Hypothesis 4 - Does greater disclosures and transparency in corporate governance practices mitigates investors risk and builds market confidence in listed companies in Saudi Arabia?
The agency theory affirms that increased corporate governance facilitates financial transparency, thus reducing investors risk and ultimately boosting market confidence among the companies listed on the Saudi Stock Exchange. As such, market confidence will be mirrored by the stock liquidity of these listed firms. Stock liquidity is a dependent variable whose measures are the turnover ratios. The underlying hypothesis states that greater disclosures and transparency in corporate governance practices reduces adverse selection in the market. Accordingly, investors will depict the firms that implement better and transparent corporate governance. Corporate governance, on the other hand, is the independent variable. Findings of the study will demonstrate the honesty of the corporate administrative, institutional proprietorship, and how independent financial audits enhance the stock liquidity in Saudi Stock Exchange. In conclusion, the hypothesis affirms that corporate transparency decreases the issues of data asymmetry and enhances stock liquidity. Consequently, this study will prove immensely valuable to corporate managers, stakeholders, investors, financial executives, and risk analysts.
Over the time, the aspect of corporate governance has been seen to be on the forefront for establishing the basic standards for the corporate ethics. These particular ethics are primarily aimed at reducing the unscrupulous corporate practices while at the same time making sure that the business is done in an affair environment. Corporate governance is the existence of power over the corporate entities. In light of this, corporate framework will, therefore, provide for transparency, accountability and the corporate control
Transparency in financial reporting
One of the crucial information that is highly regarded by the investors is the financial reporting information (Habbash& Habbash, 2016). Some of the significant risk that is in most cases associated with the financial statements is that the fact that the corporate financial statement is not in most cases relatively presented. This could be as a result of inadvertent or could be intentional errors. In certain instance, the concerned management may fail to provide various information to various users of their financial statements. When this is however done deliberately, it could be misleading especially to the investors about the companys operations (Habbash& Habbash, 2016). In light of this, a without the fullness of required information, it could be extremely difficult to fully understand a companys financial information.
According to Tricker & Tricker, (2015), the concept of transparency as presented by the financial information helps creditors, market participants Dn investors to help in evaluating the financial condition of given firm. Apart from assisting the investors to make better decisions, the aspect of transparency is significant in increasing confidence in the fairness of the prevailing market. In light of this, the respective regulators should, therefore, make it their primary objective to ensure that the market is always fair and so that the available investors are offered a fair access to the market, corporate information and prices.
Firms that give complex and opaque financial report could be misleading. As explained by Tricker & Tricker, (2015), this type of report gives no idea about the possible risk that could be associated with the company. In analyzing companies, companies that usually present tintype of the report are in most cases regarded as more risky and are less valuable for proper r investments. For examples, in cases where a firm could be hiding its debts, the investors, therefore, are not capable of exposing their level of bankruptcy. Significantly, financial transparency in corporate can be as well used by the board of directors to evaluate the management effectiveness thus allowing them to take early corrective actions. As such, it is only prudent that all public companies should be able to provide, comprehensive understandable and reliable financial report that truly portray their financial condition and performance. As illustrated by Love & Rachinsky (2015), according to standards also provide f for a framework that is usually intended to present a finical information in such way that it can easily facilitate in fumed judgment. Corporate governance, for instance, has over the time relied on this type of information and disclosure to help them in forming expectations that could be relating to the future companys performance.
However, currently, corporate reporting should not only be restricted to financial statements, on the contrary , it has grown to encompasses a broad a ray of various additional matters that are also deemed necessary to be disclosed to provide the respective investors with the necessary information they could require to evaluate their investments. Some of these other aspects include; the possible guidance on future revenue and the corporates rearming targets
As attributed by Stefanescu (2014), provided the various volatility that currently exists in the international capital market, it, therefore, calls for demand and a need for a propers transparency in reporting and disclosure.
The concept of building transparency culture is considered to be the fundamental step to enhancing trust. As explained by Stefanescu (2014), an open and honest communication is key to the decision on trust. In most cases, lack of open communication is likely to cause a suspicion. In light of this, the transparency can only occur when an institution can create a culture of conjure and also respect. It is also enhanced when all the stakeholders in evolved can speak the truth to bother the board ante management. In this case, when the executive is willing to listen to the views being presented by the other stakeholders, they will have created good transparency culture. As attributed by Al-Janadi, et al. (2013), the board of directors of any organization tend to be the ones bearing direct responsibility. To ensure sure that they have inculcated the concept of a culture of accountability they should be, therefore able to come up with policies that will ensure that transparency and accountability in the organization are key.
There exist two kinds of transparency; internal transparency and the external transparency. The internal openness will always aim at putting the right information together with the correct prisons at the required time. External transparency, on the other hand, will be concerned with the demonstration of communication of values to both the companys customers and consumers (Love & Rachinsky, 2015).
Transparency disclosure and risk management
Strong corporate governance and transparency are both significant in domestic and international business and all phases of investments. Currently, the rapid, transparent data is son becoming integral to the overall establishment of route or pipeline of disclosure and the concept of risk management information. In light of this, as explained by Al-Janadi, et al. (2013), risk managers, therefore, need a consistent and also accessible data on both the current and potential corporate exposures. They also need to evaluate the cost of managerial risk both currently in future. This kind of information is deemed necessary since it can be used to price the varying risk management alternatives.
As explain by Al-Janadi, et al. (2016), the whole concept of transparency could be said to be lying at the intersection that exists between the public right to know hand has full knowledge of the corporation right to privacy. This means that the stakeholder's interest and the overall interest of getting all the information regarding the corporation.
Table 2.2 below depicts the major missing corporate governance disclosers in Saudi Arabia in comparison with UK.
Table 2.2: List of major missing Corporate Governance Disclosures in Saudi Arabia
The above list has been introduced to a sample of shareholders, board members of listed companies in Saudi Arabia and potential investors to explore their opinion in disclosing such data in their annual reports. The shareholders feedback was positive to implement and disclosure such data in their annual report as it provides them with comfort about the level of the integrity and transparency of the annual report. However, the board of directors were concerned about their legal liability. On the other hand, the potential investors emphasized the importance of implemented such disclosures. A larger sample will be investigated further in the final report.
Saudi Arabia approach to disclosure and transparency
Saudi Arabia seems to be having a regulatory framework whose purpose is basically to set out the condition for the adoption of an effective corporate governance in Saudi Arabia, the concept of transparency and disclosure of information is regarded as determinates for the development and also economic growth. According to Al-Bassam et al., (2015), without them, there cannot be full economic growth. It is also significant to acknowledge the fact that the robustness of various activities that usually happen in a market economy depends on appropriate and also accurate information which is useful in determining the resource allocation thus improving the efficiency if market activity. Also, the result of this work is likely to develop the production which is aimed at driving an economy. From the discussion below, it is, however, evident that most of the SSE and other listed companies are still falling short of the standard of transparency that is desirable for an efficient market. One of the reasons attributing to this factor as explained by Al-Bassam et al.,(2015), is the fact that Saudi Arabia is an emerging economy and also the fact that the regional culture is still assimilating the corporate governance
The Saudi disclosure is usually found on the rules of the corporate governance presented I different countries like the UK. Some of these rules concern she aspect of sharing of a particular fir m information and the production of the firms board report.
Some of the validated principles of disclosures in the country by the listed companies include
Article/principle List of the missing disclosures in the Saudi Arabia Violating companies Level of importance impact
The principle presented in article 9-F of the CGR Any form of punishment or restriction that has been imposed on given company by the capital market authority or the board should be mentioned in the board annual report. Saudi international petrochemical company important Should affect the investors decision
Article 9-B The respective names of any joint s tock company where by the firms board of directors members acts as the same board of directors should be published in the board an annual report Al baha investment and development company important Shareholders and investors
Article 44-C of the LR An organization should be a able to announce t with the means of electronic applications, both its interim and annual accounts immediately upon approval by the board. In this case such statement should not be published directly to the shareholders prior to the official announcements that take place into stock exchange The Southern Pro...
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