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RESEARCH METHODOLOGY AND DESIGN
The purpose of this chapter is to explain how the model specification and hypotheses were being developed and tested. The idea is to take some lines of thought about factors that might affect Saudi Arabian public listed companies’ decision on the types of financial information to be disclosed on their website. This chapter will discuss the signs and the directions of relations among variables.
Section 3.1 specifies internet financial disclosure as determined by a set of variables modeled as a system of simultaneous equation. This study uses existing literature to select and define variables in this system. This section continues by stating the hypothesis regarding the signs of the coefficient. Section 3.2 presents the model that will be used, setting out the variables that will be employed in the present study. Finally, this chapter also describes the sample selection process and the method of analysis employed.
This study main objective is to investigate whether board characteristics and ownership structure affect the extent of internet financial disclosure on Saudi companies’ website. In order to achieve the stated objective, this study will test the relationship between the dependent variable and various independent variables. The dependent variable for this study is internet financial disclosure. This study uses the same index to measure internet financial disclosure (IFD) in the same way as Alarussi, et al. (2011). The data for dependent variable consist of 15 items that represent the index for the financial disclosure. A score sheet is utilized to determine the score of the extent of disclosure amongst the selected companies. These items represent the financial information that is disclosed through the internet annual report and other places on the website. It is recorded as 1 if disclose item is available and 0 if does not. The 15 items include financial highlights, current press release or news, current share price, share performance chart, operation review, financial review, financial calendar, annual report, annual report for past year, half year report, quarterly report, balance sheet in quarterly report, income statement in quarterly report, cash flow in quarterly report and accounting notes in quarterly report.
The data for the independent variables are extracted from the companies’ 2013 website and online annual reports. Several score sheets are used to measure each of the independent variables according to its scale of measurements (nominal, ordinal, interval and ratio). This study looks at two different main determinants for independent variables: the board characteristics and ownership structure, which will be further discuss in the following section.
Based on the literature review done in chapter 2, the following conceptual framework was developed to suit the study as per figure 1 below. This study use internet financial disclosure as the dependent variable. There are eight independent variables, which are predicted to have an associated with the dependent variable. Basically this study will show whether there is a relationship between independent variables and dependent variables
DV
Role duality
Board size
Board activity
Private agency
Government ownership
Concentration ownership
Board independence
Foreign ownership
IFD
Ownership structure
Board characteristic
Figure 1: Conceptual framework
3.1.1 BOARD CHARACTERISTICS
Board of directors can be an effective mechanism to monitor top management on behalf of dispersed shareholders. The preparation of the annual report falls within the discretion of the boards. The way the board is composed affects the extent of financial disclosure in the annual report. Board characteristics are relevant to corporate performance (Ghosh, 2006). Board characteristics include its independence, its size, the presence of a leadership structure and the board activity.
(a) Board independence
The agency problem emerged from the conflict of interest between shareholders and managers where managers have the tendency to maximize their interests at the expenses of shareholders’ welfare (Jensen & Meckling, 1976). This conflict of interest has led shareholders to be more eager to monitor the managers by delegating authority to the board of directors to monitor and control the decisions made by the managers. For directors to be more effective and act in the shareholders’ interest there should be higher proportion of non-executive directors on the board. The agency theory assumes that the presence of outside administrators leads to a reduction of the agency problems between the managers and shareholders due to their independence and objectivity. The independence non-executive directors are considered as a tool for controlling the behavior of the leader. Fama (1980) views that board of directors’ viability might be enhanced by the inclusion of outside directors. A high percentage of independent directors on the board enhances the monitoring of managerial opportunism and reduce management’s chances of withholding information (Kelton & Yang, 2008). Several empirical studies (Beaslye, 1996; Xiao et al, 2004) found a positive relationship between the proportions of non-executive directors and the extent of internet financial disclosure. However, other result (Eng & Mak, 2003; Gul & Leung, 2004) found that increased presence of outside directors is associated with reduced disclosure by companies in Singapore and Hong Kong.
This study assume that when the board is independent this will lead to a better control of management and therefore a high extent of internet financial disclosure. Thus, the study suggests the following hypothesis:
H1: There is a relationship between the board independence and internet financial disclosure.
Board independence is measured by the proportion of non-executive directors (NED) on the board. It is calculated by the number of NED on the board divided by the total number of directors on the board.
(b) Role duality
Role duality occurs when the chief executive officer (CEO) is also the chair of the board of directors. According to agency theory, dual role creates a strong individual power base, which could impair board independence and the effectiveness of its governing function may thus be compromise. The CEO may be capable of controlling board meetings, selecting agenda items and selecting board members (Fama & Jensen, 1983 and Kelton &Yand, 2008). Agency theory supports the separation of the two roles to provide checks and balances over management’s performance (Haniffa & Cooke, 2002). However, Gul & Leung, (2004) found that CEO duality is associated with lower voluntary disclosure. Cadbury Committee Report (1992) recommended that large companies separate the roles of CEO and chair of the board of directors. Separation of the position of the chairman of the board and CEO can enhance the independence board leadership and help fully representing the interest of the shareholders.
As such, this study based its argument on agency theory, that an independent chairman provides strong power to the board in effectively monitoring and demanding sufficient information This study hypothesize that
H2: There is a relationship between the role duality and internet financial disclosure.
Role duality is coded as ‘1” if the CEO is also the chair of the board. Otherwise it is coded as “0’.
(c) Board Size
The number of directors on the company’s board should play a critical role in monitoring of the board and in taking strategic decisions. There are different views and arguments on the issue of board size. There is an argument supporting the idea of increasing board size. Resource Dependency theory argues that large board size has a variety of knowledge and more ability to manage the capital resource of the company (Pfeffer, 1972). A large board also assists in performing more monitoring, providing companies with the diversity that help them in providing critical resources and eliminate environmental uncertainties, alleviating the dominance of the CEO, and increasing the pool of expertise that yields from the diversity of the board (Singh et al., 2004; Yermack, 1996). Lipton and Lorsch (1992) stated that large board size is dysfunctional because a large number of directors are easy to be controlled by top managers and, therefore, they cannot criticize the policies of the top managers or discuss the performance of the company truthfully. While, another view argues that small board size provides more quality of monitoring because there is no contradiction in thinking or objectives among directors. According to Jensen (1993) the board consists of more than seven or eight directors are more easily controllable by the manager. Campos et al (2002) noted that the size of the board should not be too large or too small and suggested an optimum number is between 5 to 9 members. Large board increase problems of communication and coordination and also reduces the ability of directors to oversee management.
Based on the above argument, this study hypothesize that there is a relationship between the size of the directors’ board and the internet financial disclosure. This study expects that company with small size of board will disclose more information on the internet. As such, the following hypothesis is formulated:
H3: There is a relationship between board size and internet financial disclosure.
Board size is measured by the total number of member on the board.
(d) Board activity
Board of directors meeting frequency can be considered as a measure of the activity of the Board of Directors (Xiao et al, 2003). When the number of meetings increases, the operating performance of the company is improved (Vafeas, 1999). This suggests that the frequency of meetings is an important aspect in the effectiveness of the Board. The board that meets more frequently, should be able to devote more time to discuss more important issues. To control the production of information at board meetings and participate in decision making, the attendance of members at meetings can be considered as a determinant of the quality of the work of the board (Ben Ayed-Koubaa, 2010). When the board is active, they will demand sufficient information from company. Thus, this study suggests the following hypothesis:
H4: There is a relationship between board activity and internet financial disclosure
Board activity is measured by the percentage of attendance at the board meeting during the year.
This study focuses on four aspects of ownership structure of companies that are likely to affect the extent of financial disclosure. These aspects include concentration of ownership, government ownership, private ownership and foreign ownership.
(e) Concentration of ownership
The agency theory suggests that in modern society, due to the separation of ownership and control, there is a possibility of agency conflicts (Jensen & Meckling, 1976). This conflict may be more important when shares are widely distributed than when they are held by one person (Fama & Jensen, 1983). Managers can therefore disclose information as a means to reduce agency conflicts with shareholders. The premise of agency theory is that companies with widely held ownership can incite their managers to disclose more information to convince the shareholders that they are taking the right actions and to help their shareholders in monitoring their behavior (Raffournier, 1995). Presenting their financial reporting on the Internet is perhaps a mechanism by which they might disclose more information to reduce the agency costs. Managers with high ownership-control have the power to act against the interest of minority shareholders (Jenson and Meckling, 1976). This is because they have greater access to internal information and no compelling need to present their financial reporting on the Internet. The findings of studies examining the relationships between concentration of ownership and Internet financial disclosure are mixed. Oyelere et al. (2003) and Marston and Polei (2004) find a positive association between concentration of ownership and Internet financial disclosure while Abdel Salam & Street (2007) and Xiao et al. (2004) find no association. This study will use the following hypothesis to see whether concentration of ownership has an effect on Internet financial disclosure.
H5: There is a relationship between concentration of ownership and internet financial disclosure.
Concentration of ownership is measured by the percentage of shares held by major shareholders.
(f) Government ownership
Xu and Wang (1999) stated that government agencies do not emphasize on efficiency, competence or profitability when making investment. Rather government may place top priority on maintaining social order and creating job opportunity and thus favor companies employing more workers. Saudi Arabia political pressures might be expected on companies where government holds proportion of their total shares. In 2013, government ownership in Saudi Arabia listed companies range between 0.0048% to 0.015% (Tadawul Annual Report, 2013). Wang (2003) stated that government investors might be subjected to a high degree of political control due to simply being government representatives. Xiao et al (2004) also support that firms with government agency held ownership perform significantly worse than other types of firms. Company with government agency held ownership would reduce internet financial disclosure because they are less motivated than other ownership type. Based on this argument, it is hypothesized that
H6: There is a relationship between government ownership and internet financial disclosure.
Government ownership is calculated based on the sum of the percentage of equity shares owned by the government.
(g) Private ownership
Private agencies ownership or blockholders refer to entities holding more than 3% of a firm’s outstanding shares (Abdelsalam & El-masry, 2008). A high private agencies ownership shows a tight monitoring by outsiders to the management of the entities. This kind of monitoring will encourage managers to increase their performance and to manage the business more transparently. In turn, it will also decrease managers' opportunistic behavior. In 2013 private individual hold around 99.91% and private companies held around 0.06% of Saudi Arabia listed companies (Tadawul Annual Report, 2013). Based on the argument, it is therefore hypothesized that:
H7: There is a relationship between private ownership and internet financial disclosure
Private agencies ownership is calculated based on the sum of the percentage of equity shares owned by private individual or private companies.
(h) Foreign ownership
Agency theory implies that company with foreign ownership would disclose more information. This is supported by Haniff and Cooke (2002) that found a significant positive relationship between foreign ownership and the extent of paper-based disclosure. The results support the argument that the higher foreign ownership is in an organization, the higher information asymmetry will be, and, it is critical if the regulations of the investment receiving country are not well understood. This in turn, pushes foreign shareholders to ask for more information, which is initially not required by the regulations, and eventually leads to more disclosure (Leung, Morris & Gray 2005). The best way to fulfill that requirement is through the Internet as it is available everywhere (Lodhai, 2004). In 2013 1.73% of Saudi listed company shares are held by foreign shareholders (Tadawul Annual Report, 2013). Consequently, it is hypothesized:
H8: There is a relationship between foreign ownership and internet financial disclosure
Foreign ownership is calculated based on the sum of the percentage of equity shares owned by foreign companies or individual
This study will use a content analysis approach to examine the information cited by most active traded companies listed on Tadawul in 2013. Content analysis has been defined as a systematic applicable technique for compressing many word of text into fewer content categories based on explicit rule of coding (Gao, 1996). Content analysis enable researcher to go through large volume of data with relative ease in a systematic fashion (Gao. 1996). Content analysis allows inference to be made which can then be corroborated using other methods of data collection. This study uses a content analysis to collect information for dependent variable and independent variables by checking each website of listed companies and also by checking each companies online annual report.
Data is collected for 2013 as it is the most recent years for which company annual reports are available. The sample is used for two reasons (1) consistent with prior studies that assumed listed companies are more likely to have resources to adopt internet financial reporting and failure to do so is more likely reflect the result of a deliberate choice (2) Saudi listed companies make the most important contributions to the Saudi Arabian economy.
The data for this research is secondary in nature and obtained from two sources: (1) the companies’ websites; and (2) the companies’ online annual reports. Since this study is related to internet financial disclosure, only companies that have websites will be selected as the population of the study. Companies without a functioning website and websites not in English will not be included. Table 1 shows the breakdown of the sample with the final sample selection. A total of 90 datasets were collected during November 15, 2014 to December 1, 2014 from 168 companies.
To test the hypothesis, a model is developed for a regression analysis on the relationship between dependent variable and the independent variables. Multiple regression analysis is used because regression analysis represents a well-established and robust statistical tool for investigating the significance and extent of any relationship or association between a variable of interest and other explanatory variables. The regression model is utilized to find out the results of this study and this is in tandem with the previous study (Arussi, et al. 2009)
A formal regression equation used to test the hypotheses is:
IFD = β0+ β1indepedent+ β2duality+ β3boardsize+ β4attendance+ β5major+ β6private+ β7foreign+β8government+Ɛ
Where
IFD = Total disclosure score across the entire 15 items
Independence = the percentage of non-executive directors (NED) on the board
Duality = Role duality is coded as ‘1” if the CEO is also the chair of the board. Otherwise it is coded as “0’.
Board size = number of people on the board
Attendance = percentage of meeting attendance
Major = percentage of shares held by major shareholders
Private = percentage of shares held by private shareholders
Foreign = percentage of shares held by foreign shareholders
Government = percentage of shares held by government shareholders
Ɛ = error term
This chapter discusses the dependent and independent variables used in the model for this study of Internet financial disclosure .This chapter concludes with the research methodology employed in this study.