members with different companies provide confidential information, which could help in strengthening FRQ. These theories, originally found applicable in a widely held ownership structure setting, explain the disclosure and governance practices in closely controlled business environments such as in Oman.
Despite the practical implications, there are a number of limitations in relation to the study. Our sample is considered small, due to the small size of Omani financial institutions. We focused only on the Omani context, which limits generalisability as disclosure practices may be affected by company type, industry and institutional context. Furthermore, we are aware of the effect that other board composition variables (e.g. board size and meeting) may have on disclosure quality.
Given the novelty of our study, we believe that our findings offer opportunities for future research. This research could be extended by analysing different institutional contexts. Future studies could also examine the impact of AC characteristics on voluntary risk disclosure, the cost of equity, credit rating, trade credit and companies’ performance. In addition, the Omani revised CG code prevented AC chair from being a member of any other committee within a company. However, it sets out the requirement for nomination and remuneration/compensation committees, which resulted in overlapping members across these committees. Further research could examine whether overlapping AC membership improve the FLD quantity and quality and which type of overlapping matters. Finally, it could be interesting to examine the impact of performance on FLD tone in financial institutions as this would help stakeholders to know whether managers are providing truthful explanation or engaging in impression management.
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