Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange

ADIAC-00252; No of Pages 15 Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

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Advances in Accounting, incorporating Advances in International Accounting

Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange Narendra Sharma ⁎ 222 Williams Hall, Department of Business and Economics, Elizabeth City State University, 1704 Weeksville Road, Elizabeth City, NC 27909, United States

a r t i c l e

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Available online xxxx Keywords: Banks and Financial Institutions Corporate Governance Disclosure Nepal Stock Exchange Nepal Rastra Bank Listed Companies

a b s t r a c t Corporate governance disclosure has seen renewed interest by researchers, policy makers, and regulating bodies internationally, but has remained only an emerging construct in Nepal. The primary purpose of this study was to assess the extent of mandatory corporate governance disclosure in Nepal. The secondary purpose was to examine the associations between the extent of disclosures and five firm-specific characteristics. The third purpose was to assess the significant determinants to explain variations of disclosures. The study's sampling frame consisted of 125 banking and finance companies listed on Nepal Stock Exchange. A sample size of 59 companies was randomly selected. On average, companies disclosed 91% of items in the mandatory category, 48% in the voluntary category, and 74% in total. A significant positive correlation existed between governance disclosures and firm characteristics of size, leverage, and foreign ownership. There was no significant relation between governance disclosure and listing age or profitability. With regards to determinants, bank size was a significant predictor of governance disclosure. Three regression models for total disclosures (DScore), mandatory disclosures [DScore (M)], and voluntary disclosures [DScore (V)] with three predictors of size, leverage, and foreign ownership were significant and explained 47%, 24%, and 54% variations respectively in total, mandatory, and voluntary corporate governance disclosures in Nepal. This research provides guidelines to policy makers and standard setters for developing future regulations and accounting policies. © 2014 Elsevier Ltd. All rights reserved.

1. Introduction Mandatory disclosure is a regulatory tool and is the minimum framework of transparency (Brown, Goetzmann, Liang, & Schwarz, 2008). What is being disclosed needs to be authentic, attested, and based on generally accepted accounting principles and standards issued by accounting bodies. Disclosure can enable investors to avoid operational risk by ensuring a framework of transparency (Brown et al., 2008). Limited transparency puts demands on corporate governance systems to ease moral hazard problems (Bushman & Landsman, 2010) and the failure to disclose would signal the investors to assume the worst. Chen, Chung, Lee, and Liao (2007) concluded that poor corporate governance was usually accompanied by poor disclosure practices. As a result, poor governance induced higher levels of asymmetric information risk, which ultimately reduced the market liquidity of the stock (Chen et al., 2007). All these significant outcomes were crucial in keeping an efficient allocation of resources on the stock market (Arvidsson, 2011). Hence, disclosures are mandated by law as a regulatory mechanism so as to mitigate the agency problems arising as a result of separation of ownership and management of companies (Jensen & Meckling, 1976; Mahoney, 1995).

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Financial companies, whether domestic or international, are required to have appropriate levels of corporate governance standards owing to their sensitive role in the economy to maintain credibility in the marketplace (Abraham, Deo, & Irvine, 2008), to secure their extensive dependence on depositors for capital (Boolaky & Thomas, 2010), and to maintain depositor confidence (Hossain & Reaz, 2007). However, the issue of corporate governance and its disclosure in the banking industry has not received the same level of attention in the research as other sectors (Turlea, Mocanu, & Radu, 2010) as the overall number of studies concentrating on governance-related disclosures is limited (Hooghiemstra, 2012). The exclusion of banks and financial institutions in many of the current international disclosure research and lack of recognition of countries like Nepal in such studies have further accentuated the problem (Adelpo, 2011; Akhtaruddin, Hossain, Hossain, & Yao, 2009; Arcot, Bruno, & Faure-Grimaud, 2010; Donnelly & Mulcahy, 2008; Kelton & Yang, 2008; Maingot & Zeghal, 2008; Thapa, 2008). Banks and financial institutions have been excluded in previous research because they differ substantially from firms in other industries (Akhtaruddin et al., 2009; Arcot et al., 2010; Donnelly & Mulcahy, 2008; Kelton & Yang, 2008; Maingot & Zeghal, 2008). Hence, a dedicated study of this kind with only banks and financial institutions' disclosure will contribute to the literature without diluting the results. Moreover, this study can be considered timely owing to the recent media coverage about the banking financial

http://dx.doi.org/10.1016/j.adiac.2014.09.014 0882-6110/© 2014 Elsevier Ltd. All rights reserved.

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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crisis and the central bank official's opinion that “bad corporate governance” (Post Report, 2011) being the largest problem of the banking sector in Nepal. Internationally, Kirkpatrick (2009) argued that the global “financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements” (p. 1). Pokhrel (2007) and Asian Development Bank (ADB) (2010) had raised similar concerns about governance issues prevalent in listed companies, in Nepal. Pokhrel (2007) stated that concentrated ownership structure and family-dominance were major constraints in implementing good corporate governance in Nepal. There are many potential negative consequences of such trends. First, it may impact the quality of earnings and firm value of companies (Ammann, Oesch, & Schmid, 2011). Second, the users may distrust the corporate disclosures (Bhuiyan & Biswas, 2007) because weak corporate governance and lack of transparencies are associated with an increased likelihood of adverse financial reporting (Carcello, Hermanson, & Ye, 2011). Third, weakens the stock market, brings about economic uncertainties, compromises investor protection, results in poor performance, and ultimately culminates into greater intervention by the government (Tsamenyi, Enninful-Adu, & Onumah, 2007). Similarly, companies may engage in selective disclosures by only disclosing those sets of indicators that would put them in the most favorable light (Sharma, Bejou, & Bejou, 2012). The primary purpose of this non-experimental quantitative study was to assess the extent of mandatory corporate governance disclosure in Nepal in compliance to the requirements mandated by the disclosure regime there. A secondary purpose was to examine the extent of corporate governance disclosures and its relation with five firm-specific characteristics for banks and finance companies listed on Nepal Stock Exchange of Kathmandu, Nepal. The five firm-specific characteristics examined were: (a) size, (b) profitability, (c) leverage, (d) listing age, and (e) extent of foreign ownership of the bank. Considering the significant associations between the test variables, the study pursued further inquiry to identify significant determinants to explain variations in disclosure by examining associations between the criterion variables [DScore, DScore (M), and DScore (V)] and predictor variables of corporate size, profitability, and the extent of foreign ownership (Cooper & Schindler, 2008). Agency theory provides the theoretical framework for this study with its structural platform for disclosure decisions (Kelton & Yang, 2008). This theory builds on the separation of ownership from control, manifested in most of the corporate forms of business. Jensen and Meckling (1976) popularized the theory, and they defined agency relation as a “contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some services on their behalf” (p. 5). Based on this relationship, Jensen and Meckling (1976) posited that the agent might not always act in the best of interests of the principal. Therefore, the principal incurred monitoring costs to limit the activities of the agent. On the other hand, agents incurred “bonding expenditures” to assure the principals. Hence, agency costs are generated by such contractual arrangements between the owners and top management of the corporation (Jensen & Meckling, 1976). Furthermore, Harford, Mansi, and Maxwell (2008) emphasized that “any discussion of the efficacy of corporate governance mechanisms … must address this issue” of agency conflict between the principal and agent (p. 535). Ntim, Opong, and Danbolt (2012) concurred that the disclosure of corporate governance practices was one of the key ways of resolving such agency conflicts. In concert with such views, there was an emerging international affirmation supporting the existence of an agency conflict of interest between owners and management (Henry, 2010). Henry (2010) suggested that the corporate governance disclosure might reduce the agency conflicts as a result of reduced information asymmetry. Similarly, Armstrong, Guay, and Weber (2010) viewed governance mechanisms as a set of contracts between the management and shareholders and said that

information asymmetry played a role in mitigating agency conflicts between these parties. Greater compliance with the index comprising of the code of governance practice in Australia seemed to reduce the level of agency cost of Australian listed firms (Henry, 2010). Based on these premises and others, agency theory is a viable theory to study disclosures, especially by corporations. At times, regulation, an unconfined feature of banking, changes the boundaries of the agency relation by introducing a third party, the regulator (Islam, Islam, Bhattacharjee, & Islam, 2010). This further generates additional information asymmetries and associated agency problems. This causes a typical concern that any “moral hazard” brought about by regulation is a more forceful indicator of poor governance than is the simple conflict of interest anticipated between the principals (owners) and agents (managers) of commercial banks (Islam et al., 2010). Liberalization of the banking sector has intensified the moral hazard since it has allowed banks to undertake greater risks and the regulator, usually the central bank, will also share such risks as a “lender of last resort” (Islam et al., 2010). Boyd and de Nicoló (2005) provided another perspective of agency theory relating to the financial industry. Banks are “agents” for the depositors but are “principals” for their borrowers (Boyd & de Nicoló, 2005). These additional dimensions of agency theory and the banking industry's role in the recent economic upheavals justify the financial industry's selection as a sample (Bonsón & Flores, 2011) and agency theory as the theoretical foundation to study companies that are exposed to both governance contracting and debt contracting (Armstrong et al., 2010). The study was important because corporate governance disclosure is considered a core component of corporate strategy for every public corporation especially in the current global context. According to Nicoló, Laeven, and Ueda (2008), corporate governance reform was one of the top priorities on the agenda of policy makers in many countries around the world. Bauwhede and Willekens (2008) were of the opinion that waves of scandals involving large corporations like Enron, Worldcom, and Parmalat in the most developed countries of the world had forced the business, and political leaders to make governance as one of their priorities to reinstate the public trust in capital markets. Cheung, Jiang, Limpaphayom, and Lu (2008) believed “improved corporate governance practices will lead to value maximization and provide an incentive for corporate managers to improve the quality of corporate governance practices” (p. 461). This research provides significant guidelines to policy makers and standard setters for drawing up future regulations and accounting policies for listed companies in Nepal. The fact that there have been no studies in this area in the Nepali context, this research, will make a significant contribution in generating interest in the area for policy makers, companies and various users of company information. The research makes substantive contributions towards theory building by testing the predictions of agency theory in the financial sector. The research also provides empirical evidence, using correlation analysis and subsequently by multivariate analysis, about the potential determinants of varying levels of disclosure for banks and finance companies in a developing country like Nepal. There are many reasons that Nepal's disclosure environment provides a unique opportunity to conduct the study. First, Nepal has a unique geopolitical situation, sandwiched between two giants— India and China. Second, Nepal is still experimenting with newfound democracy coming out of a long-drawn civil strife. Third, its capital market is still at its infancy; its regulatory environment is less matured and still developing. Fourth, the majority of listed companies on its exchange (NEPSE) are family-owned companies, and they have their own interpretations of governance. Hence, Nepal has its own distinct characteristics that influence the determinants and extent of disclosures made by listed companies. Therefore, this study provided a unique opportunity to expand the current body of knowledge about the extent of disclosure, determinants of such

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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disclosure, and the benefits of corporate governance mechanisms in a developing country setting.

There are several provisions relating to disclosure especially the sections 76, 108 and 109 of the companies Act. The main gist of the provisions as identified by Sharma (2013) are as follows:

2. Background

1. All public companies are to hold their annual general meeting within 6 months after the expiry of its financial year (Sec 76)1; 2. All companies are to maintain their accounts in either of two languages: Nepali or English, in accordance with the double entry system and in consonance with applicable accounting standards and other directives by monitoring agencies. It is the responsibility of management to maintain such books of accounts and their records (Sec 108). 3. Balance sheet, profit and loss account, and a cash flow statement are the components of the financial statements, and they are to be finalized at least 30 days prior to holding annual general meeting of the shareholders (Sec 109). 4. A report by the board in the form of Management Discussion and Analysis (MDA) — is required for companies having a paid-up capital of 10 million (NRs) or more or with an annual turnover of 10 million (NRs) or more. The report is to include:

Nepal is a small landlocked country in South Asia sharing borders to the north with China and to the south, east, and west with India. The area of Nepal is 147,181 km2 and the population was about 26 million as per latest census record (Nepal Government [NG], 2012). The official currency is Nepali Rupees (NRs.), but the Indian currency Rupee (Rs.) is also acceptable under a dual currency agreement (Rajan, 2010). In 1990, the popular peoples' movement led to democracy and constitutional monarchy in Nepal. However, the political turmoil continued till the signing of Comprehensive Peace Agreement (CPA) in 2006 and building a democratic state based on the rule of law began (Mayer-Rieckh, 2012). Against that backdrop, in spite of the Nepali peoples' continued engagement in redress and accountability, Kaufmann, Kraay, and Mastruzzi (2012) reported the following governance indicators for 2011 in a scale of − 2.5 (weak) to 2.5 (strong): (a) accountability score was −0.53; (b) political stability was −1.55; (c) the government effectiveness was −0.79; (d) the regulatory quality was −0.72, and (e) the rule of law score was −0.99. However, World Bank's doing business ranking for the same period was 107 (in a ranking scale of 1–183) as compared to the South Asian average of 117, ranked higher than India and Bangladesh. The ease of starting a business ranking was 100 against the regional average of 23 in the rank of 1–183. The extent of director liability, strength of investor protection, and the extent of disclosure indices were 1, 5.3, and 6 respectively in a scale of 0–10 (World Bank, 2012). At the micro-level, the disclosure regime applicable to listed companies in Nepal comprised of (a) accounting standards issued by Accounting Standards Board (ASB) of Nepal, (b) requirements of Securities Board of Nepal (SEBON) based on Securities Act 2006, (c) provisions of Companies Act 2006, Banks and Financial Institutions Act 2006 (BFIA), (d) listing requirements of the Nepal Stock Exchange (NEPSE), and (d) the directives from Nepal Rastra Bank (NRB) — the Central Bank of Nepal (Sharma, 2013). The banking and financial companies had a two-pronged regulatory regime requiring them to make disclosures: one by their specific regulator, Nepal Rastra Bank, and another as a public company. All banks and financial institutions registered as public companies are required to obtain a license from Nepal Rastra Bank to conduct banking business (Nepal Rastra Bank [NRB], 2010). Nepal Rastra Bank regulates the banking sector in Nepal. The Banks and Financial Institutions Ordinance initially as an interim measure in 2005 provided the basis for regulation after being ratified by the parliament in 2006. Although, the Act has twelve chapters, the ninth chapter is the most pertinent chapter for this paper as it deals with the accounts, records, information, and reports. This act requires all registrants to follow double entry system of accounting and prepare their financial statements in the format specified by Nepal Rastra Bank (Section 59). The companies have to get their financial statements audited within five months after the end of the fiscal year. The financial statements are to be signed at least by two directors, chief executive officer, and the auditor. The auditors, upon completion of the audit, submit the audit report to Nepal Rastra Bank as well as the concerned company (Nepal Government [NG] 2006a, 2006b). Another significant basis for mandatory disclosure was the revised Companies Act 2006. The new Companies Act came into effect from October 9, 2005 as an ordinance, ratified by the rejuvenated parliament in the year 2006 as Companies Act 2006. A major shift in the law was its orientation towards good corporate governance, improved status of the shareholders, and a better framework for financial transparency of the company affairs (Nepal Government [NG], 2006a; Shrestha, 2006).

a. review of the transactions of the previous year; b. impact of national and international situation on the transactions of the company, c. achievements during the current year and the outlook of the Board of directors; d. industrial or business relation of the company; e. alterations in the board of directors and reason thereof; f. major factors effecting the transactions of the company; g. comment of the board of directors on the remarks if any, on the auditor's report; h. amount of dividend recommended for distribution; i. the number of forfeited shares, if any, the face value of the shares forfeited, the total amount forfeited, and the amount received on forfeited shares and the details of amount refunded, if any; j. progress report of the company and its subsidiary; k. the principal transactions completed by the company and its subsidiary including any material changes in transactions; l. the information provided to the company by the substantial shareholders; m. the details of shares held by directors and officials in the previous financial year and the details of information received from them regarding their involvement in transactions in the company's shares; n. the details provided in relation to the personal interest of any director and their close relative in agreements entered into with the company in the previous year; o. if the company has purchased its own shares, the reasons for such purchase, number of shares so purchased, face value of the shares purchased and payment made by the company for such purchase; p. information about the internal control system and details of such system; q. the total management expenses in the previous year; r. names of the members of the audit committee, and any remuneration, allowances and facilities received by them; s. the amount due to be paid to the company by a director, managing director, chief executive, substantial shareholders or their close relatives or firms, company, corporate body in which they are involved; t. the amount of remuneration, allowances and facilities paid to the director, managing director, chief executive and officers; u. the amount of unclaimed dividend by the shareholders; v. details of purchase or sale of properties; w. details of transactions carried on between associated companies; 1 The numbers within the parenthesis refer to relevant section numbers of the Companies Act 2006.

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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x. the reports are signed by the chairperson and at least one director; and y. comparative figures for two years in all the financial statements (Sec 109). In view of these mandatory requirements for accounting and disclosure by companies in Nepal, this study bridges the apparent gap in the available literature regarding the compliance level. 3. Literature review Banking companies are required to maintain appropriate levels of corporate governance standards owing to their sensitive role in the economy to uphold credibility in the marketplace (Abraham et al., 2008); their extensive dependence on depositors for capital (Boolaky & Thomas, 2010), and the need to maintain depositor confidence (Hossain & Reaz, 2007). Furthermore, the banking industry's role in the recent economic upheavals (Bonsón & Flores, 2011) has only accentuated the role of disclosure by banks. However, there are few disclosure studies (Barako & Brown, 2008; Hossain, 2008; Maingot & Zeghal, 2008) involving banking and finance companies since most of the past disclosure research in other countries had excluded banks and financial institutions from their samples (Arcot et al., 2010; Chow & Wong-Boren, 1987; Cooke, 1989) and completed in developed countries with mature stock markets that may have different determinants and features of the disclosure (Lan, Wang, & Zhang, 2013). Hossain and Reaz (2007) investigated the extent of disclosures made voluntarily by 38 listed banking companies in India. The extent of disclosure by these banks was measured using a disclosure index, scored dichotomously. Based on the disclosure score and company characteristics, the association between them was empirically tested (Hossain & Reaz, 2007). The investigation showed that Indian banks on an average disclosed about 35% of the voluntary disclosure index and the size and assets-in-place variables were significant predictors of such disclosures. However, the other variables including age, diversification, board composition, exchange listings, and complexity of business were not significantly associated with the level of voluntary disclosures by banks (Hossain & Reaz, 2007). In contrast, Hossain (2008) reported a lower level of voluntary disclosures (25%) by banks in India and found board composition to be a significant determinant of disclosure. Hossain (2008) studied the extent of mandatory and voluntary disclosures by banking companies listed on Bombay Stock Exchange and National Stock Exchange (both in India), and used a disclosure index with 184 items of which 101 were classified as mandatory and 83 items in the voluntary category. The banks in India were disclosing, on an average, 88 items in the mandatory category and 25 items, in the voluntary category. Size, profitability, board composition and market discipline variables were found to be significant predictors of disclosure, but age, complexity of business, and assets-in place were insignificant in explaining the levels of disclosure by banks in India (Hossain, 2008). Maingot and Zeghal (2008) studied the disclosure of governance information by banks in Canada. The results of the study showed that bigger firms made significant disclosures and investors were better-off referring to annual reports to find full and complete information on corporate governance (Maingot & Zeghal, 2008). However, these studies (Hossain, 2008; Hossain & Reaz, 2007) did not address the specific issue of corporate governance disclosures in the banking sector. Maingot and Zeghal (2008) did provide insight into governance disclosures by banks, but their sample size was restrictive and too small to be able to generalize. Similarly, there were areas of controversies and unanswered questions in the existing knowledge with regards to determinants of corporate disclosure. Size-based regulation and the roles of firm size on compliance with disclosure have continued to be debated (Ettredge, Johnstone, Stone, & Wang, 2011). The mere size of a company placed them under greater public scrutiny (Liu & Taylor, 2008; Tower, Vu, &

Scully, 2011) and, thus, tended to make more disclosures (Reverte, 2009; Tang, 2010) because they adopted more stringent disclosure regimes (Hermalin & Weisbach, 2012). In the US, Securities and Exchange Commission has scaled down its disclosure requirements “because of the lack of capacity” for smaller firms (Securities & Exchange Commission, 2008) that has been continued, with Dodd– Frank Act providing an exemption for smaller firms from section 404 requirements of Sarbanes Oxley Act of 2002. In Nepal, as discussed earlier, the new Companies Act has exempted firms with less than 10 million (in NRs) assets or turnover to prepare and disclose a Management Discussion and Analysis. However, it is unclear whether a bank size is an important determinant for mandatory disclosure as all banks whether small or big is regulated with same perspectives by the regulators. The proponents of agency theory theorized a positive correlation between profitability and disclosure (Gallery, Cooper, & Sweeting, 2008), which were confirmed by some researchers (Aerts, Cormier, & Magnan, 2007; Akhtaruddin et al., 2009; El-Gazzar, Fornaro, & Jacob, 2008; Li, Pike, & Haniffa, 2008). But, on the other hand, Ho and Taylor (2007) reported a negative relation between disclosure and profitability. Furthermore, an insignificant impact of profitability on the levels of disclosure was found (Aljifri, 2008; Ferrer & Ferrer, 2011; Mia & Al-Mamun, 2011). Hence, there are three different perspectives using the same theory. Another area of the controversy was the relation between leverage and disclosure. The proponents of agency theory proposed higher incentives to disclose information by leveraged firms to reduce agency costs (El-Gazzar et al., 2008; Kang & Gray, 2011). Other researchers had proposed the same, arguing that higher leveraged firms had higher agency costs and hence, good disclosure levels were used to reduce agency costs and cost of debt by reducing information asymmetries with extensive disclosures (Bauwhede & Willekens, 2008; Lopes & Rodrigues, 2007). However, the researchers reported refutation of their initial hypothesis as they found that the levels of disclosure were not affected by the agency costs of debt or leverage (Aly, Simon, & Hussainey, 2010; Bauwhede & Willekens, 2008; Lopes & Rodrigues, 2007; Reverte, 2009; Wang, Sewon & Claiborne, 2008). On the other hand, Ho and Taylor (2007) reported a negative association between disclosure and leverage, though the relation was not statistically significant. At the same time, some researchers have reported a positive and significant relation between leverage and disclosure (El-Gazzar et al., 2008; Tang, 2010; White, Lee, & Tower, 2007). Leverage is a crucial firm-specific characteristic for banks and financial institutions since it is believed that excessive leverage by banks has led to the financial crisis as it allows banks to maximize profits beyond its direct investment of the funds (D'Hulster, 2009). In a note prepared for the World Bank, D'Hulster (2009) suggested that leverage ratio could be an important tool to assess the risk of excessive leverage build-up by banks. Lopes and Rodrigues (2007) explained that the foreign ownership of companies was generally believed to influence the corporate governance structures and disclosures. The more a company has ties with the international community, the larger the need to disclose to its stakeholders signaling that it is a well-managed company (Lopes & Rodrigues, 2007). Ananchotikul and Eichengreen (2009) reported significant improvements in corporate governance, in companies with foreign investors in several countries with those investors lobbying for reform. Companies operating in more than one geographical area are also required to have better managerial control systems owing to their diverse operations (Cooke, 1989). The proportion of foreign ownership was found to be a significant predictor of voluntary disclosures (Al-Akra, Eddie, & Ali, 2010; Ananchotikul & Eichengreen, 2009; Wang, Sewon & Claiborne, 2008). Donnelly and Mulcahy (2008) examined the relation between corporate governance characteristics (board structure and ownership) and voluntary disclosures in Ireland. No evidence was found that ownership structure was related to voluntary disclosure. Similarly, there is an eminent lack of data whether foreign ownership

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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impacts mandatory disclosure of corporate governance in Nepal or not. Although, there were only few (15%) companies with foreign ownership and Nepali stockholders owned the majority of the companies (85%) in the financial industry of Nepal, the finding of its impact on disclosure can be meaningful for policy decisions. Li, Mangena, and Pike (2012) concluded that younger firms that were newly listed on the stock exchange might have higher information asymmetry. Hence, they may have greater needs for disclosure to reduce skepticism of potential investors and boost confidence of the existing investors (Gandia, 2008; Li et al., 2008). Furthermore, the length of the company's listing on the stock exchange may be associated with more disclosure as the older companies were required to have established procedures for disclosures (Kang & Gray, 2011). Considering the mixed results and controversies surrounding the impact of firm characteristics on the levels of disclosures, this study utilizes the opportunity to test the impact of bank size, profitability, leverage, listing age, and foreign ownership on corporate governance disclosures in a developing country like Nepal. 4. Research methodology and design This study utilized the quantitative and non-experimental correlation design using archival cross-sectional data for a single fiscal year in Nepal i.e. July 15, 2009 to July 16, 2010 providing a snapshot for that one point in time (Cooper & Schindler, 2008). A cross-sectional study was preferred because the purpose of the study was to provide a snapshot of the disclosure for a period so that it could serve as a benchmark for future research. 4.1. Research hypotheses The following seven hypotheses were tested by the study using agency theory (Henry, 2010; Jensen & Meckling, 1976; Kent & Stewart, 2008; Tsamenyi et al., 2007; Yi, Davey, & Eggleton, 2011) in view of the study objectives. The selection of variables was based on the propositions of agency theory regarding their associations. A positive association between corporate size and disclosure is predicted by the proponents of agency theory since larger companies disclose more information to reduce information asymmetry in view of managers being more informed than the stakeholders (Álvarez, Sánchez, & Domínguez, 2008). Similarly, it is argued that the managers of more profitable companies use disclosure to communicate their success to maintain their existing positions and compensation packages (Gallery et al., 2008). Likewise, managers of leveraged companies minimize the monitoring costs by engaging in public disclosures (Jensen & Meckling, 1976) and recently listed firms may have greater needs for disclosure to reduce skepticism of potential investors and boost confidence of the existing investors (Gandia, 2008; Li et al., 2008). At the same time, foreign ownership in a company disperses ownership structure and creates an information-gap, which increases the demand for disclosure (Tsamenyi et al., 2007). Hence, the advocates of agency theory suggest that companies that are large, profitable, leveraged, aged, and associated with foreign firms disclose significantly greater information. They do that to reduce the agency costs, to avoid political and litigation costs, and to reduce information asymmetry between the principals and agents in the corporate form of business (Álvarez et al., 2008; Aly et al., 2010; Armstrong et al., 2010; Bauwhede & Willekens, 2008; Gallery et al., 2008; Gandia, 2008; Henry, 2010; Islam et al., 2010; Jensen & Meckling, 1976; Kang & Gray, 2011; Kent & Stewart, 2008; Li et al., 2008; Tang, 2010; Tsamenyi et al., 2007; Wang, Sewon & Claiborne, 2008; Yi et al., 2011). However, all these predictions have not been confirmed in the studies done in the past. The first hypothesis assessed the compliance level to corporate governance disclosure regimes in Nepal. Empirical studies that have examined the mandatory disclosure compliance as such are limited (Al-Akra

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et al., 2010). Arcot et al. (2010) examined the effectiveness of the UK Combined Code of Corporate Governance using a content analysis methodology and reported overall compliance of 77% in 1998 and 91% in 2004. Alanezi and Albuloushi (2011) reported an average mandatory disclosure compliance level of 72% in Kuwait. Similarly, Hossain (2008) found banks in India disclosed 88% of items in the mandatory category. In view of these findings, a high level of compliance was expected in Nepal because studies in other countries had shown that the establishment of disclosure regimes enhanced compliance levels (Al-Akra et al., 2010). H1. Banking companies engage in corporate governance disclosure, and there is a high-level of compliance with mandatory disclosure requirements placed by the disclosure regimes in Nepal. The second hypothesis tested associations between the corporate size and the levels of corporate governance disclosure by banks and finance companies in Nepal. A positive association between corporate size and disclosure was anticipated; on the basis of agency theory as larger companies disclose more information to reduce information asymmetry since they are exposed to agency problems typically found in companies with separate ownership and management (Álvarez et al., 2008). Thus, larger companies were expected to engage in more corporate governance disclosure as compared to the smaller ones. H2. The extent of corporate governance disclosure is higher for larger listed banking companies in Nepal. The third hypothesis tested associations between the current corporate profitability and the levels of corporate governance disclosure by banks and finance companies in Nepal. Based on the agency theory, it is reasoned that the managements of more profitable companies use disclosure to reinforce their existing positions and compensation packages (Gallery et al., 2008). Prior researchers suggest three different levels of findings. Hence, the hypothesis that profitability provides the basis for higher levels of disclosures is tested. H3. More profitable listed companies engaged in higher levels of corporate governance disclosure. The fourth hypothesis tested associations between the extent of debt used in the management of the company and the levels of corporate governance disclosure by banks and finance companies in Nepal. Based on the agency theory, it is argued that the managements of more leveraged firms minimize the monitoring costs by engaging in public disclosures (Jensen & Meckling, 1976). Hence, leveraged firms have higher incentives to disclose information to reduce agency costs (Kang & Gray, 2011) and, therefore, the two variables may be significantly associated. The following hypothesis is proposed to test the possibility of leveraged firms making higher-levels of disclosures in order to reduce agency costs. H4. The extent of corporate governance disclosure for leveraged companies was higher than other listed companies. The fifth hypothesis tested associations between the corporate listing age and the levels of corporate governance disclosure by banks and finance companies in Nepal. The length of the company's listing on the stock exchange may be associated with more disclosure as the older companies have established procedures for disclosures (Kang & Gray, 2011). This leads to the fifth hypothesis. H5. The older companies listed on NEPSE were likely to engage in higher levels of corporate governance disclosure.

The sixth hypothesis tested the associations between the extent of foreign ownership and the levels of corporate governance disclosure by banks and finance companies in Nepal. Broberg, Tagesson, and Collin (2010) explained that the presence of foreign ownership will

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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increase the heterogeneous nature of ownership structure in a company which may not only lead to information asymmetry, but also increased agency costs. The demand for disclosure, and monitoring costs, increases when ownership is more dispersed because of foreign ownership (Tsamenyi et al., 2007; Wang, Sewon & Claiborne, 2008). Bokpin and Isshaq (2009) highlighted the informational disadvantage of foreign investors in comparison to domestic investors. Hence, engaging in governance disclosure, the management may want to assure the foreign shareholders of the existence of appropriate governance mechanisms and transparency thereby reducing the potential conflicts (Broberg et al., 2010). This leads to the sixth hypothesis. H6. Listed companies with higher levels of foreign ownership were engaged in significantly higher levels of corporate governance disclosure. The seventh hypothesis was pursued to identify significant predictor variables in view of the significant relation found between corporate disclosure and the firm-specific characteristics in prior research. The most consistently acknowledged determinants of overall disclosures of firms have been: (a) size of the company, (b) multi-nationality, (c) profitability, (d) ownership concentration, (e) age, (f) business complexity, (g) financial leverage, and (h) audit (Jindal & Kumar, 2012). Only a few studies had specifically investigated the determinants of governance disclosures of firms (Bauwhede & Willekens, 2008; Gandia, 2008; Samaha, Dahawy, Hussainy, & Stapleton, 2012). Gandia (2008) analyzed the corporate governance disclosures by Spanish listed companies through the Internet and concluded that disclosure levels depended on the degree of analysts' following, their listing age, their “visibility” and the industry type (Gandia, 2008). Bauwhede and Willekens (2008) examined the determinants of the level of corporate governance disclosure by listed companies in Europe and concluded that the explanatory power of all predictor variables was limited to 29%. Hence, it was important to test as to which of the five firmspecific characteristics examined in this study were significant determinants of the extent of corporate disclosure. H7. Firm-specific characteristics were significant determinants of the extent of corporate governance disclosures by listed banking companies in the Nepali financial industry.

4.2. Sample The sampling frame for the study consisted of 125 banking and finance companies listed with Nepal Stock Exchange as of 16 July 2010, which was the end date of the Nepali fiscal year (Nepal Stock Exchange Limited [NEPSE], 2010), and was considered as the study target population. A random sample of 59 companies was needed for the study to meet the power of 80% at the alpha level of 0.05. It was the best possible sample size considering the sampling frame (see Table 1). The complete company annual reports (CARs) of 51 companies were downloaded from the publicly available company websites. Letters were sent to eight other companies requesting for their annual reports for the fiscal year 2009–10 with a return prepaid mailing slip, which resulted in a return of 3 company reports. A follow-up letter, email, and phone call requesting CARs yielded no further response, and the last five CARs were subsequently obtained from libraries

Table 1 Power analysis to determine sample size. (power = 0.80 and α = 0.05). Effect size (f2)

Sample size (N)

% of sampling frame

0.1 0.2 0.3 0.4 0.5

113 59 40 31 26

90.41 46.86 32.38 25.16 20.85

Table 2 Computation of power achieved with sample size: post hoc analysis.

Input:

Output:

Effect size f2 α err prob Total sample size Number of predictors Noncentrality parameter λ Critical F Numerator df Denominator df Power (1-β err prob)

F-tests

Fixed model

0.15 0.05 59 3 8.85 2.77 3 55 0.67

0.35 0.05 59 3 20.65 2.77 3 55 0.97

F tests — Linear multiple regression. Fixed model — R2 deviation from zero.

maintained by the regulators (Securities Board of Nepal library and Nepal Rastra Bank). 4.2.1. Sampling method A probability sampling method was used for the study to ensure that each company in the sampling frame had equal probability of being chosen in a random selection process. The design was chosen for two reasons: (a) it had little or no bias; and (b) the sample provided an adequate precision (Cooper & Schindler, 2008). Table 1 shows the results of a priori power analysis calculations using G*Power software for an F-test using linear multiple regression fixed model r-squared deviating from zero for effect sizes between 0.10 and 0.50 at an alpha level of 0.05. The computations were based on the suggestions of Faul, Erdfelder, Bucher, and Lang (2009). Houser (2007) suggested that when researchers conduct a priori power analysis, the work could not be suspected of a Type II error. Determination of sample size began with the sampling frame of 125 available companies. A medium to large effect size was possible considering the sample sizes required as shown in Table 1. The output of the power analysis suggested that actual power of 80% at an alpha level of 0.05 could be achieved with a sample of more than 40 listed companies to be considered as feasible, efficient, and constitute a reasonable size (Houser, 2007) especially considering a low submission rate of their annual reports by listed companies to Securities Board of Nepal (Securities Board of Nepal [SEBON], 2011). Therefore, a sample of 59 companies were randomly selected representing 47% of the sampling frame for the study and achieved a power of 0.67 with a medium effect size of 0.15 at an alpha level of 0.05 and for a large effect size of 0.35, the achieved power was 0.97 (see Table 2). 4.3. Materials/instruments The instrument used to measure the extent of corporate governance disclosure was the disclosure index. The disclosure index is a comprehensive checklist of items that are disclosed by a company (Marston & Shrives, 1991). The index could include items that are mandatory or voluntary in nature. The annual reports of the banks and finance companies for the financial year July 15, 2009 to July 16, 2010 listed on the Nepal Stock Exchange were scored using a corporate governance disclosure index for the criterion variable. The comprehensive index was segmented into two sub-parts: (a) a mandatory corporate governance disclosure index, and (b) a voluntary corporate governance disclosure index.2 A total disclosure index was also calculated by including both the mandatory and voluntary disclosures indices. The mandatory index was used for testing the first hypothesis (H1). All three indices, the total disclosure index, the mandatory disclosure index, and the voluntary disclosure index, were used for the correlation analysis and testing the correlation-related hypotheses (H2–H6) and to test the seventh hypothesis (H7) relating to determinants of disclosure. 2 Corporate Governance Disclosure Index used for the study is available from the author on request.

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

N. Sharma / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

Disclosure index to measure the extent of disclosure was first used by Cerf (1961) and continues to be one of the most popular methods to measure levels of disclosures (Aljifri, 2008; Cheung, Jiang, & Tan, 2010; Çürük, 2009; Donnelly & Mulcahy, 2008; Hassan, Romilly, Giorgiono, & Power, 2009; Ho & Taylor, 2007; Kelton & Yang, 2008; Li et al., 2008; White et al., 2007). Although disclosure indices are important research tools, their construction and scoring must be appropriate to mitigate any reliability and validity issues (Kelton & Yang, 2008).

4.3.1. Construction of a disclosure index The first step in the construction of an index was the selection of items for the checklist. There were several possible items that could be included in the index; hence, the focus on the purpose of measuring the level of disclosure was considered the most important one (Marston & Shrives, 1991). The purpose of measuring the levels of disclosure in this study was to assess the degree of corporate governance mechanisms and financial transparency. Therefore, a list of all possible items concerning corporate mechanisms and financial transparency was accumulated based on the requirements of disclosure regime in Nepal and items that have been included in prior studies, OECD's principles of corporate governance, Basell II indicators of governance and transparency, and other items of importance as apparent in the existing literature.

4.3.2. Index scoring and weighting Items included in the disclosure index could be weighted or unweighted. Weights could be assigned to items of disclosure based on the understanding of user groups collected using a survey (Gao & Kling, 2012). In view of the fact that weighted and un-weighted scores gave the same results when the index contained a large number of items (Marston & Shrives, 1991) and the fact that similar results were found using either weighted or un-weighted index (Chow & WongBoren, 1987), an un-weighted index was used to measure the disclosure levels in this study. Furthermore, other researchers (Cooke, 1989; White et al., 2007) had preferred an un-weighted index in view of the possible user bias in weights assigned for the items in the index. Although, a consistent perception by users surveyed would increase the homogeneity of a disclosure item but it was not always possible because of their objective-bias (Marston & Shrives, 1991).

4.3.3. Reliability of the index Reliability of a disclosure index used to measure the extent of disclosures is one of the most important issues that need to be addressed (Kelton & Yang, 2008). The disclosure index used in this study was based on following eight components of governance disclosures (four each for mandatory and voluntary criteria): 1. 2. 3. 4. 5. 6. 7. 8.

Commitment mandatory disclosure Mechanisms mandatory disclosure Transparency mandatory disclosure General voluntary disclosure Commitment voluntary disclosure Mechanisms voluntary disclosure Transparency voluntary disclosure General voluntary disclosure

A Cronbach's alpha, as proposed by Kelton and Yang was calculated, and the coefficient was 0.91 for the eight components and 0.84 for all the 130 items in the index, both of which were above the acceptable limit of 0.70 for assessing scale reliability. An assessment of the correlations between the items of disclosure index was made as recommended by Botosan (1997). The correlation coefficient of inter-items was positive (r = 0.83), which indicated that disclosure strategies by samples companies were stable across categories (Kelton & Yang, 2008).

7

4.4. Data collection, processing, and analysis The archival data was obtained from company annual reports publicly available from business websites or libraries, and few were obtained directly from the companies. The disclosure scores were based on the disclosure index designed to award a score of 1 for disclosure and 0 for non-disclosure. The data for firm-specific characteristics was hand collected primarily from annual reports and the annual report of Securities Board of Nepal for the fiscal year 2009–10 for the listing age. Using SPSS, descriptive statistics for the test variables were tabulated. The data was examined for errors, missing items and assessment of assumptions about the data, such as normality was done (Field, 2009). Data transformation, using a log transformation, was done for the size variable (Size) and listing age (LAge) variable as the assumption of normality was rejected for these variables. The normality assumption for another variable, foreign association (ForenAsc) was also not supported and log transformation yielded the same results, hence, a non-parametric version of correlation analysis was used. However, for the purpose of regression analysis, the ForenAsc variable was recoded as FOwn variable by assigning “1” to companies with foreign ownership and “0” to companies without any foreign ownership. The level of compliance to mandatory disclosure requirements (H1) was assessed using the DScore (M) and its level. The higher the score better the compliance to the disclosure regime. For all significance tests, the alpha level 0.05 or less was considered acceptable (Cooper & Schindler, 2008; Field, 2009), and the Pearson correlation coefficient was used to assess associations between the variables (H2–H5). However, normality for one variable was not supported, and Spearman's rho, a non-parametric test, was used to test the correlation hypothesis (H6). Considering significant associations between the criterion variables of DScore, DScore (M), DScore (V) and the predictor variables (LogSize, Lev, and FOwn), multiple regression was pursued (Cooper & Schindler, 2008) to test the seventh hypothesis (H7). The model was used to assess relations between variations in disclosure and determinants that may influence those disclosures as conclusions about causality could not be based on correlation analysis alone (Field, 2009). Three regression models were run for each criterion variables of DScore, DScore (M), and DScore (V) and the predictor variables were selected based on the significant correlations found while testing Hypotheses 2 through 6. To ensure reliability of the model, test for multicollinearity was also done (Field, 2009). The full specification of the three models is follows: DScore ¼ β0 þ β1 FOwn þ β2 LogSize þ β3 Lev þ ε

ð1Þ

DScore ðVÞ ¼ β0 þ β1 FOwn þ β2 LogSize þ β3 Lev þ ε

ð2Þ

DScore ðMÞ ¼ β0 þ β1 FOwn þ β2 LogSize þ β3 Lev þ ε

ð3Þ

where: DScore

the total disclosure index including both mandatory and voluntary items in the index, DScore (M) the mandatory component of corporate governance disclosure, DScore (V) the voluntary component of corporate governance disclosure. FOwn dummy variable with a value of 1 if the company is associated with a foreign company or has a foreign company as its shareholder; 0 if otherwise, LogSize logarithm of size which is total assets in local currency,

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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N. Sharma / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

Table 3 Descriptive analysis of sample companies (N = 59). Sample characteristics

Mean

SD

Min.

Max.

Size (millions of NRs) Profit (%) Lev (%) LAge (years) ForenAsc (%)

10,969.90 1.74 87 8 4.7

13,800.00 0.8 4.8 6 14.2

498.3 0.12 77.7 1 0

57,305.40 3.55 96.7 25 75

NRs stands for Nepali Rupees, the local currency of Nepal as shown in balance sheet.

Lev

ε

the amount of debt component in the total capital of a company calculated as total debt over total assets reported in the balance sheet of a company, error term

financial industry. There were few companies having a nomination committee (7%) and remuneration committee (3%). Similarly, only 2% of companies disclosed that the auditor independence was not compromised. The companies making disclosures using both English and Nepali annual reports had an average of 87 pages with a mean disclosure score of 82.4%. The English annual reports had an average of 86 pages with a mean disclosure score of 80.31%, and Nepali annual reports were 62 pages long in average with a mean disclosure score of 71.99% (see Table 4). It was interesting to note that some of the foreign owned companies made disclosures only in English and others made disclosures both in English and Nepali. However, companies with Nepali owners prepared their accounts and made disclosures primarily in Nepali making no -effort to attract foreign investors.

5. Findings

5.1. Hypothesis testing

A descriptive analysis of the sample characteristics was conducted, and the results are tabulated in Table 3. The majority of the companies (68%) in the study sample were listed on Nepal Stock Exchange for a period of less than ten years (Mean = 8), and a portion of companies (10%) was listed for more than 15 years. The majority of the companies (58%) had asset size of less than or equal to 5000 million Nepali Rupees (NRs.), while a portion of companies (10%) held assets of 25,000 million (Mean = NRs. 10,969.9). Many companies (42%) had a return on assets of between one and two percentages, while a few companies (7%) had more than three percent of return on their assets (Mean = 1.7%). The average leverage, in percentage of total liabilities to total assets, of sample banks and finance companies in Nepal was quite high (Mean = 87%). Several companies (32%) had leverage between 90% and 95%, while a small number (2%) of companies had a leverage ratio of more than 95%. Nepali shareholders owned the majority of the companies in the financial industry (85%), and there were some (15%) companies listed on Nepal Stock Exchange having foreign ownership (Mean = 4.7%). There were four timeliness dimensions included in the data collection instrument: (a) completion of an audit; (b) Annual General Meeting; (c) submission of quarterly reports and (d) submission of annual reports. Most of the companies (92%) were completing their audits within the deadline imposed by Nepal Rastra Bank. Similarly, the majority of companies (75%) were conducting their Annual General Meeting (AGM) of shareholders within the time frame suggested in the Companies Act. However, only less than half of the companies (49%) were submitting their annual reports on time and 64% of the companies were submitting their quarterly reports on time to Securities Board of Nepal. A significant number of companies (98%) reported about the formation of an audit committee, its members, the allowances paid to the members, summary of functions undertaken by the committee, and recommendations made to the management. Similarly most companies (97%) reported that a non-executive director headed their audit committee. However, not many companies (37%) were disclosing regarding number of audit committee meetings and the attendance of members in those meetings. The other committees considered as corporate governance mechanisms like the nomination committee and remuneration committees were not popular amongst the companies in Nepali

The hypotheses of this non-experimental quantitative study were tested using the Pearson's correlation coefficient for variables meeting the assumptions required for parametric tests and Spearman's rho when variables did not meet the normality assumptions (Cooper & Schindler, 2008). When significant correlations were found between the criterion and the predictor variables, inferential analysis using multiple regression analysis was conducted to assess the extent of disclosure scores explained by those significant firm-specific characteristics, found in the correlation part of the study (H2–H6). The statistical inferences for testing hypotheses were based on two-tailed tests and an alpha level of 0.05 or less was considered significant. 5.1.1. Hypothesis 1 The first hypothesis examined by this study was concerning the level of compliance of corporate governance disclosure to the requirements as mandated by Nepal Rastra Bank, Companies Act 2006, and Bank and Finance Companies Act 2006 within the Nepali financial industry. There were 130 items on the index (DScore) that had 78 mandatory disclosure score [DScore (M)] items and 52 voluntary disclosure score [DScore (V)] items. The mandatory disclosure score, DScore (M), consisted of all the items required to be disclosed by any one of the disclosure regimes in place for the year 2009–2010 and voluntary disclosure score, DScore (V), consisted of the items that were not required to be disclosed but desired based on existing literature and suggestions by international agencies like OECD. The companies in the financial industry in Nepal disclosed a majority of items in the overall disclosure index (Mean = 73.9%). Comparatively, the disclosure score in the mandatory category was higher (Mean = 90.6%) whereas the companies disclosed less than half of the items in the voluntary governance component (Mean = 47.5%). The descriptive statistics for DScore components are shown in Table 5. The disclosure index comprised of four sub-indices within the mandatory governance disclosure category: a) commitment to corporate governance; b) mechanisms of corporate governance; c) corporate transparency and d) general corporate disclosures. The companies in the financial industry displayed high levels of disclosure commitments to all the four areas of mandatory disclosure. The means for the four areas of disclosures were 83.6% for commitment to governance, 90.5%

Table 4 Descriptive statistics for DScore, DScore-M, DScore-V and the Language of Annual Reports. English (5 CARs)

Nepali (43 CARs)

Both Eng. & Nep. (11 CARs)

CAR Language

Mean

SD

Min

Max.

Mean

SD

Min

Max.

Mean

SD

Min

Max.

DScore-M DScore-V DScore

89.49 65.71 80.31

15.0 22.6 17.5

63.0 31.0 50.0

97.0 88.0 94.0

89.68 41.32 70.99

3.83 12.28 6.62

81 27 61

97 86 93

94.52 63.22 82.4

3.20 15.245 7.04

87 40 72

97 86 93

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

N. Sharma / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx Table 5 Descriptive statistics of components of corporate governance disclosures. Components of governance disclosures

Commitment mandatory disclosure Mechanisms mandatory disclosure Transparency mandatory disclosure General mandatory disclosure DScore (M) Commitment voluntary disclosure Mechanism voluntary disclosure Transparency voluntary disclosure General voluntary disclosure DScore (V) Corporate governance commitment total disclosure Corporate governance mechanism total disclosure Transparency total disclosure General total disclosure DScore

Disclosure scores (%) Mean

SD

Min.

Max.

83.6 90.5 88.3 95.8 90.6 38.8 44.2 48.5 82.6 47.5 51.6 72.0 60.2 9.3 73.9

15.6 6.9 5.7 6.2 5.6 26.2 12.9 18.9 22.1 17.0 21.3 8.4 6.3 8.5 9.2

33.0 59.0 54.0 79.0 63.0 7.0 17.0 27.0 20.0 27.0 24.0 42.0 38.0 71.0 50.0

100.0 100.0 92.0 100.0 97.0 100.0 78.0 100.0 100.0 88.0 100.0 91.0 74.0 100.0 94.0

for governance mechanisms, 88.3% for corporate transparency, and 95.8% for general disclosures respectively (see Table 5). There were not many variations in those disclosure scores except in the commitment to corporate disclosure that had the wide variation in disclosure by companies (SD = 15.6%). At the same time the average corporate governance transparency scores (Mean = 88.3%) were below the overall average mandatory disclosure score (Mean = 90.5%) indicating that some companies were not taking the commitments to governance and transparency as seriously as were required by regulators. However, considering that the mandatory disclosure score was about 90.5%, the hypothesis H1 was accepted.

5.1.2. Hypothesis 2 The second hypothesis examined by this study was concerning the relation between levels of corporate governance disclosure by banks and finance companies in Nepal and the corporate size. A descriptive analysis was made to summarize and describe the characteristics of firm size (Size) and to assess the disclosure index (DScore) of sample companies (See Table 6). The mean disclosure index for companies Table 6 Disclosure score (DScore) based on Size, Profit, Lev, LAge, and FOwn. Variable Size (NR) b5000 5000–10,000 10,000–15,000 15,000–20,000 N20,000 Profit b1% 1%–2% 2%–3% N3% Lev: b80% 80%–85% 85%–90% 90%–95% N95% LAge (years): b5 5–10 10–15 15–20 N20 FOwn: No Yes

DScore 69.4 78.2 73.2 78.5 83.2 70.5 75.9 73.2 73.7 66.5 69.5 74.9 79.9 63.8 72.9 73.5 72.6 75.9 88.1 72.6 81.4

9

with assets less than 5000 million (NRs.) was found to be the lowest (Mean = 72.9%). However, the mean disclosure index for companies with assets more than 20,000 million (NRs.) was the highest (Mean = 83.2%). Following the descriptive analysis to ascertain mean scores, a Pearson's correlation test was pursued; however, the test required the variable to be at least interval-level and normality of data to establish associations (Field, 2009). Although the variables were continuous and ratio level, the standard tests for skewness and kurtosis revealed that firm size was not normally distributed, which was confirmed by Kolmogorov–Smirnov and Shapiro–Wilk tests of normality. A natural log transformation of Size was done to avoid heteroskedasticity and non-linearity problems that could occur for variables of firm size when used in the raw form (Li et al., 2008; Matolcsy, Tyler, & Wells, 2012). To ensure data normality after transformation, the Kolmogorov–Smirnov and Shapiro–Wilk tests of normality were used to confirm that the LogSize was normally distributed, and the same tests were done for DScores to ensure a normal distribution. The results of both Kolmogorov–Smirnov and Shapiro–Wilk showed that the data for both variables were normally distributed. A Pearson coefficient of correlation (r) was calculated to determine the relation between the DScore, DScore (M), DScore (V) and LogSize. A significant positive relation was found between the DScore and LogSize (r = 0.68), DScore (M) and LogSize (r = 0.47), DScore (V) and LogSize (r = 0.72) and the hypothesis H2 was accepted. A significant positive relation (r = 0.52) between corporate leverage (Lev) and corporate size (LogSize), a significant negative relation (r = − 0.26) between corporate leverage (Lev) and corporate profitability (Profit), and a significant positive relation between the corporate listing age (LogLAge) and the corporate size (LogSize) (r = 0.28) were also found (see Table 7). 5.1.3. Hypothesis 3 The third hypothesis examined by this study was the relation between levels of corporate governance disclosure by banks and finance companies in Nepal and the corporate profitability. A descriptive analysis was made to summarize and describe the measures of corporate profitability (Profit) and disclosure indexes (DScore) of sample companies (see Table 6). The mean disclosure index for companies with the return on assets (Profit) of less than one percent was the lowest (Mean = 70.5%). At the same time, the mean disclosure index was highest for companies with the return on assets between one percent and two percent (Mean = 75.9%). The majority (76%) of companies were earning between one percent and three percent returns on their assets (Profit). Subsequent to the descriptive analysis to describe the basic features of corporate profitability, a Pearson's correlation (r) test was pursued, after the normality test and visual analysis showed normality of data, to assess relations between the between the DScore, DScore (M) DScore (V) and Profit. No significant relation was found between corporate profitability and the disclosure index variables (see Table 7), and the study results failed to support the hypothesis H3. Table 7 Pearson correlation analyses of firm-specific characteristics and disclosure indexes. Variables

DScore-M

DScore (M) DScore (V) DScore LogLAge LogSize Lev Profit

1.00

DScore-V

0.67**

1.00

0.85** 0.09 0.47** 0.28* 0.06

0.96** 0.17 0.72** 0.43** −0.05

DScore

LogLAge

LogSize

Lev

Profit

1.00 0.16 0.68** 0.41** −0.02

1.00 0.28* −0.02 0.25

1.00 0.52** −0.04

1.00 −0.26*

1.00

N = 59. **, * significant at the 0.01 and 0.05 levels, respectively (2-tailed).

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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N. Sharma / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

5.1.4. Hypothesis 4 The fourth hypothesis examined by this study was concerning the relation between levels of corporate governance disclosure by banks and finance companies in Nepal and the corporate leverage. A descriptive analysis was made to summarize and describe the basic features of the measures of corporate leverage (Lev) and disclosure index (DScore) of sample companies (see Table 6). The mean disclosure index (DScore) for companies with leverages (Lev) of less than 80% was the lowest (Mean = 66.5%). However, the mean disclosure index (DScore) for companies with leverage of between 90 and 95% was the highest (Mean = 79.9%). There was only one company having more than 95% of total assets that were on borrowed funds with a disclosure score of 63.8%. Subsequent to the descriptive analysis to show the mean disclosure scores at different levels of leverage, a Pearson's correlation (r) test was pursued, after the normality test and visual analysis showed normality of data, to assess relations between the DScore, DScore (M), DScore (V) and Lev. A significant positive relation was found (see Table 7) between the DScore and Lev (r = 0.41), DScore (V) and Lev (r = 0.43), DScore (M) and Lev (r = 0. 28), and the hypothesis H4 was accepted. 5.1.5. Hypothesis 5 The fifth hypothesis examined by this study was concerning the relation between levels of corporate governance disclosure by banks and finance companies in Nepal and the corporate listing age. A descriptive analysis was made to summarize and describe the measures of listing age (LAge) and disclosure indexes (DScore) of sample companies (see Table 6). The mean disclosure index (DScore) for companies with a listing age (LAge) of between 10 and 15 years was the lowest (Mean = 73.5%). At the same time, the mean disclosure index (DScore) was highest for companies that were listed (LAge) for more than 20 years (Mean = 88.1%). A significant number of companies (39%) were listed for less than five years with a mean score of 72.9%. Following the descriptive analysis, a parametric correlation analysis was pursued; however, the test required the variable to be at least interval variables and normality of data to establish associations (Cooper & Schindler, 2008). The variables were continuous and ratio level, but the standard tests for skewness and kurtosis revealed that listing age was not normally distributed. The Kolmogorov–Smirnov and Shapiro– Wilk tests of normality confirmed that. A natural log transformation of LAge was done, and new variable LogLAge was used to avoid heteroskedasticity and non-linearity problems that could occur for variables of listing age (Li et al., 2008; Matolcsy et al., 2012). To ensure data normality after transformation, the Kolmogorov–Smirnov and Shapiro– Wilk tests of normality were used to confirm that LogLAge was normally distributed, and the same tests were done for DScores to ensure the normal distribution. The tests results showed that the variables were normally distributed, and a visual analysis of the Q–Q plot also showed normality of data. A Pearson's r was used to determine the relation between the disclosure indexes and listing age between the DScore and LogLAge, DScore (M) and LogLAge, DScore (V) and LogLAge, and no significant relation was found (see Table 7). The results offered no evidence to accept the hypothesis H5. 5.1.6. Hypothesis 6 The sixth hypothesis examined by this study was concerning the relation between levels of corporate governance disclosure by banks and finance companies in Nepal and their association with a foreign company (ForenAsc). A descriptive analysis was done of the corporate governance disclosure and company's foreign association (see Table 3). There were only few (15%) companies with foreign ownership and Nepali stockholders owned majority of the companies (85%) in the financial industry of Nepal. Companies with foreign ownership (FOwn) disclosed about 81.4% of items in the corporate governance disclosure

index and companies owned by Nepali owners disclosed at an average of 72.6% (See Table 6). Subsequent to the descriptive analysis, a test using Spearman's rho was used to determine the relation between the DScore (M), DScore (V), DScore and ForenAsc, considering the normality test results of ForenAsc variable. A significant positive relation was found between ForenAsc variable and both DScore (M), DScore variables, both with rs = 0.29 and a similar relation between DScore (V) and ForenAsc was found with rs = 0.31, and therefore, hypothesis H6 was accepted. 5.1.7. Hypothesis 7 The seventh hypothesis examined by this study was concerning the determinants of varying levels of corporate governance disclosure and the extent of explanatory powers of significant variables identified in the correlation study within the Nepali financial industry. Descriptive analysis for this segment of the study was not conducted as it included the test variables that were already examined (H2–H6) in the correlational study. A multiple regression analysis was pursued with three models for each disclosure index [DScore, DScore (M), DScore (V)] as the criterion variables and firm-characteristics as predictor variables likely to provide the coefficient of determinants (Field, 2009) of the criterion variables. The three significant firm-specific characteristic variables were: LogSize, Lev and ForenAsc. The Collinearity statistics, Tolerance Index and VIF, were computed and were found within the acceptable thresholds. All variables had met the requirements to be included for parametric statistics, in the correlation segment of the study, except one variable i.e. foreign association (ForenAsc). The normality of foreign association (ForenAsc) was not supported. However, Field (2009) suggested that dichotomous variables were acceptable as predictor variables in the regression analysis. Therefore, the foreign association variable was recoded as a dichotomous variable assigning “1” to mean foreign association and “0” to mean non-association. The new variable was named as FOwn. Multiple regression analysis was conducted (See Table 8) by running three models to determine significant predictor variables for the Table 8 Regression analysis for three criterion variables and firm characteristics. Including the collinearity statistics for predictor variables. Variable

Prediction

B

Panel A: criterion variable: DScore FOwn + 0.01 LogSize + 0.1 Lev + 0.15 Intercept 0.25 N 59 df 3,55 F 16.51** R2 0.47

SE 0.03 0.02 0.22 0.17

Panel B: criterion variable: DScore (V) FOwn + 0.07 0.05 LogSize + 0.17 0.03 Lev + 0.30 0.38 Intercept −0.44 0.29 N 59 df 3,55 F 21.13** R2 0.54 Panel C: criterion variable: DScore (M) FOwn + −0.02 0.02 LogSize + 0.05 0.01 Lev + 0.06 0.16 Intercept 0.69 0.12 N 59 d.f. 3,55 F 5.68** 2 R 0.24

Beta

t

Tolerance

VIF

0.06 0.62 0.08

0.51 4.92** 0.69 1.52

0.80 0.61 0.73

1.25 1.65 1.37

0.15 0.61 0.09

1.42 5.16** 0.80 −1.51

0.80 0.61 0.73

1.25 1.65 1.37

−0.13 0.50 0.05

−1.01 3.33** 0.35 5.59**

0.80 0.61 0.73

1.25 1.65 1.37

**, * significant at the 0.01 and 0.05 levels, respectively.

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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disclosure score [Panel A: DScore, Panel B: DScore (V), and Panel C: DScore (M) in Table 8] with corporate size (LogSize), leverage (Lev), and foreign ownership in a company (FOwn) as possible predictors. All the three models were significant, with R2 = 0.47; F(3, 55) = 16.51 for DScore as the criterion variable; with R2 = 0.54; F(3, 55) = 21.13 for DScore (V) as the criterion variable; and with R2 = 0.24; F(3, 55) = 5.68 for DScore (M) as the criterion variable. Hence, the hypothesis H7 was accepted as at least one of the firm characteristics (LogSize) was found significant in all the three models to explain variations in corporate governance disclosures, in Nepal. A post-hoc power computation was also done for linear regression with three predictors. A 67% power was achieved for a medium effect size of 0.15 and 97% for a large-size effect of 0.35 indicating that there was more than adequate power at the large effect size level, but less than adequate statistical power at the medium effect size level with 59 listed companies as the sample size in explaining variations, in governance disclosure, by the three predictor variables (See Table 2). 5.2. Evaluation of findings The companies in the financial industry of Nepal were found to disclose 91% of the mandatory items in the disclosure index, which shows a considerable level of compliance, to the requirements placed by the disclosure regime there. There were significant correlations found between the disclosure variable and three firm-specific variables including corporate size, leverage, and foreign association of the company. However, no significant correlations between the extent of governance disclosure and profitability or listing age were found. With regards to predictors of governance disclosure, only corporate size was found to be a significant one contributing to variations in disclosure. The following section evaluates the findings of this study and reviews the similarities and differences with prior research. 5.2.1. Extent of mandatory governance disclosure This study examined the compliance levels of corporate governance disclosure of banks and financial institutions in Nepal in view of an agency problem existing between the management and stakeholders. Levels of disclosure mandated by regulatory regimes in this study were measured using a disclosure index. The hypothesis H1 was that companies disclosed significantly large number of the required items as a high level of compliance to mandatory disclosure requirements was expected of corporations because these obligations were instituted to standardize the information disclosed, and to pressure greater accountability (Hossain, 2008). Higher levels of mandatory disclosure were also explained by the presence of other templates that existed in the generally accepted accounting principles (Green, Morris, & Tang, 2010). Furthermore, the stock exchange had provisions to delist a company for non-compliance to disclosure requirements (Nepal Stock Exchange Limited [NEPSE], 2010) and provisions for fines by companies, in some cases to be personally borne by officers of the companies (Nepal Government [NG], 2006a). In view of these factors, the mean disclosure score was high (91%), which means that more than 91% of items required to be disclosed by banks and finance companies were being disclosed through their annual reports in Nepal. The findings of this study are comparable to Arcot et al.'s (2010) overall compliance of 91% in UK and Hassan et al.'s (2009) 90% in Egypt. And the disclosure in Nepal was above the Hossain's (2008) average mandatory disclosure of 88% in India, Alanezi and Albuloushi's (2011) average mandatory disclosure compliance level of 72% in Kuwait, and Cheung et al.'s (2010) reported 66% mandatory disclosure index for Chinese listed companies. 5.2.2. Corporate size and governance disclosure A significant positive correlation between corporate governance disclosure and corporate size was found suggesting that larger companies tended to disclose more. The positive relation between size and

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disclosure could be because disclosure requires resources and larger companies have access to those resources. Apart from the access to resources, larger companies also enjoy other advantages because of their size (Gallery et al., 2008; Holder-Webb, Cohen, Nath, & Wood, 2009). Owing to the size, they tend to have several stakeholders and are more visible in the society which possibly could lead to more scrutiny in the affairs of these larger companies and hence, a positive association between size and governance disclosure is explained in that context (Tagesson, Blank, Broberg, & Collin, 2009). Hossain and Reaz (2007) reported similar results when they found a positive and statistically significant relation between disclosures by banks and their size. However, some researchers like Akhtaruddin et al. (2009) rejected the hypothesis that levels of disclosures were higher for larger firms. Aljifri (2008) also concluded that the size had an insignificant impact on the levels of disclosure.

5.2.3. Corporate profitability and governance disclosure No significant correlation between profitability and governance disclosure was found in this study. The finding was consistent with other researchers as they reported insignificant results regarding the correlation between the profitability and disclosure variables. Aljifri (2008) found that the profitability had an insignificant impact on the levels of disclosure. Similarly, Aerts et al. (2007) reported a positive relation between performance disclosures and profitability but the association was statistically not significant. The finding was not consistent with Ho and Taylor's (2007) findings of a negative relation between Triple Bottom-line (TBL) disclosure and profitability. However, others have found a positive impact of profitability of a company on the extent of disclosure, and reported that higher the profitability of a company, greater the extent of disclosure by those companies. Such relation can be explained as profitable companies have the required expertise and experience to make their company profitable and therefore will possess the expertise and knowledge to engage in higher levels of disclosures (Tagesson et al., 2009). It is also believed that profitable companies are more exposed to political and social pressures and therefore maintain higher levels of governance standards and disclosure mainly through their annual reports (Li et al., 2008). However, findings of this study do not suggest companies in Nepal felt such pressures.

5.2.4. Corporate leverage and governance disclosure A significant positive correlation between leverage and governance disclosure was found. Companies with more debt in the total capital employed of a company disclosed more governance related information. This finding was consistent with Tsamenyi et al.'s (2007) results of positive correlation between disclosure and leverage. White et al. (2007) also found a significant correlation between disclosure and leverage. Such a finding can be as a result of the fact that banks not only depend on borrowed funds but also use depositors fund which leads to higher levels of scrutiny and compliance requirements to maintain depositor confidence (Hossain & Reaz, 2007) that would lead to have higher levels of corporate governance standards. On the other hand, higher disclosures are also required by leveraged companies to adhere to debt covenants (Taylor, Tower, van der Zahn, & Neilson, 2008) and provide greater disclosure of information to minimize the monitoring costs generated owing to higher leverage (White et al., 2007). This study's finding was in contrast to some of the other findings relating to the correlation between leverage and disclosure. Cormier, Ledoux, and Magnan (2009) reported that firms with higher leverage disclosed less information than others. Aerts et al. (2007) also reported a negative relation, for both European and North American firms, between performance disclosure and leverage. On the other hand, leverage did not have any significant impact on the levels of disclosure (Akhtaruddin et al., 2009; Aljifri, 2008; Ho & Taylor, 2007).

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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N. Sharma / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

5.2.5. Corporate listing age and governance disclosure No significant correlation was found between listing age of the company and governance disclosure. Contrary to the proposition that firms listed for a greater number of years disclosed more governance and transparency related information through their annual reports (Li et al., 2008), listing requirements and regulations in Nepal have not been able to generate enhanced disclosures. When listed companies are subjected to listing requirements by the stock exchanges and have established disclosure policies with compliance systems in place owing to continuous listing, the companies are expected to disclose more information. Although, age has often been considered as a proxy for risk (White et al., 2007) with younger companies being considered riskier than the older companies and age as a proxy for the firm's stage of development and growth (Owusu-Ansah, 1998), older firms in Nepal have not attained the stage of development that would lead to higher disclosure. These findings were not consistent with White et al.'s (2007) and Owusu-Ansah's (1998) results, as they had found a positive correlation between disclosure and age of business. The finding was also not consistent with the belief that younger firms have motivations to disclose more to combat cynicism against recently listed firms and raise confidence of investors (Gandia, 2008), which was the finding of Li et al. (2008) when they reported a significant negative association between disclosure and listing age. 5.2.6. Foreign association of the company and governance disclosure A significant positive correlation was found between foreign association of the company and governance disclosure. Companies with foreign ownership tended to disclose more information about corporate governance. This finding was in support of the assertion that the existence of foreign ownership enhanced the levels of disclosure to reduce the information asymmetry created because of geographical separation of owners and management (Bokpin & Isshaq, 2009; Khlif & Souissi, 2010). Barako and Brown (2008) also argued that the foreign association of a company might elevate the governance structure and practices, which in turn, would improve the disclosure level. The finding was in conformity to the findings of other researchers. A positive and significant relation between disclosure and foreign ownership was apparent (Al-Akra et al., 2010; Wang, Sewon & Claiborne, 2008). Tsamenyi et al. (2007) also found a similar relation between ownership structure dominated by foreign ownership and disclosure. However, the finding was in contrast to the findings of Khlif and Souissi (2010). Based on their meta-analysis, they concluded that the foreign ownership was not conducive to higher levels of disclosure as they found a lack of support for a significant correlation between disclosure and foreign ownership. Haat, Rahman, and Mahenthiran (2008) also concluded similarly as they did not find a significant relation between foreign ownership and corporate transparency. 5.2.7. Determinants of governance disclosure This study identified the corporate size (LogSize), leverage (Lev), and foreign ownership in a company (FOwn) as potential determinants of varying levels of disclosure. Although, a significant regression equation was found for all three models, suggesting that the company's disclosure score whether mandatory or voluntary increased with the increase in the three firm-characteristics and explained variations in governance disclosure, only the LogSize variable was a significant predictor of governance disclosure. The finding of this study that size was one of the significant predictors of governance disclosure was consistent with the argument that the mere size of the company would place the company under greater public scrutiny (Liu & Taylor, 2008; Tower et al., 2011) and, thus, tended to make more disclosures (Reverte, 2009) because they adopt more stringent disclosure regimes (Hermalin & Weisbach, 2012). There was substantial empirical evidence that the firm size was one of the prominent determinants of disclosure (Holder-Webb, Cohen, Nath, & Wood, 2008; Kelton & Yang, 2008; Kent & Stewart, 2008; Liu & Taylor, 2008; Reverte, 2009; Tagesson et al.,

2009; White et al., 2007). Hence, the finding of this study was consistent with other researchers. 5.3. Theoretical evaluation of findings Agency theory was chosen as the theoretical framework for this study (Gallery et al., 2008; Kelton & Yang, 2008). The theory is one of the most popular theories used to study corporate disclosure since it provides the structural platform for disclosure decisions (Kelton & Yang, 2008). This theory is based on the separation of ownership from control, manifested in most of the corporate forms of business (Gallery et al., 2008). A high level of compliance (Mean = 91%) to mandatory corporate governance disclosure supports the theoretical underpinning that managers were engaged in initiatives to reduce information asymmetry to mitigate agency problems prevalent in Nepali financial industry. Such high levels of compliance can also be explained with another agency relation existing between regulators like Nepal Rastra Bank (NRB), being exposed to moral hazards as a lender of the last resort, and the banking companies in Nepal (Islam et al., 2010). Such a disclosure level can also be explained from the point of yet another agency relation existing between Banks as “agents” of the depositors and “principals” for their borrowers (Boyd & de Nicoló, 2005). The finding of this study that leveraged firms had higher incentives to disclose more information to reduce agency costs (Kang & Gray, 2011) also lent support to the propositions of agency theorists. Another theoretical implication was that the extent of foreign ownership was able to mitigate agency problems by aligning incentives of managers to be more transparent to enhance their reputation and credibility to foreign investors (Haat et al., 2008). Broberg et al. (2010) posited that the existence of foreign ownership would lead to information asymmetry and increased agency costs in view of the agency theory. When ownership becomes more dispersed with foreign ownership, monitoring costs and thus, the demand for disclosure increases (Tsamenyi et al., 2007; Wang, Sewon & Claiborne, 2008) and therefore, engaging in higher levels of governance disclosures, the management will assure the foreign shareholders of the presence of appropriate governance mechanisms and transparency. The finding of this study, a positive significant correlation between disclosure and foreign association, lent support to the agency theory propositions that the higher the level of foreign ownership, the higher the disclosure level (Wang, Sewon & Claiborne, 2008; Xiao, Yang, & Chow, 2004). 5.4. Generalization of findings In view of the value, desirability, and incentives to institute governance mechanisms, corporate governance disclosure has emerged as a core component of every corporation's strategy (Gaa, 2009). However, the sampling frame of this study was limited to bank and financial institutions, the findings can be generalized to disclosure decisions of such companies only. The findings, although significant, may not be applicable to other listed companies other than banks and financial institutions engaged in banking. 5.5. Recommendations Sound corporate governance is critical to the success of every business (Ammann et al., 2011), and a purposeful communication about corporate governance is essential to inculcate trust in users of corporate information (Bhuiyan & Biswas, 2007). That trust seems to have been compromised as the Nepali media reported about the banking financial crisis emphasizing the Nepali central bank official's view “The biggest problem facing the banking sector (in Nepal) currently is bad corporate governance” (Post Report, 2011). In view of the importance of corporate governance and the findings of this study, the following recommendations are offered.

Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014

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5.5.1. Recommendation for practice There are empirical evidences that weak corporate governance is associated with an increased likelihood of adverse financial reporting (Carcello et al., 2011). Hence, the role of board independence, efficiency of committee structures and audit function are important indicators of the level of corporate governance. The results of this study show that 37% of companies were not disclosing regarding number of audit committee meetings and the attendance of members in those meetings, and there were few companies having a nomination committee (7%) and remuneration committee (3%) along with only 2% of companies disclosing that auditor independence was not compromised suggests that companies in Nepal were not very committed to all spheres of corporate governance. Based on these findings, it is recommended that companies provide narratives about popular best practices of corporate governance in their annual reports. At the same, it is recommended that regulators formulate a national corporate governance code that sets out the best practice in corporate governance and its disclosure, which will guide the expectation and accountability of listed companies. Few companies (7%) appointed or identified a person responsible for advising the Board on all governance matters. Based on the study results of 74% overall governance disclosure and 48% of voluntary disclosure, it is recommended that company leadership identify a designated individual or individuals responsible for handling corporate governance matters so that the efforts of companies are channelized and communicated to capital market timely and accurately. More detailed disclosure in company annual reports covering all the required disclosures is recommended to enhance investor confidence and reduce information asymmetry so that both sophisticated and unsophisticated investors are better informed. It was apparent that companies were not in compliance with many disclosure requirements and mainly it may be because there is either lack of accountability or the enforcement mechanism is too shallow. Hence, it is recommended that regulators and disclosure regime enforce the compliance provisions more rigorously to ensure that companies have the desired levels of governance mechanisms in place and disclosure policies so that the resources provided by the investors, creditors, and depositors are protected. It may also attract the much-needed foreign investment in Nepal. The study used a disclosure index to collect data about commitment, mechanisms, transparency, and general attributes of corporate governance disclosure. Such an instrument was a checklist of items that are required (mandatory) and desired (voluntary) of companies to disclose. Companies may use this checklist to assess their compliance to mandatory disclosures and also identify opportunities for voluntary disclosure. Similarly, the regulators and monitoring agencies may also find the tool useful to evaluate the compliance levels and suggest the desired voluntary disclosures. 5.5.2. Recommendation for further research In spite of an extensive search of the literature, there were very few discourses available on disclosure in Nepal. Hence, this study may generate interest in the subject and will offer as a benchmark for further studies relating to disclosure by companies considering the heightened interest in activities of public companies and their scrutiny because of scandals around the world. The current study found a monotonic relation between disclosure as a criterion variable and firm-characteristics of corporate size, corporate leverage, and foreign ownership of a company. In view of it, research using Ordinary Least Squares (OLS) based on ranked variables is suggested as an alternative predictive model as a higher ranked predictor variable will correspond to higher-ranked criterion variable, irrespective of the precise relation between the unranked variables (Lang & Lundholm, 1993). There are several alternative channels of disclosure and this study was based on disclosure by annual reports prepared by companies. Other mediums like the web-based disclosure, special reports, press releases and quarterly reports could be studied to assess the disclosure

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levels in their entirety, as companies may have preferred alternative medium of disclosure. The current study found no significant association between governance disclosure and firm characteristics of listing age and profitability contrary to the expectations. However, further enquiry using alternative measures of those variables with an increased sample size may be useful. The current study identified only corporate size as a significant predictor of governance disclosure although with two other firm specific characteristics including leverage and foreign association combined explained 24% in mandatory disclosure, 54% in voluntary disclosures and 47% of variations in total disclosure. A quantitative study using multiple regression that includes other variables such as ownership concentration, existence and efficiency of committees (audit, remuneration, nominating), board independence, capital adequacy ratios, non-performing loans carried by these companies, auditors used, CEO/Chairperson duality, and the extent of promoter's shareholdings may be useful to gage the unexplained variations. 6. Conclusions The problem of corporate governance and its disclosure in the financial sector of Nepal was addressed by this study. The companies in Nepal were found to engage in the mandatory disclosures with 91% of items in the disclosure index being disclosed but were only disclosing 48% of the expected disclosure in the voluntary category. Three significant correlations were found in this study: a positive significant correlation between corporate size and disclosure was found, which suggested that larger companies disclosed more information than the smaller companies; a positive significant correlation was found between disclosure and corporate leverage suggesting that companies with higher amount of the debt component in their total assets disclosed more information, and a significant positive correlation was found between foreign association of the company and governance disclosure suggesting that companies with foreign ownership tended to disclose more information about corporate governance. No significant relations were found between profitability or listing age and governance disclosure. Acknowledgment This article is based on a research carried out by me for a Ph.D. program at Northcentral University: “A Correlational Study of the Extent and Determinants of Corporate Governance Disclosure in the Nepali Financial Industry”. I gratefully acknowledge the guidance and supervision of Dr. Robin Throne (Dissertation Committee Chair) and Dr. Becky Takeda-Tinker (Dissertation Committee Member). I appreciate the Graduate School anonymous reviewers for their comments, feedback, and suggestions, which provided meaningful direction, and set standards for the research. I appreciate the comments by two anonymous reviewers of this journal which were very constructive and definitely added value to the paper. I also would like to thank the editor, Dr. J. Timothy Sale and the associate editor, Dr. Robert Larson for their guidance and feedback. References Abraham, A., Deo, H., & Irvine, H. (2008). What lies beneath? Financial reporting and corporate governance in Australian banks. Asian Accounting Review, 16(1), 4–20. Adelpo, I. (2011). Voluntary disclosure practices amongst listed companies in Nigeria. Advances in Accounting, incorporating Advances in International Accounting, 27, 338–345. Aerts, W., Cormier, D., & Magnan, M. (2007). The association between web-based corporate performance disclosure and financial analyst behaviour under different governance regimes. Corporate Governance: An International Review, 15(6), 1301–1329. Akhtaruddin, M., Hossain, M., Hossain, M., & Yao, L. (2009). Corporate governance and voluntary disclosure in corporate annual reports of Malaysian listed firms. Journal of Applied Management Accounting Research, 7(1), 1–19. Al-Akra, M., Eddie, I.A., & Ali, M.J. (2010). The association between privatization and voluntary disclosure: Evidence from Jordan. Accounting and Business Research, 40(1), 55–74.

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Please cite this article as: Sharma, N., Extent of corporate governance disclosure by banks and finance companies listed on Nepal Stock Exchange, Advances in Accounting, incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.014