CORRELACIÓN DE LAS VARIABLES DE LA INVESTIGACIÓN TABLA DE CORRELACIÓN ENTRE LAS VARIABLES:

2.3.2.1Agency Theory

A significant body of work in the area of developing the theoretical foundation of financial disclosure practices and more recently in the development of that of corporate governance has been built on the notions of agency theory. Agency theory has been developed within the discipline of financial economics (Tricker, 2009) and is defined by Jensen and Meckling (1976: 5) as a “contract under which one or more persons [the principal(s)] engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent”.

Under agency contracts two potential conflicts of interest may result: the shareholder/manager conflict which gives rise to the agency cost of equity, and the bondholder/shareholder-management conflict, which gives rise to the agency cost of debt (Abd-Elsalam, 1999).

Agency costs are the sum of monitoring costs, bonding costs, and residual loss (Jensen & Meckling, 1976; Kelly, 1983). Monitoring costs result when the actions of company management are observed and judged by the principal and remuneration is linked with the outcome of monitoring (McKolgan, 2004; Omar, 2007). Bonding costs result when the agent endeavours to assure that he/she will not exploit or harm the principal’s interests (Denis, 2001; McKolgan, 2004; Omar, 2007). Finally, residual loss results when the principal cannot be assured that the agent acts fully in his interest; thus, the principal takes action himself (Omar, 2007).

Owusu-Ansah (1998a) suggests that all agency relationships have two distinguishing characteristics. The first is the degree of decision-making autonomy that the agent exercises which affects the welfare of both the principal and the agent. The second is the differing and varying interests of both parties to the contract. These features create a conflict of interests, whereby the agent acts to maximise his/her utility at the expense of the principal – a phenomenon referred to as opportunism (Mallin, 2009).

In the agency relationship, agents (managers) are considered to have an information advantage over principals (owners). Owners who are not directly involved in running their business believe they are at a disadvantage compared to managers who have access to all information (Cooper & Keim, 1983; Bromwich, 1992; Haniffa, 1999; Fields et al., 2001; Al-Htaybat, 2005; Barako et al., 2006). This problem is referred to as information asymmetry which arises when the principal and the agent have access to different levels of information (Bromwich 1992; Omar, 2007; Mallin, 2009). Thus,

one way of monitoring managers’ activities and ensuring that they are not behaving in a manner detrimental to the owners’ interest is by demanding access to financial and non-financial information on a regular basis (Haniffa, 1999). Marston and Shrives (1996) and Watson et al. (2002) argue that managers could reduce agency costs and investor uncertainty by disclosing more financial information in annual reports, which would subsequently increase the confidence of shareholders. Mallin (2009) argues that the desire for improved disclosure embodied in corporate governance best practices should help in reducing the information asymmetry problem since shareholders would be better informed about company activities and strategies. Additionally, Healy and Palepu (2001) make the point that the election of a board of directors to act on behalf of investors, and the use of intermediaries’ information such as that from financial analysts, help to reduce agency costs.

Concerning the interpretative power of agency theory in corporate governance research, Tricker (2009) suggests that this enables researchers to examine the hypothesis that a causal relationship prevails between governance systems established to control the agent and the impact on the interests of the principal. In this regard he states that “agency theory offers a statistically rigorous insight into corporate governance processes. Because of its simplicity and the availability of both reliable data and statistical tests, agency theory has provided to corporate governance theory building” (Tricker, 2009:220). In a similar vein, Daily et al (2003) argue that in addition to recognising the self-interested nature of humans, this theory is simple as it reduces large corporations to two participants; managers and shareholders with a clear and consistent identification of the interests of each. Based on this argument, the use of agency theory in prior corporate governance research seems justified (e.g., Haniffa, 1999; Ghazali, 2004; Cheng & Courtenay, 2006; Ghazali & Weetman, 2006; Dey, 2008; Khan, 2010). However, although the agency theory goes some way toward explaining management’s motivation to disclose all material information, and whilst it is the most commonly used in corporate governance scholarly research, its opponents argue that it fails to explain non-financial motivations which influence levels of disclosure such as the unwillingness by some companies to avoid the release of material information to their competitors (Ockabol & Tinker, 1993, cited in Vlachos, 2001:107). Also, it is criticised on the grounds that in corporate governance research, it has a relatively narrow theoretical scope as it interprets corporate governance-related issues in terms of the principal-agent contract, ignoring the fact that board behaviour is influenced by interpersonal communication, group dynamics and political intrigue which cannot be measured (Tricker, 2009). Daily et al (2003: 372) state that “A multitheoretic approach to corporate governance is essential for recognizing the many mechanisms and structures that might reasonably enhance organizational functioning”. Hence, it can be said that agency theory alone cannot provide a competent theoretical foundation

for compliance behaviour, especially within the developing country context where the cultural influence dominates. Consequently, in this study, the employment of other theories in order to enhance the integration between the empirical findings and their theoretical foundation is justified.

2.3.2.2Cost-benefit Analysis

Managers’ incentives to disclose more information in order to reduce agency costs, to raise capital as cheaply as possible, or to distinguish their companies from other companies, are based on the trade-off between the costs and benefits of providing such information (Bhushan & Lessard, 1992; Al-Htaybat, 2005). In a similar vein, Abd-Elsalam (1999) argues that management decision to comply with mandatory disclosure requirements involves a comparison between compliance and non-compliance costs. This supports the notions of ‘Transaction Cost Economics’ theory which argues that financial disclosure costs should be incurred to the point at which the increase in costs equals the reduction of the potential loss from non-compliance (Tricker, 2009).This theory is closely related to agency theory with its underlying financial economics basis (Mallin, 2009; Tricker, 2009). In this regard, Stiles and Taylor (2001, cited in Tricker, 2009:223 and in Mallin, 2009:18) argue that both transaction cost economics and agency theories focus on managerial discretion. Additionally, they argue that both theories highlight the important role of board of directors in monitoring management behaviour.

As proposed in prior research, there are direct and indirect costs associated with disclosure (Foster, 1986; Haniffa, 1999; Al-Htaybat, 2005).The former include the value of the resources used in gathering, preparing and processing the information, management, supervision, audit and legal fees as well as the dissemination of information (Foster, 1986; Cooke, 1992). Indirect costs include the time spent in deciding what to disclose by corporate managers (Benston, 1976). In most cases, managers must balance the benefits of lower capital cost, extra information and the costs associated with such disclosure like the cost of providing and preparing information. In the meantime, they must consider the effects of such disclosure on their competitive status (Meek et al., 1995; Al- Htaybat, 2005). Within the same context, Vlachos (2001) proposes that in order to assess management’s disclosure decision, it is necessary to analyse the different costs of, and benefits from, corporate financial disclosure and to assess which of them are likely to have significant influence on the disclosure decision. However, he argues that although several costs and benefits have frequently been suggested, most cannot be easily measured in monetary terms and, consequently, their empirical testing is difficult.

Many researchers argue that due to transaction costs related to financial disclosure, companies in general are unwilling to incur additional costs through expanded disclosures unless required to do

so, or the potential benefits exceed the estimated costs (Gray et al., 1984a cited in Haniffa, 1999:66; Suwaidan, 1997). This argument emphasises the importance of accounting regulations and the importance of strict enforcement of such regulations especially within the context of developing countries (Abd-Elsalam, 1999; Fields et al., 2001; Scott, 2003). The same argument applies to the MENA stock exchanges examined in this study as there is a low demand for accounting information by naïve investors (Al-Htaybat, 2005; Abdelsalam & Weetman, 2007) and market pressures and regulatory enforcement are not as effective as in developed capital markets – hence, non-compliance costs might be less than compliance costs (Abd-Elsalam, 1999). Consequently, it can be argued that, the stimulation of disclosure practices requires strict enforcement of capital market regulations and awareness raising among producers of accounting information regarding the benefits of improved disclosure to overcome anti-disclosure cultural values such as secrecy, which undoubtedly has a negative impact on management incentives to improve transparency. Developing the moral hazards of management regarding the importance of disclosure and compliance with laws and regulations is expected to change management’s way of evaluating the costs and benefits of financial disclosure. Meanwhile, it is important to develop the awareness of naïve (i.e., non- professional) investors regarding the minimum level of disclosure required of companies to satisfy the enhanced demand for accounting information.