Academic journal article Academy of Accounting and Financial Studies Journal

Monitoring Mechanisms and Intellectual Capital Disclosure among Banks in the Gcc

Academic journal article Academy of Accounting and Financial Studies Journal

Monitoring Mechanisms and Intellectual Capital Disclosure among Banks in the Gcc

Article excerpt

INTRODUCTION

Studies to examine the association of voluntary disclosure and corporate governance mechanisms have been done extensively in different countries for various sectors (e.g. Alfraih & Almutaw, 2017; Jaffar, et al. 2013; Saha & Akter, 2013). The current study focuses on a particular type of voluntary disclosure, which is intellectual capital (IC) disclosure since it is an important dimension of voluntary disclosure for which there is a growing demand (Holland, 2003, Burgman & Roos, 2007). IC is the key driver of the company's competitive advantage, and disclosing it reduces investors' uncertainty about future prospects and facilitates a more precise valuation of the company (Barth et al., 2001; Bukh et al., 2005; Holland, 2006; Li et al., 2012). Despite the importance of IC disclosure, the company is disclosing it voluntarily (Petty & Cuganesan, 2005; Zhang, 2001). IC is specific to a particular company and cannot be seen from other companies. Smaller shareholders are at disadvantages if the information about IC is not disclosed because they do not have access to the information. Thus, corporate governance mechanisms are more critical for IC than other types of disclosure inasmuch as it involves information asymmetry more (Aboody & Lev, 2000; Hidalgo et al. 2010). Agency cost due to opportunities for moral hazard, adverse selection and other opportunistic behaviour of management will be increased (Aboody & Lev, 2000; Holland, 2006). Therefore, governance mechanisms might act to reduce agency cost by enhancing voluntary disclosure of IC information (Ramadan & Majdalany, 2013).

A combination of several governance mechanisms can be considered better for reducing the agency cost and protecting the interests of shareholders because of the effectiveness of corporate governance being achieved via different channels (Cai et al., 2008) and a particular mechanism's effectiveness depends on the effectiveness of others (Davis & Useem, 2002; Rediker & Seth, 1995). Ward et al. (2009) argued that it is advisable to view corporate mechanisms as a set of mechanisms to protect and not in isolation from each other. The effectiveness of board of directors, which is an important internal corporate governance mechanism, depends on its characteristics like board size, board independence, and frequency of board meetings, non-duality and board committees (e.g. Alfraih & Almutaw, 2017; Baldini & Liberatore, 2016; Cerbioni & Parbonetti, 2007; Li et al., 2008; Ruth et al., 2011; Saha & Akter, 2013). Thus, it could be said that boards that have a higher score for these characteristics are better able to protect the shareholder by increasing the level of disclosure than boards that have a lower score. In the same vein, it can be said that the effectiveness of the audit committee depends on its characteristics like audit size, independence, frequency of meetings and audit financial expertise (e.g. Akhtaruddin et al., 2009; Akhtaruddin & Haron, 2010; Saha & Akter, 2013). Ward et al. (2009) argued that previous studies considered each mechanism separately in addressing agency problems as they ignored the idea that effectiveness of single mechanism depends on the other mechanisms. In addition, Agrawal and Knoeber (1996) proof that the results on the effectiveness of single mechanism might be misleading by showing that the effect of some single mechanisms on firm performance disappeared in the combined model. Based on the idea that the impact of internal governance mechanisms on corporate disclosures is complementary; increase (decrease) of the characters that enhance the board and audit committee effectiveness leads to increase (decrease) of the level of voluntary disclosure. This current study diverges with the prior studies on IC disclosure (that looked to each board characteristic individually) by examining the effect of board characteristics as a bundle of mechanisms in protecting shareholders interest. …

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