Board Composition , Firm Characteristics, And Voluntary Disclosure: The Case Of Jordanian Firms Listed On The Amman Stock Exchange

729 words - 3 pages

In their classical propositions of the perfect capital market, Modigliani and Miller (1958, 1963) assume that management act exclusively on behalf of shareholders. Thus, there is no information asymmetry because insiders (management) and outsiders (shareholders/investors) have the same information about the firm’s future investment opportunities. Contrary to Modigliani and Miller (1958, 1963), the empirical evidence provided by Jensen and Mekling (1976) and Myers (1977), suggest that management may set their personal interests ahead of those of shareholders, which leads to a conflict of interest problem between the two parties. Jensen and Mekling (1976), suggest that the separation of ownership and management gives arise, among other things, to the information asymmetry problem. Being insiders to the firm, management are more knowledgeable than shareholders/investors. This situation may tempt (induce) them to work for their own interests. Myers and Majluf (1984) argue that information asymmetry leads to mispricing the firm’s equity in the marketplace, causing a loss of wealth for existing shareholders. Accordingly, if this problem is not fully resolved it can potentially breakdown the functioning of the capital market (Akerlof, 1970).
Kim and Nofsinger (2007) suggest two mechanisms to solve the asymmetric information problem: incentives and monitoring. The incentive mechanism attempts to align the interests of the managers with those of the investors. This requires management to disclose relevant information to the investors. Empirical evidence provided by Welker (1995) demonstrates that higher disclosure policy reduces information asymmetry. Bloomfield and Wilks (2000) shows that higher-quality disclosure ensures that investors pay a high price for shares. According to Heflin et al. (2002) a firm with high-quality accounting disclosure enhances its market liquidity through reducing information asymmetries across traders. The second mechanism is to, effectively, monitor the behaviour and actions of management by the board of directors. Empirical evidence shows that board monitoring improves the quality of managers’ decisions (Monks and Minow, 1995). According to Healy and Palepu (2001), board monitoring will insure that management behaves in the sense of increasing the shareholders’ interests and discloses credible rather than self-serving voluntary information. However, the effectiveness of the board monitoring is determined among other things by its composition. Therefore, board...

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