Role of Foreign Ownership in the Relationship between Board Characteristics and Voluntary Disclosures of Jordanian Banks

Introduction

Increasingly, voluntary disclosure of both financial and non-financial information in company reporting has gradually been of interest to most researchers. Studies conducted in both developed and developing countries, but little has been done in Jordan regarding the impact of foreign ownership to voluntary disclosure index of banks in Jordan Jonasson, (2016). Voluntary disclosure of company reports shows freedom of the management of companies to provide both financial and non-financial information to satisfy investors and shareholders concerning investment plans. The management enjoys enormous information superiority compared to investors and shareholders. Self-centered Management often awards themselves more privileges and may often be associate themselves with unbeneficial projects. This results in information asymmetry when the ownership and control issues of an organization are positioned towards personal interests forgetting about investors and shareholders.

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Some mechanisms put forward to mitigate information asymmetries include monitoring and transparency that requires disclosure of pertinent information to assist investors and shareholders to assess whether resources have been managed adequately to maximize profits in the firm. The board of directors should monitor the behaviors and activities of the management. This improves the quality of decisions made by the managers that in turn influences the interests of shareholders and investors.

However, the effectiveness of board monitoring is solely determined by the composition of the board. This study examines the intervening role that foreign ownership play in the relationship between board characteristics and voluntary disclosures of banks in Jordan. Banks are critical to enhancing the economic growth of a country, and the failure of a banking system is crucial than any other sector in the economy. On average, shares, subsidiaries and cross-border loans of bank assets across developing countries held by foreign bank ownership have risen (Cash, Cash Equivalents, and Investments, 2017). Foreign banks encourage competition among local banks and increase their efficiency through reducing of net interest margins. Therefore, this encourages the growth of an economy through efficient resource allocation.

Rivals, on the other hand, argue that foreign bank investors tend to select low default risk borrowers and subject local banks to serving customers with a high risk that result to its inefficiency and a reduction in the level of competition (Davies et al., 2016). Foreign banks tend to reduce the level of competition with the local banks by tracking the rent-seeking activities.

The Significance of the Study

Jordan's countrywide economy experienced several developments because of remarkable economic growth. The current economic conditions in Jordan are rising because of the financial crises it experienced. Stern operation of accounting regulations gives crucial information about Jordan banking economy (Kavoura, Sakas & Tomaras, 2017).

The importance of this study is to study a theoretical and practical inference on the impact of foreign ownership on board management and voluntary disclosure in Jordanian banks. Bank information requires that its statements pertaining information disclosure in the annual reports should be reliable and relevant to provide useful information to influence investor's decision positively.

This study tries to evaluate the intervention of foreign ownership to the board on issuing voluntary disclosure in their annual reports to reduce information asymmetries problems. Foreign ownership information will assist to provide additional substantiation for Jordanian regulators to improve further on local bank information sharing in their annual reporting.

Research Questions

What is the relationship between board management and voluntary disclosure?

What is the mediating effect of foreign ownership in the relationship between board management and voluntary disclosure practices of banks in Jordan?

What is the impact of foreign directors to the level of voluntary disclosure index of Jordanian banks?

Literature Review and Hypothesis Development

Foreign Ownership

Foreign ownership is determined by the percentage of shares held by foreign investors. Foreign ownership improves the firm's corporate reporting practices. Due to geographical barriers, foreign investors are expected to experience high levels of information asymmetry as equated to local Jordanian competitors. Waleed, Albassam & Collins, 2017, found out that foreign investors have a habit of investing more in banks that disclose higher levels of information. Through foreign ownership power, foreign investors are likely to encourage management to communicate higher information levels. Waleed, Albassam & Collins, 2017 concluded that there is a definite relationship between foreign ownership and the level of voluntary disclosure. Foreign investors are highly attracted to companies that are associated with low levels of asymmetry information. They possess the improved expertise to monitor companies freely. Consequently, the high percentages of foreign ownership encourage local Jordanian companies to improve their levels of information transparency. Foreign investors who are excellent in corporate governance assists enhance managerial control of a company. This discussion leads to the following hypothesis.

Hypothesis 1: There is a definite significance relationship between foreign ownership and the levels of voluntary disclosure in Jordanian banks.

Individual Members

Individual members are viewed as a control mechanism for performing independent monitoring activities and are not employed by the bank. Their presence reduces the information asymmetry hence controlling the agency issue between management and investors/shareholders by giving voluntary disclosure (Jizi, 2017). Therefore, the higher the number of individual members, the more information they would disclose to the shareholders and investors.

Hypothesis 2: The number of individual members and the level of voluntary disclosure of foreign Jordanian banks has a significant positive relationship

Board Size

The critical role of the board of directors is to monitor and control activities on the management. Islam, 2017 states that increasing board members, in turn, improves the proficiency of the board in performing its operations that increase the transparency disclosure of information by the management. Bigger board sizes often have different and diverse opinions that increase their capacity to effectively monitor management activities, which boosts the bank's disclosure policy. According to Jordan's security commission, 2009, it recommends a board that comprises of more than five and less than fifteen members of the industrial and services sector.

Hypothesis 3: The board size and voluntary disclosure have a substantial positive relationship in Jordanian banks.

Board Meetings

Islam, 2017 states that although the board size and the structure of the board concentration and member profile has a critical role in monitoring management functions, the persistence of the board shows the actual level of activities undertaken and the quality of monitoring the board has on management. The frequency of board meetings has often been used as a measure of the effectiveness of the board of directors. A frequent board meeting will assist in strategizing, planning and assessing the performance of the management and improve investor/stakeholder representation. The board of directors will frequently be updated on emerging issues on time. Therefore, the frequency of board meetings positively impacts on the level of voluntary information disclosure.

Hypothesis 4: There is a definite significant relationship between the frequency of board meetings and voluntary disclosure.

Role Duality

Duality in positions of the Chief Executive Officer and the chairperson of the board of directors. This distorts the independence of a board because it is a critical characteristic of corporate governance and it negatively affects the capability of a board to monitor and control activities. Position duality tends to concentrate more authority to manage the affairs of the bank to an individual. Thus, it may reduce the value of disclosed information hence increasing information asymmetry issues. Role duality is a sign of having more power over the board, therefore, reducing the capability of control management efficiently that consequently reduces the amount of information disclosed to stakeholders and investors.

Hypothesis 5: There is a significant negative relationship between role duality and the level of voluntary disclosure in Jordanian banks.

More than Two Directors

Directors from different backgrounds contribute significantly to the professional knowledge imparted to the board. Kim et al., 2018 found out that the smaller the number of directors, the more effective they will supervise the operations of the management. On the other hand, the lower the number of directors, the higher the probability that voluntary information disclosure due to the pursuit of personal gains. Therefore, when the size of directors is more significant with the directors having a diversified background, the possibility of quality of information disclosed is higher. Hence the following hypothesis is drawn.

Hypothesis 6: The number of directors has a significant positive relationship with the level of voluntary information disclosure.

Theoretical Literature Review

Agency Theory

This theory models the association between the principal and agent. It is referred to an agency relationship where principals involve an agent in performing some services involving authorizing some decisions based on agreed terms (Bagnoli & Watts, 2016). The agents and principals pay incurred fees to ensure that the managers' interests are not put at stake. In the context of an organization, an agent is a manager, and the principal is the shareholder. The critical issue for managers and shareholders is the information asymmetry where managers enjoy information advantage. The agent takes advantage because of the lack of monitoring to engage in activities to satisfy his interests.

Signaling Theory

Signals represent the reaction of information asymmetry among stakeholders and companies while companies respond through availing information (Habtoor & Ahmad, 2017). Therefore, an increase in voluntary disclosure increases public trust leading to a rise in the demand for company shares hence growing financial performance of the company. Companies with high performance tend to make a voluntary disclosure readily, and by this foreign-owned, companies can stand out distinguishable from the local banks.

Voluntary Disclosure Theory

Information of an organization can be obtained from annual reports, organization's magazine and press reports but in countries like Jordan, annual reports are the primary formal source of firm's information. The level of voluntary disclosure is measured by the quantity of the elements of non-mandatory accounting information that is detailed in the management section of the annual report (Mcdonough & Schoenfeld, 2018)

Voluntary Disclosure Index

The number of companies that voluntarily disclose information measures the level of disclosure in Jordanian banks. The main aim of voluntary disclosure index is to choose the elements of voluntary disclosure to be presented in the annual report of a company. There are different methods to construct a disclosure index. The first is a self-construc...