Voluntary Disclosure, Enterprise Risk Management, Culture and Stock Price Synchronicity

CAPITAL UNIVERSITY OF SCIENCE AND TECHNOLOGY, ISLAMABAD Voluntary Disclosure, Enterprise Risk Management, Culture and Stock Price Synchronicity by Zeeshan Ghafoor A thesis submitted in partial fulfillment for the degree of Doctor of Philosophy in the Faculty of Management & Social Sciences Department of Management Sciences 2019 i Voluntary Disclosure, Enterprise Risk Management, Culture and Stock Price Synchronicity By Zeeshan Ghafoor (PM131007) Prof. Dr. Erwan Le Saou Universit Paris 1 Panthon-Sorbonne, France Foreign Evaluator 1 Dr. Ali Coskun Bogazici University, Istanbul, Turkey Foreign Evaluator 2 Dr. Arshad Hassan (Thesis Supervisor) Dr. Sajid Bashir (Head, Department of Management Sciences) Dr. Arshad Hassan (Dean, Faculty of Management & Social Sciences) DEPARTMENT OF MANAGEMENT SCIENCES CAPITAL UNIVERSITY OF SCIENCE AND TECHNOLOGY ISLAMABAD 2019 ii Copyright c 2018 by Zeeshan Ghafoor All rights reserved. No part of this thesis may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, by any information storage and retrieval system without the prior written permission of the author. iii This work is dedicated to my Parents, Late Grandparents, My Wife, My Son, My Brother and My Sister without whom I would have not been able to achieve this accomplishment. vii List of Publications It is certified that following publication(s) have been made out of the research work that has been carried out for this thesis:- 1. Ghafoor, Z., & Hassan, A. (2018). Voluntary Disclosure, Enterprise Risk Management and Stock Price Synchronicity: Evidence from Shariah Com- pliant and Non-Shariah Compliant Companies . Journal of Islamic Business and Management, Vol. 8(1), 102-115. Zeeshan Ghafoor (Registration No. PM131007) viii Acknowledgements I am highly thankful to Almighty Allah for countless blessings in my life. I would like to express my sincere gratitude to my Teacher and Supervisor, Prof. Dr. Arshad Hassan who has been real inspiration for me. I have learnt tremendously from his intellect and wisdom. I would like to acknowledge my other teachers and mentors Prof. Muhammad Amanullah Khan, Prof. Dr. Khurram Shahzad, Dr. Muhammad Abbas and Dr. Raza Saleem Khan who have given me motivation and guidance to pursue the research track. I acknowledge my parents, wife, sister and brother for motivating me and giving me ultimate support to conduct this research. Finally, I acknowledge my friends especially Mr. Irfan Tahir, Mr. Mubashar Hassan Zia, Mr. Ayub Ayubi, Mr. Afkar Majeed, Mr. Naeem Ahmed Tahir, Mr. Syed Hassan Jamil, Mr. Shoaib Shafique and Mr. Amir Shareef who have been giving me continuous motivation and support. ix Abstract Recent literature reports that stock prices reflect non-only the systematic information but also the un-systematic information. The study, in this regard, is an attempt to explore the factors which are crucial for stock price informativeness or stock price synchronicity. The study significantly contributes in a way that it adds many new dimensions which are crucial for firms’ and countries' information environment and that have not been tested in association with stock price synchronicity. The study applies the panel data regression on 450 companies from 15 markets as 30 companies from every market for the period of June 2009 to July 2017. The markets are grouped into three categories based on developed, emerging and developing markets. The study finds that the firm’s information environment and country's both formal and informal information environment significantly affect the stock price synchronicity. The low stock price synchronicity is found in developed economies in comparison to emerging and developing economies. Consistent with the same notion, voluntary disclosures are higher in developed markets in comparison to emerging markets. Overall the firm’s internal control, financial constraints and enterprise risk management are found negatively related with stock price synchronicity. The study also finds the partial acceptance of firm age and government ownership with a positive relation with stock price synchronicity. The country's economic globalization is found significant and negatively related with stock price synchronicity. The same is the case with control of corruption, rule of law and reg- ulatory quality of a country. Out of three cultural dimensions, only individualistic vs collectivistic dimension is found significant and consistent with the hypothesis. Lastly, the study repeats all the analysis with systematic volatility and idiosyncratic volatility in addition to stock price synchronicity and finds the significant results with them also. Key words: Stock price synchronicity, Voluntary disclosure, Enterprise risk management, Corporate governance, Financial constraints, Culture and idiosyncratic volatility. Contents Author's Declarationv Plagiarism Undertaking vi List of Publications vii Acknowledgements viii Abstract ix List of Figures xiv List of Tables xv Abbreviations xviii 1 Introduction1 1.1 Background of the Study........................1 1.2 Firm Level Information Environment.................3 1.2.1 Voluntary Disclosure......................3 1.2.2 Board and Audit Committee Composition..........5 1.2.3 Financial Constraints......................6 1.2.4 Enterprise Risk Management..................7 1.2.5 Firm Age and Government Ownership............8 1.3 Formal Country Level Information Environment..........9 1.4 Informal (Culture) Country Level Information Environment.... 12 1.5 Problem Statement........................... 13 1.6 Research Questions........................... 16 1.7 Research Objectives........................... 17 1.8 Significance............................... 17 1.9 Plan of the Study............................ 19 2 Literature Review 21 2.1 Agency Theory............................. 21 2.2 Theory of Information Asymmetry.................. 24 x xi 2.3 Signaling Theory............................ 26 2.4 Capital Market Theory......................... 29 2.5 Stock price Synchronicity....................... 31 2.5.1 Literature in Favor of Standard Interpretation of Stock Price Synchronicity.......................... 33 2.5.2 Literature against the Standard Interpretation of Stock Price Synchronicity.......................... 44 2.6 Voluntary Disclosure.......................... 47 2.6.1 Motivation of Voluntary Disclosure.............. 49 2.6.2 Capital Market Effects of Voluntary Disclosure........ 51 2.6.3 Voluntary Disclosure and Stock Price Synchronicity..... 52 2.7 Corporate Governance......................... 55 2.7.1 Corporate Governance Standards for Stock Exchange List- ing Requirement........................ 58 2.7.2 Board Responsibilities and Independence........... 59 2.7.3 Board Size............................ 62 2.7.4 Board Meeting Frequency................... 64 2.7.5 Corporate Governance, Information Environment and Stock Price Synchronicity....................... 65 2.8 Audit Committee........................... 67 2.8.1 Audit Committee Independence............... 67 2.8.2 Audit Committee Size..................... 69 2.8.3 Audit Committee Meeting Frequency............. 70 2.8.4 Audit Committee, Information Environment and Stock Price Synchronicity.......................... 71 2.9 Financial Constraints.......................... 72 2.9.1 Financial Constraints and Stock Price Synchronicity..... 75 2.10 Enterprise Risk Management...................... 76 2.10.1 Enterprise Risk Management and Stock Price Synchronicity 77 2.11 Audit Quality and Stock Price Synchronicity............. 78 2.12 Firm Age and Stock Price Synchronicity............... 80 2.13 Government Ownership and Stock Price Synchronicity....... 81 2.14 World governance Indicators and Stock Price Synchronicity..... 82 2.15 KOF Globalization Index........................ 84 2.16 Culture and Stock Price Synchronicity................ 84 2.17 Hypothesis................................ 86 3 Research Methodology 88 3.1 Population and Sample........................ 88 3.2 Capital Asset Pricing Model and Stock Price Synchronicity..... 90 3.2.1 Other Proxies of Stock Price informativeness:........ 94 3.2.2 Idiosyncratic Volatility..................... 94 3.2.3 Systematic Volatility...................... 95 3.3 Voluntary Disclosure.......................... 95 xii 3.4 Board Composition........................... 99 3.4.1 Board Independence (BINED)................. 99 3.4.2 Board Committee Meetings (BMEETING).......... 99 3.4.3 Board Size (BSIZE)....................... 99 3.5 Audit Committee............................ 100 3.5.1 Audit Committee Independence................ 100 3.5.2 Audit Committee Meetings (ACMEETING)......... 100 3.5.3 Audit Committee Size (ACSIZE)............... 101 3.6 Financial Constraints.......................... 101 3.6.1 Interest Cover.......................... 101 3.6.2 K-Z Index............................ 102 3.7 Enterprise Risk Management (ERM)................. 103 3.7.1 Dedicated Risk Committee................... 104 3.7.2 Corporate Risk Officer (CRO)................. 104 3.8 Audit Quality.............................. 104 3.9 Age of the Firm (Age)......................... 105 3.10 Government Ownership......................... 105 3.11 World Governance Indicators..................... 105 3.12 KOF Globalization Index........................ 106 3.13 Culture................................. 106 3.14 Control Variables............................ 106 3.14.1 Firm Size...........................

Load more