Corporate Governance Mechanisms and Extent of Disclosure: Evidence from Companies in Nepal

Topics: Corporate governance, Board of directors, Non-executive director Pages: 21 (7010 words) Published: September 3, 2012
Corporate Governance Mechanisms and Extent of Disclosure:
Evidence from Companies in Nepal
Bikash Gajurel, Dinesh Pyatha, Ganesh Joshi, and Jyoti Kafle Uniglobe College
Baneshwor, Kathmandu
The main purpose of the study is to investigate whether the existence of corporate governance mechanisms is effective in increasing the extent of disclosure amongst public listed companies in Nepal. Dscore index is prepared to collect data for the study. Regression analysis is used to determine the association between corporate governance mechanism and extent of disclosure level in Nepalese companies. This study reveals that the extent of corporate governance disclosure in larger companies is higher than small companies.

The corporate governance is the process by which organizations are directed, controlled and held to account. This implies that corporate governance encompasses the authority, accountability, stewardship, leadership, direction and control exercised in the process of managing organizations. Since this definition recognizes the need for checks and balances in the process of managing organizations, it can be considered to be more comprehensive (Gregory, 2000). Moreover, it is similar to the definitions provided by the Audit Commission (2009) and CIPFA/SOLACE (Chartered Institute of Public Finance and Accountancy and the Society of Local Authority Chief Executives 2007) which emphasize the core aspects of accountability and control in the governance of organizations. Corporate Governance (CG) structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. It is the allocation of ownership, capital structure, managerial incentive schemes, takeovers, board of directors, pressure from institutional investors, product market competition, labor market competition, organizational structure, etc. The Asian financial crisis of 1997 resulted in most Asian Countries seeking strengthen their corporate governance, transparency and disclosure levels (Ho and Wong,2001).In case of Malaysia also, it was suggested that the erosion of investor confidence in Malaysia was bought by the country’s poor corporate governance standards and a lack of transparency in the financial system (Noordia,1999b).Therefore , an effective system of corporate governance controls is considered crucial in aligning the interests of directors with those of shareholders. The board of directors has its key role in corporate governance; their main responsibility is to endorse the organization’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its shareholders, authorities and other stakeholders. Weakness in corporate governance and lack of transparency are considered causes of the Asian financial crisis, and the subsequent events of corporate collapses and accounting fraud. As a consequence, investors have demanded improvements in governance practices which lead to the implementation of corporate governance codes as the guidelines for companies to improve their governance and disclosure practices. The issue arises as to whether these improvements have been effective in reducing agency costs and therefore enhancing company disclosure. According to Abdul Hadi et al. (undated), financial transparency is an important mechanism that provides depositors, creditors and shareholders with the credible assurances that they will not do fraudulent activities. Therefore, the audited financial statements comprise a crucial part of the financial reporting system that is required for effective corporate governance. Further, Beasley et al. (2000) have suggested the need for auditors to acknowledge weak governance mechanisms that are related to financial fraud across a...
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