the value relevance of corporate voluntary disclosure in the middle-east: the case of jordan

J. Account. Public Policy 31 (2012) 533–549

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J. Account. Public Policy

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The value relevance of corporate voluntary disclosurein the Middle-East: The case of Jordan

Mahmoud Al-Akra a, Muhammad Jahangir Ali b,⇑a 10/43 Macdonald ST, Lakemba, NSW 2195, Australiab School of Accounting, La Trobe University, Bundoora, Vic. 3086, Australia

a b s t r a c t

0278-4254/$ - see front matter � 2011 Elsevier Indoi:10.1016/j.jaccpubpol.2011.10.007

⇑ Corresponding author. Tel.: +61 3 9479 5177;E-mail addresses: [email protected]

We examine whether higher voluntary disclosure, resulting fromprivatization and the accompanying governance reforms, enhancesthe value of privatized Jordanian firms. We use panel data for 243firm-year annual reports (over a period of 9 years from 1996 to2004) and employ univariate and multivariate tests in order to testour hypothesis,. We construct a governance index to proxy for theimpact of privatized firms’ governance on voluntary disclosure.Also, we control for the endogeneity of voluntary disclosure in itsrelation with firm value. Our multivariate results indicate that vol-untary disclosure is positively associated with firm value. We alsofind that firm value is associated with industry types as a proxy forsize. However, we did not find that growth and liquidity are asso-ciated with firm value.

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1. Introduction

As part of an economic package including an ambitious privatization program in 1996, the govern-ment of Jordan has introduced several reforms for accounting regulations, securities exchange lawsand corporate governance. Privatization is an international economic phenomenon utilized by morethan one hundred countries (developed and developing) primarily to optimize the efficiency ofstate-owned firms (ASE, 2007). State-owned firms’ inefficiency is due to their poor governance prac-tices resulting from agency conflicts within these firms (Eng and Mak, 2003). These agency conflictsare a result of the exploitation by government agents of their positions to pursue their own objectives,

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534 M. Al-Akra, M.J. Ali / J. Account. Public Policy 31 (2012) 533–549

political interference in the firms,1 and a lack of high-powered incentives for, or proper monitoring of,management (La Porta and Lopez-De-Silanes, 1999).2

Privatization brings about significant changes in the ownership structure of privatized firms fromthe state to private outside owners. Moreover, it compels governments to reform their accounting reg-ulations, securities exchange laws and corporate governance standards (Megginson and Netter, 2001).Such reforms contribute to more transparent markets, hence, privatization is expected to enhanceprivatized firms’ disclosure practices.

It is argued that enhanced information disclosure could create value for the firm through its effecton firms’ cost of capital, the cash flows that accrue to shareholders, or both (Lang et al., 2003). Greaterinformation disclosure leads to reduced cost of equity capital (Botosan, 1997) and cost of debts (Seng-upta, 1998) thus generating interest for firms’ securities. Further, privatization is associated with im-proved corporate governance which can stimulate management to pursue objectives in the interestsof shareholders (Silva and Alves, 2004). Also, improved corporate governance ensures higher qualityinformation disclosure (Cohen et al., 2004). High disclosure reduces the potential for opportunismby managers. Hence, enhanced information disclosure can add value to firms.

Value relevance is described as the ability of financial statements to capture information that af-fects stock prices (Francis and Schipper, 1999). This is based on the notion that accounting numbersneed to reflect the economic reality of enterprises, manifested in the price of equity. Earlier value rel-evance studies mostly examined this issue in developed countries, particularly the US (Collins et al.,1997; Francis and Schipper, 1999). Recently, several studies have tested this issue within the contextof emerging markets (see Alford et al., 1993; Harris et al., 1994; Barth and Clinch, 1996; Chen et al.,1999; Graham and King, 2000; Hellstrom, 2006; Banghøj and Plenborg, 2008; Hassan et al., 2009).

While a number of studies examine the association between disclosure and firm value, these stud-ies report mixed results.3 A plausible explanation for the mixed results lies in the claims of Holthausenand Watts (2001) that value relevance studies’ tests ignore the roles of the forces that determineaccounting practice. They argue that the reluctance of these studies to explore directly the influenceof these forces on financial information limits the implications of their results. Further, the authors crit-icize the models utilized by these studies declaring them inappropriate for most situations. This is be-cause theory and evidence supports the notion that the relation between the variables and firm valuein the evaluation models is non-linear. Therefore, this study addresses these issues thereby contributingto the understanding of the value relevance of accounting information.

Building upon Al-Akra et al. (2010), we extend their study by examining whether improved volun-tary disclosure has contributed to the enhancement of the value of privatized firms. We also constructa governance index to assess the impact of the governance of privatized firms on voluntary disclosure.Further, our study utilizes a methodology that controls for the endogeneity of voluntary disclosurewhen examining its impact on firm value and applies panel data estimation techniques providingreliable results of value relevance tests with minimum ambiguity.4 To ascertain that our findings area result of privatization and the accompanying reforms, we compare our sample of privatized firms witha sample of private ones. We also extend our panel data model by checking for the possibility of non-linearity in the relation between voluntary disclosure and firm value.

Privatization has gained significant importance and its impact on firm performance has been exten-sively examined (Megginson and Netter, 2001, survey 225 empirical studies in this regard). However,prior value relevance research has failed to explore the impact of privatization despite the significantchanges privatization brings about in terms of ownership changes and the accompanying reforms in

1 Political interference results in excessive employment, poor choices of product and location and lack of investments.2 This lack of incentives and monitoring is due to ‘‘the weaker accountability for financial performance, easier access to

financing, lack of exposure to a market for corporate control, and weaker monitoring by shareholders’’ (Mak and Li 2001, p. 240).3 For example, while Chen et al. (1999) and Hellstrom (2006) find that accounting information is value relevant, Banghøj and

Plenborg (2008) and Hassan et al. (2009) find no association between more voluntary disclosure and firm value.4 The use of panel data compensates for the small sample size. Dougherty (2006) explains that panel data has many advantages

including: (i) It provides a large number of observations. If there are n units of observation and if the study is undertaken in T timeperiods, there are potentially nT observations; (ii) Its use may offer a solution to the problem of bias caused by unobservedheterogeneity, a common problem in the fitting of models with cross-sectional data sets; and (iii) It reveals dynamics that aredifficult to detect with cross-sectional data.

M. Al-Akra, M.J. Ali / J. Account. Public Policy 31 (2012) 533–549 535

corporate governance and disclosure regulation (Megginson and Netter, 2001). Hence a study thatexamines the impact of privatization on firm value fills an important gap in the literature.

Previous value relevance studies have mostly examined developed capital markets with a smallnumber of studies investigating the case of emerging markets. Further, no studies have as yet beencarried out for the case of Jordan. Jordan is of interest because of the recent extensive reforms,with rapid developments in information reporting, that have taken place there in an economic con-text that is significantly different from other countries. Hence, our study extends the value rele-vance research and provides implications beyond those of previous value relevance research.Moreover, to our knowledge, no studies have examined the value relevance of corporate disclosureof privatized firms that result in changes in corporate governance principles and other regulatoryreforms.

We use 243 annual reports of 27 privatized Jordanian listed companies over a 9-year period, 1996–2004. We estimate a two-stage OLS (2SLS) model where firm value is the dependent variable and theindependent variable of primary interest is voluntary disclosure. Our evidence supports the hypothe-sis that improved voluntary disclosure is a result of privatization and the resulting reforms enhancefirm value.

The remainder of the paper is structured as follows. Section 2 briefly provides the cultural andpolitical background of Jordan. Section 3 outlines the voluntary disclosure environment in Jordanwhile theory and the development of hypotheses are presented in Section 4. Section 5 offers theresearch methodology and Section 6 describes the results of the study. Section 7 concludes thepaper.

2. Jordan’s cultural and political background – a brief sketch

A gateway to the Middle East, Jordan is situated in Southwest Asia, at the meeting point of Asia,Africa, and Europe. Jordan’s culture is premised on Arab values similar to the surrounding Arab MiddleEastern countries. It was a British colony for the first half of the 20th century, and although Jordangained its independence in 1946, it maintained strong trade relations with Britain and the West. Jor-dan is a monarchy with a parliamentary form of government. It is stable politically, and Jordanians areguaranteed the freedom to participate in the political process through the legalization of political par-ties and elections.

In the 1970s, Jordan undertook several reforms aimed at the liberalization of foreign investment.5

Moreover, due to the civil war in Lebanon in the 1970s, Jordan took Lebanon’s place as the financial cen-tre of the Middle East, with many companies and businesses shifting to Jordan. This prompted the Cen-tral Bank of Jordan to establish the Amman Financial Market in 1978 and to license seven new banks andtwo financial intermediaries to serve the new arrivals (Marashdeh, 1996).

In 1994, Jordan signed a peace treaty with Israel bringing about stability in the region. Eventssuch as the International Economic Conference for the Middle East and North Africa, held in Jordanin 1995, gave rise to an international interest in investment in Jordan (Naser and Al-Khatib, 2000).

Moreover, in an attempt to attract foreign investment, Jordan embarked on several economic re-forms to improve the economy. The Jordanian government has worked closely with the IMF, practicedcareful monetary policy, made significant progress with privatization and liberalized the trade regimesufficiently in order to guarantee Jordan’s membership in the Word Trade Organization (EPC, 2007).

Several other Middle Eastern countries have undertaken privatization initiatives. Morocco, Tunisiaand Egypt were the first countries to adopt privatization in the region while a number of newcomershave started their own privatization programs, including Algeria and Lebanon.

Jordan has further engaged in a number of initiatives to improve its economic well-being. It hassigned a bilateral investment agreement with the US, concluded an association agreement with theEU in 1997, and signed an agreement for the establishment of a free trade area with the US in2000.

5 These reforms were: the enactment of the Encouragement of Investment Law 1972, the registration of the Foreign CompaniesLaw 1975, and the Control of Foreign Business Activities Defence Regulations 1978.


3. Voluntary disclosure environment in Jordan

Like many developing countries, the quality of Jordanian firms’ disclosure in the past was unaccept-able (Solas, 1994), leaving the users of financial statements concerned about the reliability and ade-quacy of the information disclosed (Abu-Nassar and Rutherford, 1996). This was mainly due to theincomplete set of accounting standards used by Jordanian companies. Jordanian accounting standardswere very general statements lacking any itemization or guidelines for measurement and disclosure.The disclosure practice in Jordan was dictated by the Companies’ Act No. 12 of 1964 (amended in1989) and the Commerce Code of 1966. Income tax laws and the Amman Financial Market (currentlyknown as the Amman Stock Exchange) required Jordanian firms to prepare annual reports in accor-dance to Generally Accepted Accounting Principles (GAAP) without providing a consistent interpreta-tion of what constitutes GAAP (Naser, 1998).

In 1996, Jordan embarked on its privatization program which led to a revamp of its governance sys-tems which was incorporated within the 1997 Company Law and the 2002 Securities Law (ASE, 2007).The most important provisions of the recently revamped Jordanian governance framework policy are(i) mandating the appointment of at least three non-executive directors on the board and (ii) mandat-ing audit committees to be comprised of at least three non-executive directors.

4. Theory and the development of a hypothesis

Value relevance is defined as the ability of financial statement information to capture or summariseinformation which affects share value (Francis and Schipper, 1999). This definition of value relevanceconforms to the statement of the importance of the value relevance of accounting information in theFramework for the Preparation and Presentation of Financial Statements (IASC, 1989). Relevant informa-tion is that which it influences the economic decisions of users by helping them evaluate past, presentand future events. Based on this definition, value relevance represents one of the most important attri-butes of information quality (Francis et al., 2004). Barth et al. (2001) further claims that under this def-inition the value relevance of information disclosed provides insights not only for investors, but alsofor accounting standard setters. Accordingly, value relevance should be particularly important foremerging markets that are in the process of developing their accounting environment.

As explained earlier, privatization entails the transfer of ownership from the state to private out-side owners, thereby increasing agency costs (Boycko et al., 1996). To reduce agency costs, it is inthe interests of the managers who bear these costs to voluntarily disclose information to assure inves-tors that they are acting in their interests (Morris et al., 2004). In addition, privatization is accompa-nied by governance reforms mandating the appointment of audit committees and non-executivedirectors which are expected to enhance corporate governance. Ownership changes and improvedgovernance of privatized firms are believed to lead to enhanced voluntary disclosure.

According to Lang et al. (2003), enhanced information disclosure could create value for the firmthrough its effect on firms’ cost of capital, the cash flows that accrue to shareholders, or both. Theauthors contend that the higher the information disclosure the better the investors are able to assessthe prospects of the company. This, in turn, should reduce the firm’s cost of capital and increase thedemand for its securities, thus enhancing firm value. Lang et al. (2003) argue that the cost of capital isa function of ‘‘estimation risk’’ and the better investors are able to assess the prospects of a company,the lower its expected cost of capital.

Further, higher information disclosure affects firm value through cash-flow effects by reducingagency costs. This is because privatization is associated with improved corporate governance stimu-lating management and the board of directors to pursue objectives that are in the interests of the firmand its shareholders, thereby encouraging the prioritization of the ethical commitment made to allstakeholders to maximize the firm value (Silva and Alves, 2004).

Moreover, privatization results in the transfer of ownership to outside investors who monitor man-agement closely and require higher efficiency and disclosure standards (Boubakri et al., 2005). This re-duces the potential for management to divert the firm’s cash flow to themselves and to controllingshareholders, ultimately adding value to the firm (Lang et al., 2003). Another avenue through which


privatization can enhance firms’ values is through generating demand for their securities since thisputs all firms in the privatizing country on the radar screens of investors (Shehadi, 2002), henceimproving firm value.

There is limited empirical research examining the value relevance of voluntary disclosure indeveloping markets. Chen et al. (2001) tests whether Chinese investors perceive that accountinginformation is value relevant and their results confirm their hypothesis. Lang et al. (2003) examinethe relation between cross-listing on a US exchange and the information environment anddocument that non-US firms that cross-list on US exchanges have more analyst coverage and higherforecast accuracy and ultimately have higher valuations. Silva and Alves (2004) conduct a cross-sectional study to test the association between voluntary information disclosure and firm value.Their results indicate a significant association between firm value and voluntary disclosure. Further,Baek et al. (2004) examine whether firm-specific measures of the corporate governance of Koreanfirms affect firm performance and show that firms that have a higher quality of disclosure exhibita larger rise in equity value.

Few studies have examined whether enhanced information disclosure is associated with stockprices reflecting the value relevance of information disclosure. Lundholm and Myers (2002) investi-gate how firm disclosure affects the relation between current annual stock returns, contemporaneousannual earnings and future earnings. They find that firms with relatively more informative disclosures‘bring the future forward’ so that current stock returns reflect more future earnings news.

In another study, Gelb and Zarowin (2002) examine the association between voluntary corporatedisclosure and the informativeness of stock prices. They find that greater disclosure is associated withstock prices that are more informative about future earnings. Also, Hellstrom (2006) assesses the valuerelevance of accounting information in the Czech Republic and Sweden in the period 1994–2001. Theauthor reports that value relevance in Sweden is higher than that in the Czech Republic over the wholeperiod of the study. The findings are attributed to the well-developed market economy and accountingregulations in Sweden consistent with the assumption that the development of well-functioning insti-tutions increase the value relevance of accounting information.

Hassan et al. (2009) is the only study conducted in a Middle Eastern country, and it examines thevalue of voluntary and mandatory disclosure in the Egyptian market. Their results show that voluntarydisclosure has a positive but insignificant association with firm value. We believe that the lack ofsignificance is due to the failure of the study to incorporate the impact of the environmental factorsinfluencing voluntary disclosure. Also, the study fails to control for the endogeneity of voluntarydisclosure in its relation with firm value. We consider both the above factors and, therefore, expectthat the enhanced disclosure levels of Jordanian privatized firms will be reflected in the value of thesefirms. Accordingly, the following hypothesis is formulated:

Hypothesis. The level of voluntary disclosure of Jordanian privatized firms is expected to be positivelyassociated with the value of these firms.

4.1. The model

A number of corporate attributes are found to be associated with firm value (Healy et al., 1999;Lang et al., 2003; Baek et al., 2004; Hassan et al., 2009). However, disclosure studies document thesesame variables as determinants of voluntary disclosure. The inclusion of these variables in both mod-els of voluntary disclosure and models of firm value thus leads to a spurious relation between volun-tary disclosure and firm value. Accordingly, we utilize a methodology to control for this endogeneityproblem through the use of instrumental variables technique within a two-stage OLS (2SLS) frame-work (Larcker and Rusticus, 2010). In the first stage, we regress the voluntary disclosure variable onits determinants and obtain the fitted (estimated) values. In the second stage, we regress firm valueon its explanatory variables including voluntary disclosure replaced by its fitted value from the firststage.

To estimate the first equation of voluntary disclosure, we need to incorporate the factors expectedto impact on voluntary disclosure. These are described as instrumental variables that need not be cor-related with the error term (Larcker and Rusticus, 2010). The choice of the instruments is crucial since


they must be highly correlated with voluntary disclosure but must not determine firm value. We testfor the separate effects of privatization using a dummy that takes the value of one from the privatiza-tion year onward (POSTPRIV). We develop an additional variable to measure ownership changes. Sinceprivatization entails the relinquishing of state ownership to private new owners, we include a variablerepresenting state ownership measured by the size of the state’s residual stake after privatization,which we label STAKE. We obtain the post-privatization stake from the Annual Jordanian CompanyGuide which is issued by the Amman Stock Exchange annually.

As discussed earlier, privatization entails a change of ownership to outside private owners. Bou-bakri et al. (2005) conclude that much of the decrease in government ownership is absorbed by foreigninvestors, local institutions and individuals. We trace the change in ownership of Jordanian privatizedfirms between the years 1996 and 2004 and perform a paired t-test. Our findings point to a significantincrease in the proportion of foreign investors (at the 1% level). By contrast, domestic individual inves-tors decrease significantly (at the 10% level) while local institutions exhibit a positive but insignificantincrease. The result pertaining to foreign investors is not surprising given that one of the aims of priv-atization is to attract foreign investors (Shehadi, 2002).

Foreign investors lead to better governance and demand higher transparency (Boycko et al., 1996;Dyck, 2001). In addition, privatized firms enjoy an improvement in their governance as a result of therecent reforms. Hence, we develop a variable that tests the impact of privatized firms’ improved gov-ernance. We utilize a governance index similar to that developed by Park and Son (2009) designed tomeasure the strength of a firm’s governance. The higher the governance index the firm has, the betterthe governance practices of that firm. The governance index is constructed by adding one point forevery governance mechanism that enhances the governance of firms. It includes the following sixmechanisms:

� Board independence: the higher the proportion of non-executive directors on the board the stron-ger the governance. We score 1 if 60% or more of the directors on the board are independent, 0otherwise;� Audit committees presence: the presence of an audit committee is argued to foster better gover-

nance. We score 1 if the firm assigns an audit committee, 0 otherwise;� Board size: Jensen (1993) suggests that the smaller the size of the board the more effective it is in

monitoring management. We score 1 if the firm’s board size is less than the sample median, 0otherwise;� Role duality: when the chairman is the same as the CEO, the board’s effectiveness in performing its

governing functions will be at stake since control will be concentrated in the hands of the CEO(Haniffa and Cooke, 2002). Hence, we score 1 if the firm’s CEO is not the same as the chairman,0 otherwise;� Audit firm: the board of directors appoints the external auditor and sets their compensation (ROSC,

2004). Hence, utilizing the services of a large audit firm can be a source of better governance sincethe external auditor must report any violation, abuse, fraud or other issue affecting the position ofthe firm (ROSC, 2004). We score 1 if a firm utilizes the services of a Big 4/6 auditor, 0 otherwise;� Foreign investors: foreign investors monitor managers more closely, hence they are associated with

better governance. We score 1 if the proportion of foreign investors is greater than the sample med-ian, 0 otherwise.

Several control variables are also included. We control for firm size (in terms of total assets) sincelarger firms are expected to have higher disclosure levels (Chow and Wong-Boren, 1987; Craig andDiga 1998). Larger firms account for a greater proportion of the economy’s goods and services andhave a large number of employees. They have a large asset base and are more established than smallerfirms. All these factors suggest that large firms are associated with higher disclosure levels. We mea-sure firm size as the logarithm of total assets.

It is suggested that highly leveraged firms incur higher monitoring costs (Jensen and Meckling,1976). Creditors act as external monitors that play a beneficial governance role in reducing managerialagency problems, hence a positive correlation between leverage and voluntary disclosure is expected(Ahmed and Nicholls, 1994).


Profitability has been utilized by previous research as a determinant for disclosure levels.Wallace and Naser (1995) argue that high-performing firms disclose more information so asto signal to the market their superior performance. Return on equity (ROE) is our measure ofprofitability.

Accordingly, we estimate the following equation:

6 Our

VDIjt ¼ b0 þ b1POSTPRIVj þ b2STAKEjt þ b3GIjt þ b4ASSETjt þ b5LEVjt þ b6ROEjt þ ej ð1Þ

where VDIjt is the voluntary disclosure index; POSTPRIVj the dummy variable; 1 when the firm is priv-atized onward; 0 before; STAKEjt the residual percentage of capital owned by the state of firm j in yeart; GIjt the governance index; ASSETjt the total assets of firm j in year t; LEVjt the ratio of total liabilitiesto shareholders’ equity of firm j in year t; ROEjt the return on equity of firm j in year t; b0, b1, b2, . . . ,b12

the regression estimates, and ej is the stochastic disturbance term.For the first stage in the 2SLS procedure, we use the above equation to analyze the impact of the

forces influencing voluntary disclosure. In the second stage, we replace voluntary disclosure withthe fitted value from Eq. (1). As previously emphasized, and to satisfy the conditions of the 2SLS pro-cedure, the variables chosen in the second stage must not determine voluntary disclosure (Larcker andRusticus, 2010). Value relevance studies document the association of several variables. For example,Hassan et al. (2009) controls for firm size (in terms of total assets) since larger firms are expectedto have higher firm values. However, firm size has been a predominant factor in disclosure studies.Hence, we use industry type as a variable instead on the grounds that certain industry groups are lar-ger than others. For the purposes of this study, we have six industry groups: natural resources, tour-ism, engineering, food, pharmaceutical and chemical and others. We also include past growth andliquidity (Lundholm and Myers, 2002; Lang et al., 2003) as control variables. Firms showing highersales growth signal fast growing dividends in the future (Hassan et al., 2009). Hence, we expect apositive relation between firm value and sales growth. We measure sales growth by the natural log-arithm of sales in the current year divided by sales in the previous year.

Liquidity ratio tests the ability of the firm to meet short-term commitments. As such, a highliquidity ratio is an indicator of good management performance. Accordingly, companies with higherliquidity ratios are expected to have higher firm value (Belkaoui and Kahl, 1978). Our measure forliquidity is the current ratio which is the ratio of current assets to current liabilities. We also includeyear dummies to control for the effect of any year-specific effects. Accordingly, we use the followingspecification:

MT=BVjt ¼ b1 þ b2VDIFjt þ b3SLGRjt þ b4LIQjt þX6

J¼1

b5INDj þX9

J¼1

b6YEARt þ ej ð2Þ

where MT/BVjt is the ratio of market value to book value of equity; VDIFjt the fitted values of voluntarydisclosure; SLGRjt the natural logarithm of sales in the current year divided by sales in the previousyear of firm j; LIQjt current ratio: ratio of current assets to current liabilities of firm j in year t;IND1-6jt the indicator variable; natural resources are the default group; 1 if firm j in year t is tourism,0 otherwise; 1 if firm j in year t is engineering, 0 otherwise; 1 if firm j in year t is food, 0 otherwise; 1 iffirm j in year t belongs to pharmaceutical and chemical, 0 otherwise; 1 if firm j in year t belongs toothers, 0 otherwise; YEARt the year dummies; 1996 is the default, 1 for each year, 0 otherwise; b0,b1, b2, . . . ,b6 are the regression estimates; and ei is the stochastic disturbance term.

5. Research methods

5.1. Data selection

The study examines panel data over a nine-year period from 1996 to 2004. Our sample com-prises privatized public non-financial firms listed on the Amman Stock Exchange, i.e. 27 firms overa nine-year period (243 firms).6 Privatized firms whose 1996 annual reports were available at the

primary source of candidate firms is those utilized by Al-Akra et al. (2010).

Table 1Sample companies according to industry.

Industry Industry type Number of companies

Industry 1Natural resources 1. Energy 1

2. Mining 23. Petroleum 1

4

Industry 2Tourism 1. Hotels 1

2. Media 12

Industry 3Engineering and electrical 1. Engineering 2

2. Electrical 24

Industry 4Food and allied industries 1. Food and beverages 3

3

Industry 5Pharmaceutical & chemical 1. Chemical 3

2. Pharmaceutical 14

Industry 6Others 1. Textiles 2

2. Ceramic 13. Paper and allied products 24. Real Estate 25. Transportation 3

10

Total 27


Company Controller, Ministry of Industry and Trade, Jordan (where all annual reports are filed)constituted the base for the following years. Firms that were delisted or had undergone a mergeror bankruptcy were excluded. Table 1 reports the distribution of sample companies according to theirindustry type.

5.2. Dependent variable – firm value

Several recent studies use the natural logarithm of the ratio of market-to-book value of equityas a measure of firm value (Lins, 2003; Hassan et al., 2009). The use of this measure is believed tobe better than other measures such as the logarithm of market value alone (Berk, 1995). Moreover,Hassan et al. (2009) argue that the market-to-book ratio (MV/BV) shows whether securities areundervalued or overvalued by dividing the market value of outstanding shares by the book valueof equity.

For the purposes of this study, firm value is measured as the market value of equity to the bookvalue of equity. We utilize the measure of market-to-book value used in Hassan et al. (2009). Hence,the market value of equity is measured as the number of outstanding shares at the financial year-endderived from companies’ annual reports times the average share price for 6 months after the financialyear-end. The book value of equity is the book value at the financial year-end. Due to the high skew-ness of this measure, the natural logarithm transformation was used.


5.3. Independent variables

5.3.1. Voluntary disclosure indices (VDI)The voluntary disclosure index is based on information Jordanian firms provide in their annual re-

ports.7 Two disclosure checklists are utilized; the first is applicable for the years 1996–2002 and theother is applicable for the years 2003–2004. The use of two checklists is due to the introduction ofthe Securities Law in 2002 which resulted in mandating some voluntary items. The lists are comprisedof 90 and 81 voluntary items for the years 1996–2002 and 2003–2004, respectively. They contain back-ground information, strategic information, information about directors, capital market data, product/ser-vices information, financial data, employees’ information and segments and research information.

One coder was involved in the coding process, and to reduce coding error, the annual reports werescreened twice with the voluntary disclosure checklists. Our results are consistent with those in pre-vious studies, suggesting that coding errors, if present, are not serious.

For each item in the disclosure index, a company receives a score of one if it voluntarily disclosesinformation on the item and zero if the item is not disclosed. Hence, the voluntary disclosure index(VDI) ranges from 0 to 1, with 0 for the lowest and 1 for the highest VDI. We use a relative scoringapproach in which the voluntary disclosure index (VDI) of a firm is assessed as the ratio of the totalnumber of actual voluntary items disclosed by the firm to the maximum applicable voluntary itemsthat the firm can score.8

6. Results

6.1. Descriptive statistics and univariate tests

Table 2, Panel A presents the descriptive statistics for the pooled sample of firms for the dependentvariables and its determinants. Panel B offers a comparison of firm values for the years 1996, 2000 and2004. The results show a notable increase in the means and medians over the years. Panel C depictsthe results of the paired-t test pointing to the significant differences in the means of firm values for theyears 2004, 2000 and 1996, thereby validating the above results.

Table 3, Panel A illustrates the Pearson correlation matrix of the dependent and independent vari-ables of the first equation. The table shows that voluntary disclosure is highly positively correlatedwith all the independent variables in the model. The highest absolute correlation coefficient betweenthe independent variables is (0.557), between ASSET and LEV. This implies that multicollinearity doesnot constitute a major problem.9

Panel B of Table 3 shows the Pearson correlation matrix of the dependent and independent vari-ables of the second equation. It shows that firm value is positively correlated with voluntary disclo-sure, IND2 and IND3, while firm value is negatively correlated with IND4, IND5 and IND6. Thehighest absolute correlation coefficient between the independent variables is (0.386), between LIQand IND6.

6.2. Pooled regression results

We employ a pooled regression model using both cross-sectional and time series data to test forthe association between firm value and voluntary disclosure. Panel A of Table 4 provides the resultsfor the pooled regression of the effect of privatization and the enhanced governance on voluntary

7 Please refer to Al-Akra et al. (2010) for details on the construction of the disclosure index.8 A vital issue in disclosure research is whether to penalize a firm when an item is not disclosed. One way of dealing with this

issue is not to penalize a firm for non-disclosure if the item is not relevant to the firm. Such a judgment can be made after readingthe entire annual report (Cooke, 1992). Further, an Unweighted voluntary disclosure index is used since previous research supportsthe notion that there is no significant difference between the results produced by the weighted and the unweighted disclosureindexes (Chow and Wong-Boren, 1987).

9 A rule of thumb is that multicollinearity may be a problem if a correlation is >0.7 in the correlation matrix formed by theindependent variables.

Table 2

Panel A: Descriptive statistics of sample of privatized firms (N = 243)

Continuous variables Mean Median Min. Max. Standard dev.

MV/BV 1.280 1.06 0.000 7.530 0.922VDI 0.218 0.18 0.012 0.657 0.135STAKE 18.31 12.19 0.00 78.95 20.90GI 2.62 3.0 0.00 5.00 1.082ASSET 51,572,815 13,506,196 300,951 426,597,000 96,806,089LEV 79.60 39.39 0.00 848.58 121.97ROE 5.229 5.390 �75.486 31.930 12.148SLGR 0.0079 0.0101 �2.3715 2.3027 0.4463LIQ 5.628 2.150 0.219 96.360 12.013Dichotomous variables 1 0POSTPRIV 52.26% 47.74IND2 7.41% 92.59%IND3 11.11% 88.89%IND4 33.33% 66.67%IND5 14.81% 85.19%IND6 18.52% 81.48%

Panel B: Comparison of firm value: 1996, 2000 and 2004

LN MV/BV 1996 2000 2004

Mean 0.909 1.121 1.639Median 0.750 1.10 1.270Minimum 0.00 0.00 0.570Maximum 2.470 2.30 4.360

Panel C: Tests of equality of means of firm value: 1996, 2000 and 2004

Paired t-test

t-statistic P value*

2000 versus 1996 2.23 0.0342004 versus 2000 2.89 0.0082004 versus 1996 4.91 0.000

Where MT/BV = the ratio of market value to book value of equity; VDI = voluntary disclosure index; STAKE = the residualpercentage of capital owned by the State; ASSET = total assets; LEV = ratio of total liabilities to shareholders’ equity; REO = r-eturn on equity; SLGR = the natural logarithm of sales in the current year divided by sales in the previous year; LIQ = ratio ofcurrent assets to current liabilities; POSTPRIV = dummy variable; 1 when the firm is privatized onward; 0 before; GI = dummyvariable: governance index; IND1–6 = Indicator variable; natural resources are the default group; 1 if firm j in year t is tourism,0 otherwise; 1 if firm j in year t is engineering, 0 otherwise; 1 if firm j in year t is food, 0 otherwise; 1 if firm j in year t belongs topharmaceutical and chemical, 0 otherwise; 1 if firm j in year t belongs to others, 0 otherwise.* All probabilities are two-tailed.


disclosure levels of privatized firms. The coefficients on privatization and the governance index pointto the positive significant association of these factors with voluntary disclosure of privatized Jordanianfirms (both at the 5% levels). This result indicates the positive impact privatization and the improvedgovernance of privatized firms (as a result of ownership changes and the governance reforms) have inimproving voluntary disclosure. The coefficient on STAKE is positive but insignificant possibly due tothe reduction in the state’s stake. All control variables are significant (at the 1%, 1% and 5% levels,respectively). The model produced an adjusted R2 of 64.2% and F-statistic of 31.97 significant at a levelbetter than 1%.

Our interest is in Panel B of Table 4 which shows the effect of the enhanced voluntary disclosurelevels on firm value. It shows that the coefficient of voluntary disclosure is both positive and signifi-cant (at the 5% level). This is consistent with the notion that enhanced voluntary disclosure levels cre-ated value for Jordanian privatized firms. This is because privatization, through the transfer ofownership to private outside owners and governance reforms, stimulates management to align theirobjectives with those of shareholders, namely, to maximize the firm value (Silva and Alves, 2004).

Table 3

Panel A: Pearson correlation coefficients between variables in Eq. (1)

VDI POSTPRIV STAKE GI ASSET LEV

POSTPRIV 0.162��

STAKE 0.284�� 0.298��

GI 0.451�� 0.378�� 0.126��

ASSET 0.754�� 0.003 0.205�� 0.376��

LEV 0.453�� 0.032 �0.053 0.182�� 0.557��

REO 0.222�� 0.008 0.102 0.163�� 0.223�� 0.079

Panel B: Pearson correlation coefficients between variables in Eq. (2)

MT/BV VDIF SLGR LIQ IND2 IND3 IND4 IND5

VDIF 0.401��

SLGR 0.043 0.107LIQ �0.076 �0.317�� 0.119*

IND2 0.204�� 0.171�� 0.004 0.059IND3 0.231�� 0.103 0.079 �0.004 �0.100IND4 �0.131�� 0.179�� 0.028 �0.124� �0.200�� 0.250��

IND5 �0.157�� 0.244�� 0.085 �0.058 �0.118� �0.147�� 0.295��

IND6 �0.263�� 0.295�� 0.002 0.386�� 0.135�� 0.169�� 0.337�� 0.199��

Where VDI = voluntary disclosure index; POSTPRIV = dummy variable; 1 when the firm is privatized onward; 0 before; STA-KE = the residual percentage of capital owned by the State; GI = governance index; ASSET = total assets; LEV = ratio of totalliabilities to shareholders’ equity; REO = return on equity.MT/BV = the ratio of market value to book value of equity; VDIF = the fitted values of voluntary disclosure; SLGR = the naturallogarithm of sales in the current year divided by sales in the previous year; LIQ = ratio of current assets to current liabilitiesIND1–6 = Indicator variable; natural resources are the default group; 1 if firm j in year t is tourism, 0 otherwise; 1 if firm j in yeart is engineering, 0 otherwise; 1 if firm j in year t is food, 0 otherwise; 1 if firm j in year t belongs to pharmaceutical and chemical,0 otherwise; 1 if firm j in year t belongs to others, 0 otherwise.* All probabilities are two-tailed.


Also, we have shown that privatization is associated with the disclosure of more voluntary informa-tion. The higher the voluntary disclosure the better the investors are able to assess the prospects ofthe company. This would reduce the firms’ cost of capital and increase the demand for its securities,thus enhancing firm value.

As the table indicates, LIQ is positively significant (at the 1% level). IND4, IND5 and IND6 all havesignificantly negative coefficients, as expected. However, the coefficients on growth, IND2 and IND3,are insignificant. The model’s adjusted R2 is 32.6% (F-statistic of 8.04 significant at a level better than1%).

6.3. Additional analyses and robustness checks

We perform several analyses to ascertain that our findings are robust. In particular, we compareour sample of privatized firms with a group of private firms. We also repeat our regression analysisusing a different measure of firm value. Finally, we check for the possibility of non-linearity in the rela-tion between voluntary disclosure and firm value.

6.3.1. Privatized versus private firmsDuring the late 1990s the Jordanian government introduced many economic measures, including

the liberation of trade policies, the abolishment of price regulations and full liberalization of foreignexchange dealings (EPC, 2007). Therefore, one may wonder whether the improved voluntary disclo-sure levels in privatized firms are manifestations of these macroeconomic factors. To isolate the im-pact of privatization, we test a control sample of 27 privately-held firms based on comparable sizeand the industry type of the privatized firms. The firms are also listed for the whole period of the study(from 1996 to 2004).

Table 5 depicts the descriptive statistics for the sample of private firms. Panel B allows a compar-ison of firm values for the years 1996, 2000 and 2004, while Panel C represents the results of the

Table 4

Panel A: Regression analysis of the effect of privatization on voluntary disclosure levels of privatized firms, N = 243 (1996–2004)

Predictor Predicted sign Coef. T-statistic VIF

Constant � �0.77842 �6.84***

POSTPRIV + 0.02793 1.92** 2.0STAKE + 0.0014377 1.15 1.3GI +_ 0.008716 1.91** 1.6ASSET + 0.052791 6.43*** 1.9LEV + 0.003845 2.88*** 1.7REO + 0.0008234 1.78** 1.2R-Sq 66.2%R-Sq (adj) 64.2%F-statistic 31.97***

Panel B: 2SLS estimation on the effect of enhanced voluntary disclosure levels on firm value of privatized firms, N = 243(1996–2004)


Constant � �0.0791 �0.24VDIF + 1.2796 1.98** 3.1SLGR + �0.07496 �0.91 1.1LIQ + 0.3053 2.54*** 1.4IND2 � 0.0960 0.55 1.8IND3 � 0.1573 0.79 3.4IND4 � �0.325 �1.82** 3.6IND5 � �0.3952 �1.89** 2.7IND6 � �0.4559 �2.21*** 2.6YEAR Included

R-Sq 37.2%R-Sq (adj) 32.6%F-statistic 8.04***

POSTPRIV = dummy variable; 1 when the firm is privatized onward; 0 before; STAKE = the residual percentage of capital ownedby the State; GI = governance index; ASSET = total assets; LEV = ratio of total liabilities to shareholders’ equity; REO = return onequity.VDIF = the fitted values of voluntary disclosure from the previous regression; SLGR = the natural logarithm of sales in thecurrent year divided by sales in the previous year; LIQ = ratio of current assets to current liabilities; IND: Indicator variable:natural resources are the default group; 1 if firm j in year t is tourism, 0 otherwise; 1 if firm j in year t is engineering andelectrical, 0 otherwise; 1 if firm j in year t is food, 0 otherwise; 1 if firm j in year t belongs to pharmaceutical, 0 otherwise; 1 iffirm j in year t belongs to others, 0 otherwise.⁄ Significant at the 10% level.

** Significant at the 5% level.*** Significant at the 1% level.


paired-t test. The results point to an increase in the means and medians of the firm values of privatefirms over the period of the study. Yet, when comparing these results with those shown in Table 2, it isevident that the sample of privatized firms exhibits higher voluntary disclosure levels and firm valuesthan does the sample of private firms.

Table 6 presents the regression results of this investigation. As Panel A of the table depicts, the gov-ernance index (GI) and ASSET are both positively significant (at the 10% and 1% level, respectively).Compared to the privatized firms where the (GI) coefficient is significant at the 5% level, the sampleof private firms has a 10% significance level. This result is expected given the significant improvementsin the governance of privatized firms, due to the transfer of ownership from the state to new owners,compared to private firms.

The private firms’ model produced an adjusted R2 of 36.2% with an F-statistic of 8.56, which com-pares poorly with that of privatized firms (adjusted R2 of 64.2% and F-statistic of 31.97) implying thatthe variables in the second model better explain voluntary disclosure than those in the first. This isindicative of the impact of privatization and the accompanying reforms on the enhancement of thedisclosure practices of privatized firms.

Table 5

Panel A: Descriptive statistics of sample of private firms (N = 243)

Continuous variables Mean Median Min. Max. Standard dev.

MV/BV 1.148 1.017 0.00 4.0 0.785VDIF 0.1513 0.1216 0.0282 0.6197 0.0977GI 2.296 2.00 0.00 5.00 1.054ASSET 16,358,719 9,500,000 1,104,214 147,356,797 21,027,151LEV 41.28 33.48 0.23 215.40 37.37ROE 6.99 6.77 �44.39 52.05 11.03SLGR 0.9783 1.00 0.00 2.247 0.4635LIQ 12.75 2.50 0.03 399.90 49.52Dichotomous variables 1 0IND2 7.41% 92.59%IND3 11.11% 88.89%IND4 33.33% 66.67%IND5 14.81% 85.19%IND6 18.52% 81.48%

Panel B: Comparison of firm value: 1996, 2000 and 2004

LN MV/BV 1996 2000 2004

Mean �0.113 0.1695 0.3568Median �0.228 0.0212 0.4026Minimum �1.138 �0.7314 �0.2458Maximum 2.303 1.2096 0.9395

Panel C: Tests of equality of means of firm value: 1996, 2000 and 2004

Paired t-test

t-statistic P value*

2000 versus 1996 1.63 0.1172004 versus 2000 1.98 0.062004 versus 1996 3.08 0.005

Where MT/BV = the ratio of market value to book value of equity; VDI = voluntary disclosure index; NED = the proportion ofnon-executive directors to the total number of directors; ASSET = total assets; LEV = ratio of total liabilities to shareholders’equity; REO = return on equity; SLGR = the natural logarithm of sales in the current year divided by sales in the previous year;LIQ = ratio of current assets to current liabilities; GI = governance index; IND1–6 = Indicator variable; natural resources are thedefault group; 1 if firm j in year t is tourism, 0 otherwise; 1 if firm j in year t is engineering, 0 otherwise; 1 if firm j in year t isfood, 0 otherwise; 1 if firm j in year t belongs to pharmaceutical and chemical, 0 otherwise; 1 if firm j in year t belongs to others,0 otherwise.* All probabilities are two-tailed.


Panel B, Table 6 shows a negatively significant coefficient of voluntary disclosure on firm value.This result is not unexpected because, as Panel A suggested, the voluntary disclosure of privately-held firms was marginally enhanced as a result of the regulatory reforms accompanyingprivatization.

6.3.2. Using Tobin’s Q as an alternative proxy of firm valueWhile the natural logarithm of the ratio of the market-to-book value of equity as a measure of firm

value is reliably used by previous research (Lins, 2003; Hassan et al., 2009), other measures are alsoused. Silva and Alves (2004) use Tobin’s Q measure calculated by the relation between the market va-lue of the firm and the value of replacement of its assets. The authors argue that this indicator revealsthe potential of added value of the company as perceived by the market as a reflection of its perfor-mance. Hence, if Tobin’s Q is greater than 1.0, it indicates that the firm has a market value exceedingthe price of the replacement of its assets.

Untabulated results of this analysis point to the significance of the coefficient of voluntary disclo-sure on firm value as measured by Tobin’s Q. Liquidity has a significant negative coefficient while mostof the industry indicators are significant in the right direction.

Table 6

Panel A: Regression analysis of the effect of the reforms accompanying privatization on voluntary disclosure levels ofprivate firms, N = 243 (1996–2004)


Constant � �7.002 �6.82***

GI + 0.15529 1.74* 1.2ASSET + 0.27667 4.21*** 1.2LEV + �0.06732 �0.85 1.0REO + �0.006820 �1.34 1.1Year IncludedR-Sq 41.0%R-Sq (adj) 36.2%F-statistic 8.56***

Panel B: 2SLS estimation on the effect of voluntary disclosure on firm value of private firms, N = 243 (1996–2004)


Constant � �0.2683 �0.49VDIF + �0.3924 �1.78* 2.1SLGR + 0.0594 0.41 1.3LIQ + �0.0836 �0.82 1.1IND3 � �0.9698 �3.91*** 1.9IND4 � �0.4762 �2.30** 3.0IND5 � �0.6004 �2.76*** 2.4IND6 � �0.7010 �2.98*** 2.6Year IncludedR-Sq 31.4%R-Sq (adj) 22.4%F-statistic 3.5***

GI = governance index; ASSET = total assets; LEV = ratio of total liabilities to shareholders’ equity; REO = return on equity.VDIF = the fitted values of voluntary disclosure from the previous regression; SLGR = the natural logarithm of sales in thecurrent year divided by sales in the previous year; LIQ = ratio of current assets to current liabilities; IND: Indicator variable:natural resources are the default group1 if firm j in year t is tourism, 0 otherwise; 1 if firm j in year t is engineering andelectrical, 0 otherwise; 1 if firm j in year t is food, 0 otherwise; 1 if firm j in year t belongs to pharmaceutical, 0 otherwise; 1 iffirm j in year t belongs to others, 0 otherwise.

* Significant at the 10% level.** Significant at the 5% level.

*** Significant at the 1% level.


6.3.3. Non-linearity between voluntary disclosure and firm valueHolthausen and Watts (2001) argue that most of the models used in value relevance studies to esti-

mate firm value are linear, while there is ample theory and empirical evidence suggesting that therelation between the variables in the models and firm value is non-linear. To check for this possibility,we extend specification (2) by including the instrumented VDI (voluntary disclosure index) and itssquared variable (VDI)2. Untabulated results imply that the estimated coefficient of the squared term(VDI)2 is positive and significant at the 5% levels.

6.3.4. Other robustness checksThe use of the instrumental variables approach might imply that we are measuring the effect of one

or more instrumental variables on firm value rather that the effect of the voluntary disclosure levels.We check for this possibility by regressing firm value on the instrumental variables. The results (notreported here but available from the authors upon request) show that the variable REO (return onequity) is the only significant variable (at the 5% level). The adjusted R2 of 12.9% is very low comparedto 68.4% obtained in the regression of voluntary disclosure on the same variables. The F-statistic is2.86 significant at the p = 0.001 level compared to the F-statistic of 25.08 significant at p < 0.000. Thissuggests that the instrumental variables used merely capture the effect of voluntary disclosure on firmvalue.


7. Conclusion

In this paper we empirically examine the impact of privatization and the accompanying reforms onimproving voluntary disclosure practices of Jordanian privatized firms that enhances the value ofthese firms. We use 243 annual reports of 27 privatized Jordanian listed companies over a 9-year per-iod (1996–2004). We employ both univariate and multivariate testing. Results of the paired t-testpoint to a significant increase in the means of firm values over the years of the study.

We report that privatization and the enhanced governance of privatized firms, tested using a corporategovernance index, enhance voluntary disclosure. We use a methodology that controls for the endogeneityof voluntary disclosure levels and, utilizing panel data estimation techniques, our results indicate that theenhanced voluntary disclosure levels of privatized firms significantly improved the value of these firms.

To ascertain the robustness of our findings, we compare the sample of privatized firms with a sam-ple of private ones. The results confirm that privatized firms’ voluntary disclosure was significantlyenhanced compared to that of the private firms. The results further show that the enhanced voluntarydisclosure levels of privatized firms significantly influence the firm value of these firms, while the vol-untary disclosure of private firms had no positive influence on their firm value.

We repeat our analysis using another proxy for firm value and the findings of this analysis confirmour earlier results. We also check for the possibility of non-linearity in the relation between voluntarydisclosure and firm value. The results confirm the positive significant effect of enhanced voluntary dis-closure levels on the value of privatized firms.

These results have implications for both the disclosure and value relevance literatures. Our studyconfirmed that the voluntary disclosure levels of privatized firms have been significantly enhanced.These results support the notion that environmental factors, including economic conditions in a givencountry, enhance corporate disclosure.

Although theory predicts that firms with enhanced disclosure should be more highly valued, thereis little direct empirical evidence to support that association. Hence, our findings provide valuable evi-dence that the enhanced voluntary disclosure levels of privatized firms are rewarded with higher val-uations by the market. In addition, we report that the size of the firm is the most influential controlvariable for firm value in the Jordanian context measured by industry type, while sales growth andliquidity seem to have no effect on firm value.

Jordan has witnessed rapid developments in its information reporting. Thus, this study has severalimplications of particular significance to the Jordanian investment environment given the reforms Jor-dan has embarked upon. Jordanian companies need to provide more voluntary information in theirannual reports in order to have increased investor confidence that creates value to the firm. Moreover,the study has significant implications for practitioners and standard setters in Jordan as well as inother emerging markets.

Our study is not without its limitations. Like other disclosure studies employing a disclosure checklistmethod, our study is subject to the problem of subjectivity in the scoring process which cannot be entirelyeliminated. Another limitation lies in the small sample size of the study which is due to the research designlimiting the sample firms to those listed for the entire period of the study. Nevertheless, the use of paneldata compensates for that limitation. Alternatively, to increase the sample size, and as an avenue for futureresearch, the study could have incorporated privatized firms from a number of developing countries in theregion since many of these countries undertook similar privatization programs.

Finally, we point out that the study used voluntary disclosures in annual reports, despite the pres-ence of other means of disclosures such as management forecasts, analysts’ presentations, conferencecalls, press releases and Internet sites. However, in a country like Jordan the annual report is the mainsource of firms’ financial information available to users, and it was for this reason we gave it prefer-ence over other sources of information.

Acknowledgments

The authors would like to acknowledge the comments and suggestions received from NormanSaleh, Leo Langa and the participants at the seminar of School of Accounting, La Trobe University,and AFAANZ Conference, 2010, on the earlier versions of the paper.


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