Corporate Governance and Disclosure of
Information: Evidence from Latin America
Master Thesis by
Marek Adamski Mora S1659553
University of Groningen
Faculty of Management and Organization International Business & Management
First supervisor: Mr. I. Haxhi
Second supervisor: Mr. Drs. H.A. Ritsema
Marek Adamski Mora Woesduinstraat 29-3 1058 SZ Amsterdam
+31 6 38816568
m.adamski.mora@student.rug.nl
TABLE OF CONTENTS
Abstract ... 3
1. Introduction ... 4
2. Corporate Governance and Disclosure ... 7
3. Methods ... 19
4. Results ... 22
5. Concluding remarks ... 28
References ... 31
Abstract
Disclosure of information is an essential provision of a good corporate governance agreement. This paper examines the level of disclosure of key corporate governance arrangements and factors that influence it in Argentinean, Brazilian, Chilean and Mexican firms. Our paper extends Berglof and Pajuste’s (2005) earlier research and methodology applied in Central European countries. We observe 105 listed firms from the stock exchanges in these countries. We show that, the level of disclosure of a firm is related to its size, its ownership structure and whether it shares are cross-listed or not. Overall, there is no significance on the relation between external capital dependence and the level of disclosure. Furthermore, country-level factors such as financial development and rule of law have an effect on the level of disclosure.
1. INTRODUCTION
Corporate governance (CG) has historically been an important subject of academic research. It defines how a firm is being governed and the relations derived from it. Corporate governance proposes solutions to the separation of ownership and control. The issue emerges whenever an outside investor (shareholder) wishes to exercise control differently from the manager in charge of the firm (Jensen and Meckling, 1976). This agency problem accentuates when there is a lack of accurate information (Becht, Bolton, and Röell, 2002). Disclosure of information should arise in a good corporate governance agreement. Investors require relevant and crucial information on a firm’s management and performance to make sound investment decisions. Disclosure means that this information will be available for interested parties (e.g. investors, financial analysts). As described by Ostberg (2004), disclosure is essentially a form of minority protection that reduces the scope for extraction of private benefits by controlling shareholders. More disclosure results in one-time windfall profits for minority investors as they expect less future extraction of private benefits.
economies, particularly in the US. Nevertheless, CG is also an issue of concern in Latin America. Currently, CG provisions (e.g. shareholder rights, methods of executive compensation, the role of the board of directors, disclosure of information and existing corporate legislation and regulations) in Latin America lag behind those in more developed economies. Euromoney (2006) argues that if Latin American companies wish to become truly global and raise capital from the world financial markets, it is essential to improve CG and accountancy standards. For the OECD, good corporate governance is critical to private-sector led economic growth and enhanced welfare that depend on increased investment, capital market efficiency and company performance in Latin America.
Latin America’s emerging markets are expected to progressively integrate as important players in the global economy (OECD). As their economies grow, firms will grow as well. Firms will gradually require raising more and cheaper capital to finance their expansion. On the other hand, suppliers of capital will demand more transparency in order to allocate their investments. There is no empirical evidence on the current situation of the level of disclosure of CG arrangements in Latin American firms and the factors that influence it. Research is needed to fill this gap. This situation brings us to the subsequent research question:
What is the level of voluntary disclosure of corporate governance arrangements in Latin American firms (Argentinean, Brazilian, Chilean and Mexican) and what factors influence their level of disclosure?
governance challenge to balance the incentives of controlling owners to exercise governance against the protection of minority investors.
In line with Berglof and Pajuste, we extend this study to Latin America. First, we observe what corporate governance arrangements Latin American firms are currently voluntarily disclosing. Then, we estimate what factors either promote or deter disclosure. Using a sample of 105 firms, we will observe voluntarily disclosed information of Latin American companies available on their corporate websites and grant each firm a score depending on how much they disclose. To empirically explain why certain firms disclose more than others do, we will use the voluntary disclosure score as the dependant variable and regress it to our independent variables, represented as firm-level characteristics (size, external capital dependence, ownership structure and listing-status). Furthermore, we include in the model two control variables, represented as country-level characteristics (financial development and rule of law), that indirectly could influence firm disclosure.
Our analysis focuses on four countries, namely: Argentina, Brazil, Chile and Mexico. These countries have the largest stock markets in the region. Moreover, they share certain characteristics. Argentina, Mexico and Brazil have the higher GDP from Latin America. The market capitalization of listed companies as a percentage of GDP in Chile is the highest from Latin America (World Bank), and comparable to many developed economies, making this country very interesting to research. In addition, these four countries received the largest share of FDI in Latin America in 2006 (CEPAL). Furthermore, these nations have devoted more efforts to improve CG in the recent years. Latin America’s Roundtable on Corporate Governance four meetings have been held in these countries.
approaching Latin America, a region still unexplored on this subject. Moreover, it reveals what countries are taking voluntary disclosure more seriously. Finally it aims to provide investors and policy makers with consistent facts and evidence on the current situation of disclosure of information in the region.
The outcome of our observations shows a high level of voluntary disclosure for Brazilian firms, a middle level for Chilean and Mexican companies, and a low level for Argentinean firms. We found evidence that the voluntary disclosed information is higher in large firms, less concentrated ownership structures and cross-listed companies. We however attained no evidence of more disclosure on highly external capital dependant firms. When we control for the country-level factors, we found strong significance for better disclosure on firms located on higher financially developed markets, and weak but significant evidence on better disclosure for firms located in countries with a higher ranking on rule of law.
The following section (section 2) reviews the development of CG and disclosure of information at the global and Latin American scale, and proposes four hypotheses. In our third chapter, we discuss the methodology and research design. In the fourth section, we present and discuss our empirical results. The final section concludes and draws some recommendations for future research.
2. Corporate Governance and Disclosure 2.1 Corporate Governance in the world
interests in this relationship. Later, Jensen and Meckling (1976) developed the agency theory of corporate governance, in which a principal (shareholder) interests differ from those of an agent (manager). The theory focuses on the need to sign a contract in which shareholders ensure that managers pursue shareholders interests. Following these important authors of corporate governance theory, a lot has been researched and new trends and evidence on CG development found. Effective corporate governance can positively influence the development of financial markets (La Porta et al, 1998). Consequently, financial development may foster economic growth (Levine, 1999).
It is now clear that CG differs among countries and it depends on specific institutional, labor, education, economic and law organization, among other determinants (Hall and Soskice 2001; Whitley 1994, 1999; Aguilera and Jackson 2003; La Porta et al. 1998). La Porta et al. (1998) found that common-law tradition countries contain better provisions to protect investors and creditors than other law systems including the French, German, and Scandinavian civil-law systems. In the common law countries of English tradition (USA, UK), greater legal protection to minority investors implies less need for ownership concentration, which increases access of companies to external finance and reduces capital costs. For this reason, they argue that capital markets are more developed in common-law countries, especially when compared to French civil-law countries. The French civil-law system is precisely the one in which Latin American countries base their legal systems.
more in countries with weak legal environments. This means, that firms can partially compensate for ineffective laws and enforcement by establishing good CG and providing credible investor protection such as increasing disclosure. This argument makes us think that Latin American countries may balance the lack of an efficient legal framework and public enforcement by introducing private-led initiatives aiming to improve CG provisions and investor protection. However, the authors stress on the need to improve country-level CG provisions and its legal system as an important issue in emerging markets.
2.2 Corporate Governance in Latin America
We now provide a picture on the current situation and development of corporate governance in Latin America. This review aims to set ground for a further discussion and analysis of results, which are expected to be associated to CG characteristics of the region. Latin American countries share a common feature, the French civil legal code. Civil law codes and particularly the French Civil code are not effective on the protection of investors (La Porta et al. 1998). Regulators continuously fail to provide an adequate protection to investors and minority shareholders. Enforcement in Latin America is weak and litigation is expensive, uncertain, lengthy and cumbersome (Capaul, 2003). Private litigation is uncommon, though increasing dependence on the typically inefficient state regulators. Additionally, investor protection relies not only in legal rules, but also is associated with deeper capital and financial markets (Capaul, 2003). The lack of liquidity hampers the process of investment and consequently protection of investors.
Corporate Governance in Latin America was developed by this forum. It examines the importance of good corporate governance for the region, discusses trends and characteristics particular to the region, and sets out the Roundtable's recommendations and priorities for reform.
All countries in the region share many of their characteristics. Ownership in Latin American firms is usually very concentrated. Family-owned and family-run firms are common among listed firms in Latin America. These leading families frequently build-up business groups such as conglomerates and holdings, which own large firms in often unrelated industries. It is difficult to locate the controlling shareholder, and diminishes the capacity of minority shareholders to influence corporate policy because of interference of other firms in the group. Moreover, it is common for Latin American companies to issue non-voting shares as a mechanism to raise capital without giving up control (Capaul 2003). Investors with non-voting shares are excluded from decision-making and may be affected by controlling shareholders pursuing personal benefit. Finally, the role of the boards is weak in Latin America. Due to block holding, controlling shareholders exercise significant influence over boards, either directly (as board members) or indirectly (through board members who report to them). Independent directors are not common in Latin American Corporate Governance.
trade agreements; and the new role of pension funds as institutional investors in the Latin American markets, have had responsibility on the reshape of Latin America’s financial markets and CG characteristics.
Certainly, CG has experienced changes in the last years. Argentina, Brazil, Chile and Mexico have already started some initiatives to improve the quality of CG in their firms. In Argentina the capital markets reform was decreed into law and became effective in June 2001. The new law covers a broad range of governance issues, with provisions including procedures to ensure that minority shareholders receive a “fair price” in de-listings, majority independent audit committees, establishment of arbitration courts for the resolution of conflicts and a greater role for shareholders through increased participation in shareholder meetings. Apreda (1999) suggests in his paper that Argentina has been performing as if it were following the common law countries tradition, due to a large engagement of American, British, Canadian and Australian companies in the process of privatization, mergers and acquisitions of Argentinean firms. He argues these new investors have included governance practices that go in line with common practices in their headquarters.
strengthened shareholder rights, including submission of disputes to a Market Arbitration Panel; and the Novo Mercado requires improved disclosure, strengthened shareholder rights, submission of disputes to the Market Arbitration Panel and the absence of non-voting shares. Future Initial Public Offerings (IPOs) are expected to take place on the Novo Mercado.
Chile was the first country in the region to undertake significant reforms to the legal and regulatory framework for corporate governance. In December 2000, the new Tender Offers and Corporate Governance Law was enacted. Subsequently, the Superintendence of Securities and Insurance (SVS) issued several complementary regulations. The main provisions of the new law relate to stricter rules prohibiting insider trading; stronger enforcement powers for the SVS; reinforcing the role of institutional investors (particularly pension funds and mutual funds); expanding the possibility for exercising withdrawal rights; tighter regulation of related party transactions and conflicts of interest; and the obligation to create committees of directors.
Transnational organizations are assisting experts and authorities across the region on how to improve CG. The four countries studied in this research are directly involved on these efforts. The Latin American Roundtable on Corporate Governance published the White Paper on CG in Latin America. It proposes a number of crucial reforms needed to bring CG in the region closer to international standards. The following is a compilation of some recommendations related to the policy of disclosure of information and transparency provisions.
The company should disclose all business relationships and material provisions of contracts.
Laws and regulations should enforce the disclosure of a company’s ownership structure, and report any changes on it. The company and controlling shareholders should identify all
parties with whom controlling owners have a material business relationship relevant to the company and to fully disclose all related-party transactions.
Controlling shareholders, directors, managers and other insiders should be required to make full reporting of all their transactions in securities of the company and affiliates.
Companies should fully disclose the composition of the executive board and board of directors.
The legal framework should require full disclosure on a periodic basis of director affiliation, interests and total remuneration.
2.3 Disclosure of information and hypotheses
capital. Asymmetry of information creates costs by introducing adverse selection into transactions between buyers and sellers of firm shares. Adverse selection usually manifests in reduced liquidity of firms shares. To overcome the reluctance of potential investors to hold firm shares in illiquid markets, firms must issue capital at a discount. Discounting results in fewer earnings to the firm and hence higher costs of capital.
A commitment to increased levels of disclosure reduces the possibility of information asymmetries arising either between the firm and its shareholders or among potential buyers and sellers of firm shares. This, in turn should reduce the discount at which firm shares are sold, and hence lower the costs of issuing capital.1 Leuz and
Verrecchia (2000) empirically tested this theory, applying it to disclosure levels of German firms. They found statistical significance showing that increased disclosure indeed reduces the cost of capital. Cheng, Collins and He Huang (2006) found empirical evidence that greater financial disclosure and stronger shareholder rights regimes interact in reducing firms’ costs of equity capital.
Literature on firms’ disclosure of information at the Latin American level is rather scarce. Da Silva and de Lira Alves (2004) studied the relationship between disclosure of information on the internet and the firm value effect on companies in Argentina, Brazil and Mexico. They found significant positive association between voluntary financial disclosure and firm value. However, they do not provide any information on what influences disclosure in these countries. This article will try to fill this gap on the existing literature on disclosure of information and its determinants in Latin America.
Various authors have studied the determinants of disclosure. Cerf (1961), Singhvi and Desai (1971) and Buzby (1975) seem the first to
1Diamond, Douglas W. and Robert E. Verrecchia, “Disclosure, Liquidity, and the Cost of
study the relationship between firm level characteristics and levels of disclosure of information. The main characteristics used in their research were company size and listed or unlisted status. They found a positive relationship for both characteristics. Because of strong regulation, nowadays it seems obvious that listed firms disclose more than unlisted firms do. The latter authors argue that larger firms manage a greater amount of information and data, and have more resources available to supply this information to investors. Furthermore, they argue that larger firms operate in wider markets, are monitored more extensively and make more intensive use of the security markets, making use of disclosure to incentive investors’ confidence. On the other hand, smaller firms should disclose less because they feel that fuller disclosure of their affairs may put them at a competitive disadvantage with larger firms on the same industry. More recent articles have demonstrated the influence of firm size in the levels of disclosure on information (Meek et al., 1995; Doidge et al., 2004; Tsamenyi et al., 2007). Large firms are more complex and manage bigger amounts of data and information that investors will demand to make decisions. Agency costs in large firms are commonly higher (Jensen and Meckling, 1976), thus better CG is needed to reduce them. Moreover, large firms are usually more closely monitored and followed by market players than small firms are. Hence,
H1: Larger firms disclose more.
transparency. They used availability of cash (more cash available, less external capital dependence) as a proxy for external capital dependence and found a negative relation with better governance. Other authors (Meek et al., 1995; Barako et al., 2006) found leverage is positively related to voluntary disclosure of information. Leverage is commonly used as a proxy for external capital dependence.
Berglof and Pajuste (2005) analyzed as well the impact of external capital dependence in the levels of disclosure. They however did not find a significant relationship, in contrast to Doidge et al. (2005) who did find it. Firms that rely on external capital to carry out their operations and project development should disclose more and better information (Berglof and Pajuste, 2005). Increased disclosure may allow them to obtain investors confidence. Therefore,
management might be better aligned (Berglof and Pajuste, 2005). Thus,
H3: Firms with concentrated shareholdings disclose less.
Meek et al. (1995) investigated what factors affect voluntary disclosure in continental Europe, UK and US firms. The factors studied were, firm size, country/region of origin, leverage, multinationality, industry, profitability and international listing status. They found a positive and significant relationship between international listing status and levels of voluntary disclosure. Lins et al. (2000) argues that deep and liquid U.S. capital markets reduce the cost of capital for cross-listed firms. Other authors (Cantale, 1996; Fuerst, 1998; Moel, 1999) show that higher disclosure standards in the U.S. incentive more liquidity and better opportunities for raising capital. In addition, better investor protection in the U.S. capital markets reduces agency costs for cross-listed firms (Coffee, 1999; Stulz, 1999; Reese and Weisbach, 2002). Firms with listed shares in more than one stock market need to comply with greater regulation, especially when shares are listed in markets with higher levels of investors’ protection. Moreover, firms, which cannot rise sufficient capital in their local market will voluntary, disclose more information when listed on markets where investors demand more and better information in order to allocate their money. Therefore,
H4: Firms with cross-listed shares disclose more.
countries, because the availability of capital in developed economies incentives better governance. As a result, greater financial development is positively related to transparency and disclosure. In the case of country-level characteristics, they observed the protection a state grants to investors, the legal environment, economic and financial development, all which were positively related to the governance ratings. Countries with higher financial development can provide deeper finance to firms through capital markets and can incentive better disclosure due to the availability of capital. Hence, we expect that firms located in countries with a higher level of financial development disclose more.
Berglof and Pajuste (2005) controlled for country-level effects on the level of firms’ disclosure of information. The authors took rule of law of each country from the World Bank index as a measure. They found strong evidence on the influence of rule of law on firms’ disclosure. Doidge et al. (2004) also found a significant positive relation between legal envorionment, proxied by rule of law, and disclosure and transparency.
Figure 1: Conceptual model
3. Methods
3.1 Sample and data collection
Our research design comprises the collection of data from publicly traded firms on the Argentinean, Brazilian, Chilean and Mexican stock exchanges. The sample sums 105 firms from those four countries. The sample companies were taken from their respective stock market indexes. Namely, Merval 25 for Argentinean firms, IBx 50 for the Brazilian, IPSA for the Chilean and IPC for the Mexican firms. The sample was collected from those indexes because their stocks better represent the performance of each market as a whole and may provide a better picture of disclosure practices. The study only includes firms with a website. In line with Berglof and Pajuste, we do
not include financial companies, because of the singular nature of their asset and liabilities structure, not comparable to non-financial companies.
We observed the voluntary disclosure of corporate governance arrangements on each company’s website. We use the index constructed by Berglof and Pajuste (2005). The index grants a specific score to each company depending on what to they disclose. The elements observed and their codification is as follows: Website: 0.5 if the website is only in local language, and 1 if the website is available also in English. Annual Report: 0 if the latest annual report is not available online, 0.5 if the latest annual report is provided only in local language, and 1 if the latest annual report is available also in English. CGSection: 1 if the website includes a separate section on corporate governance; and 0 otherwise. MgrNames: 1 if the website includes the names of key managers; and 0 otherwise. BoardNames: 1 if the website includes the names of board members; and 0 otherwise. Owners: 1 if the website discloses ownership structure of the firm; and 0 otherwise. InsideShares: 1 if information is provided on shares held by each board member and manager, 0.5 if information is provided on aggregate shareholdings by the managerial and supervisory board, and 0 otherwise Bylaws: 1 if company’s bylaws are available online; and 0 otherwise. Finally, we sum these eight measures into WebDisclosure (website) index that ranges from 0.5 to 8.
3.2 Variables
The dependant variable is the disclosure score (DIS) obtained from the websites observation.
dollars) as proxies (Cerf, 1961; Singhvi and Desai, 1971; Buzby, 1975; Tsamenyi et al., 2007). External capital dependence (ECD) is related to higher leverage, lower ROA and lower cash balance (Doidge et al., 2004; Berglof and Pajuste, 2005). Ownership structure (OS) is another factor. To evaluate its influence, we use the percentage of stocks owned by the largest shareholder as a measure of ownership concentration (Doidge et al., 2004; Berglof and Pajuste, 2005; Tsamenyi et al., 2007). Cross-listing status (CLS) is the last firm-level characteristic (Meek et al., 1995). We use a dichotomous (dummy) independent variable. Single-listed firms obtain a 0 and cross-listed a 1. All firm-level financial data, ownership structure percentages and listing status were collected either from firms’ websites, annual reports available on the firms’ websites or from the stock exchanges websites.
We include two control variables in the model, to evaluate the country-level effects. We use rule of law (ROL) as a factor influencing disclosure (Doidge et al., 2004; Berglof and Pajuste, 2005). Governance indicators from the World Bank will be used as a proxy (Kaufmann et al., 2006). Finally, the level of financial development (FD) is the other country-level factor influencing voluntary firm disclosure. We measure financial development by taking the ratio of stock market capitalization to GDP (Beck, Demirguc-Kunt, and Levine 2001; Doidge et al. 2004). This data is available from the World Bank website. Both indicators will be included in the model as control variables, in order to assess their potential influence on the voluntary firm disclosure.
3.3 Model
between 0.5 and 8 with a 0.5 step. The equation for the ordered logit model has the following characteristics:
ln(DIS) = αo + β1*SZ + β2*ECD + β3*OS + β4*CLS+ β5*FD + β6*ROL + ε
Of which the symbols have the following meaning: α: threshold value
β: beta coefficient ε: error term
---Insert Table B1 about here
---4. Results
Appendix C illustrates the aggregate results on the index for voluntary disclosure on the firms’ websites. Virtually all companies observed have an English version of their website. Nevertheless, very few companies include an English version of their annual report. Brazilian firms, on average, disclose by far more. Chilean and Mexican firms’ disclosure is very similar in average, with a slight advantage of Chilean companies. Argentinean firms’ disclosure lags far behind with an average score of only 2.85.
---Insert Table C1 about here
---The large variation on disclosure between Brazil and Argentina might be occurring because of a much more active involvement of the Brazilian financial authorities on CG policy and its subsequent improvement and development. We will further discuss these and other results later on.
---Table E1 summarizes the specifications of the model and all five regressions applied. The dependent variable is the score on voluntary web disclosure. The table includes the independent variables with each of their coefficient and the z statistics used to test the statistical significance of each coefficient. We report the chi-square statistic for a test of the joint significance of each regression. All tests are significant. Additionally, the pseudo R2 is used to measure the
strenght of the association between the dependant variable and the predictible variables (Norusis, 2004).
Table E1 shows that hypothesis 1 stating that large firms disclose more information on their websites, is strongly supported at a 1% level of significance. The regressions applied using totals assets and market capitalization as indicators of firm size, confirm a positive relation between the size of the firm and the amount of disclosed information. The model shows strong support for both variables; however, the explanatory power of the model increases by using total assets as the proxy for firm size.
For hypothesis 2, we can observe on Table E1 that none of the variables (leverage, ROA and cash balance) used to proxy the dependence on external capital are significant. Leverage is positively related to disclosure (as expected), however not significant. ROA is positively related to disclosure, contrarily to what was expected. Nevertheless, the relation is not significant. Cash balance is negatively related to the disclosure score (as expected), yet this relationship is insignificant. Overall, the tests do not provide us of any evidence to believe that external capital dependence encourages firms to voluntary disclose more.
concentrated shareholding. Thus, we have robust evidence to accept hypothesis 3.
Results in Table E1 support hypothesis 4 at a 5 % level of significance. Hypothesis 4 predicts higher disclosure from firms quoted in more than one stock exchange. Category 0 (single-listing status) is negatively related to more disclosure. Hence, our results show evidence of greater voluntary disclosure in firms listed in two ore more stock markets.
Regarding the country-level factors influencing firm disclosure, we found statistical evidence showing more disclosure on firms based in countries with a higher level of financial development. The ratio market capitalization/GDP is positively related to higher scores on the voluntary disclosure index. Moreover, the pseudo R2 increases when
we introduce the indicator for financial development.
The last regression in Table E1, which controls for the country-level variable rule of law, shows a positive and significant relationship between rule of law and voluntary firm disclosure. This provides evidence of higher levels of disclosure for firms located in countries with a better score on the rule of law indicator. The rule of law variable fairly diminishes the explanatory power of the model (R2
a Hypotheses: **** Strongly supported (at 0.01), *** Supported (at 0.05), ** Weakly
supported (at 0.1), * Not supported.
4. 1 Discussion
The results obtained from the observation of the sample firms’ websites shows us a substantial variation across countries. Striking is the high level of voluntary disclosed information by Brazilian firms. Brazil has implemented an aggressive CG agenda. The launch by the Sao Paulo Stock Exchange of the three new market segments, the Special Corporate Governance Levels 1, 2, and the Novo Mercado have had presumably a positive effect on the increase of disclosure levels by Brazilian firms. These new market segments are a unique case in Latin America. Many firms comprising the IBX 50 (stock market index) are also part of one of these new market segments, thus obliged to improve CG provisions. Furthermore, Brazil introduced a Code of Good Governance of voluntary compliance; that
Firm-level characteristics H1: Firm size**** H2: Dependence on external capital* H3 Ownership structure**** H4: Cross-listing** Country-level characteristics Control variables: -Rule of law -Financial development Firms’ disclosure
might have stimulated better disclosure practices by publicly traded firms. Additionally, Brazilian companies are the biggest from the sample, thus their companies are expected to disclose more. Chile and Mexico obtained a similar score on their level of disclosure. Chile implemented a number of reforms on CG regulation and strengthened the enforcement power of its supervisory institution. In the Mexican case, they introduced a Code of Good Governance. Nonetheless, Mexico is still somehow lagging. The level of shareholder concentration is higher in Mexico than in the other countries studied. This could be constraining higher levels of disclosure for Mexico. Argentina got the lowest score on disclosure level. Argentina’s financial crisis early in the decade heavily affected its financial development, with high delisting activity as many firms went bankrupt. This might have a negative impact in a further development of CG in the country. Companies might have been busier trying to survive the financial crisis than improving their CG practices. In addition, the Argentinean companies are in average smaller than their counterpart companies are. This could partially explain lower disclosure. Moreover, law enforcement in Argentina is the weakest from the countries researched. Companies may choose not to disclose when they perceive disclosure as a cost more than a benefit, and get away with it. Overall, there is no reason to believe that Argentinean companies are implementing CG practices as if they were following the common-law countries tradition due to the large engagement of American, British, Canadian and Australian companies in the process of privatization, mergers and acquisitions of Argentinean firms, as Apreda (1999) argued.
disclosure. This could reduce the cost to raise capital and hence their growth projects.
Our analysis found no significant relationship between external capital dependence and disclosure. It seems not be a determinant for disclosure of information. This result goes in line with the outcome presented by Berglof and Pajuste (2005). As financial markets are still underdeveloped in Latin America, many firms may be relying more on debt capital rather than equity. This situation makes disclosure not so advantageous as in highly developed financial markets. However, improving disclosure practices may help to increase liquidity of shares and in turn, make equity capital more attractive for firms. In order to amend certain circumstances, other matters must change before. Stock market authorities and firms must undertake initiatives in this sense.
Furthermore, we show ownership concentration is indeed a factor influencing voluntary disclosure. Concentrated shareholding structures are deterring more disclosure in Latin America. When ownership is concentrated in few hands, there is less presence of minority shareholders. This in turn means less need to inform them about the firm performance and CG arrangements. Simultaneously, controlling shareholders may seek to increase there private benefits by disclosing less information. A particular issue arising in Latin America is the existence of different class of shares. All though some shareholding structures may appear to be dispersed, the voting rights may diverge from cash flow rights. Companies may disclose to attract investors, but the controlling stake remains in few hands. Thus, disclosure is enhanced but other CG provisions such as the one share-one vote basis continue to be weak. The existence of two classes of shares is still popular in Brazil and Mexico.
The largest firms in Latin America are usually cross-listed, either in New York or European markets (mainly Madrid). Firms may be constrained by underdeveloped financial markets in the region; hence, they seek for better opportunities in other locations. Migrating firms have to compete against local firms for capital, thus they need to match -at least- their voluntary disclosure in order to attract investors. This may be affecting smaller firms that still do not have the possibility to be traded in these highly developed markets. The supervisory entities should work on the improvement of CG regulation and enforcement in order to make stock markets in the region more transparent for investors and facilitate the financing process for small and large firms equally, especially for firms with growth opportunities.
Finally, we found evidence on the influence of country-level characteristics on voluntary disclosure in Latin American firms. The country-level factors introduced in the regressions as control variables elevate the explanatory power of our model. The results above demonstrate a link between the level of financial development and voluntary disclosure. Increased disclosure should contribute to liquidity; reduce the cost of capital (Diamond and Verrecchia, 1991) and further develop financial markets. The regressions applied show that firms located in countries with greater financial development tend to disclose more. Chile and Brazil’s stock markets are more developed than the Argentinean and Mexican. This situation is reflected on higher disclosure by firms in these countries.
the annual reports. On the other hand, if disclosure requirements are not enforced, companies may decide to hide information at both the mandatory and voluntary level. The rule of law indicator is higher in Chile and Brazil, precisely the countries where firms’ disclosure is higher. These results point out to the importance of an efficient regulatory framework and its enforcement for the development of CG in Latin America.
5. Concluding remarks
This study examines for the first time the level of voluntary disclosure and its determinants in Latin American firms. The analysis presented a surprising high level of voluntary disclosure in Brazilian firms. Chile and Mexico attained middle scores on their level of disclosure. Finally, Argentina lags far behind with a low level of voluntary disclosure.
Our research provides evidence for policy makers, investors and analysts on the state of voluntary disclosure of information in Latin America and its relation with the further development of CG in the region.
The results showing higher disclosure by firms listed in more than one stock market makes us think regulation in Latin America is poor and might be affecting share liquidity. Firms migrate because of a lack of financing opportunities. Compliance with stricter CG standards in high-developed financial markets drives firms to voluntarily disclose more information. Incumbent authorities in the region have the challenge to extend the regulatory framework in order to improve CG and its subsequent enforcement. Good CG practices should set ground for a fluent and transparent investment process, enabling firms to finance their projects in liquid local markets.
On our empirical analysis, we controlled for the development of financial markets in each country. The model provides evidence of better disclosure of firms located in higher developed financial markets. Earlier research on the relation between CG and financial development (La Porta, 1998; Doidge, 2004) is supported in this study. Policies seeking financial end economic growth in Latin America need to consider the contribution of CG to these objectives. In addition, legal systems on the region should be able to establish an environment capable to promote good CG and its provisions such as disclosure. Efficient enforcement of CG laws and regulations seem crucial. In this sense, we regard as imperative for the region to continue a healthy debate together with transnational organizations (OECD, World Bank) and local authorities aiming to develop CG.
Furthermore, our results go in line with Berglof and Pajuste’s findings on Central European countries. Therefore, we consider feasible to extend their framework to other emergent economies in the world.
quality of CG law and regulations in the region and its subsequent enforcement. Moreover, our sample covers firms from four Latin American countries. Future studies might consider the inclusion of other nations such as Colombia and Peru, all though less developed, experiencing significant economic and financial growth.
Codes of good governance might also have some influence in CG and disclosure in particular. Brazil and Mexico already have introduced one in their financial markets. An interesting topic for further research might be the evaluation of the impact of codes of good governance in CG provisions such as disclosure. Should every country in Latin America implement their own code? We leave this and the above-mentioned issues for further investigation.
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