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 composition is expected to affect the level of voluntary disclosure. In this sense, the purpose of this study is to, empirically, investigate the relationship between board composition and the level of voluntary disclosure in the annual reports of Jordanian firms listed on Amman Stock Exchange (ASE).
The current study is expected to contribute to the literature on voluntary disclosure and corporate governance in different ways.
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
The Securities and Exchange Commission requires that publicly owned businesses provide annual reports, which are available to the public. Many different people use annual reports, to make informed business decisions. Management from the company uses the information to determine a number of items. Some of these items are the profitability of the company, the inventory turnover rate, and the accounts receivables rate. Creditors use the annual report to determine how well a company can satisfy its current liabilities, as well as, how the company is doing in the aspect of long tem survival. Another group of people who use the annual reports furnished by companies are the investors, who can purchase shares of stock from the publicly company. Annual reports are very important to these people, because they are an over all picture to help them determine the over all stability and reliability of the company’s financial outlook. These annual reports are important because they do not only contain the financial statements of the company, but there is a management ‘s note to discuss reasons for any unexpected numbers, and an auditor’s report, from an independent accounting firm, who either agrees or disagrees with the financial numbers. Market reporter Matt Krant said, “Ignoring these reports is akin to driving down the freeway blindfolded.”
MYERS, S.C. and MAJLUF, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221.
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
The results obtained from the cooperation of Modigliani and Miller in 1958, was an attempt to prove that the financial decisions should not be significant in the perfect conditions of the market, after being published the Modigliani and Miller theory became the main theory of the capital structure. In the M&M theory it suggested that the market is fully efficient, meaning that there are no taxes, however in the theory Modigliani and Miller included the taxes to be able to reflect their theories in reality, and the theory also suggested that there are no bankruptcy costs. There are three propositions that were published by Modigliani and Miller which are: • Proposition 1: A firm’s total market value is independent of its capital structure. Proposition 2: The cost of equity increases with its debt-equity ratio. Proposition 3: A firm’s total market value is independent of its dividend policy.
In contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor
Conflict of interest is a big problem between Enron and its auditing firms. It is believes that Enron’s auditors was hide many information and external auditors never aware or hide the losses in Enron. From audit committees to transparency committees would increase the likelihood that a firm’s key business ricks are transparent to investors (Healy & Palepu 2003, p. 21). Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader.
Lazonick, W., & O'Sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(1), 13-35. Retrieved from http://www.uml.edu/centers/cic/Research/Lazonick_Research/Older_Research/Business_Institutions/maximizing shareholder value.pdf
Tsui, J., & Gul, F. A. (2002). Consultancy on a Survey on the Corporate Governance Regimes in Other Jurisdictions in Connection with the Corporate Governance Review. Hong Kong: CityU Professional Services Ltd.
Modigliania, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review.
Solomon, J (2013). Corporate Governance and Accountability. 4th ed. Sussex: John Wiley & Sons Ltd. p.7, p9, p10, p15, p58, p60, p253.
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that t...
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.