Corporate Governance is the main focus of our investigation and it is assumed that disclosure is crucial for the proper functioning of a firm's corporate governance structure. Corporate Governance comprises "a set of internal and external control mechanisms that reduce the conflicts of interest between shareholders and managers, arising from the separation of ownership and control" (Berle and Means, 1932, p. 396), including instruments designed to evaluate and hold managers responsible for their performance and management. A lack of corporate governance mechanisms and controls allows managers to deviate more easily from shareholder interests.
In recent years, the subject of corporate governance has generated much debate. The main interventions in corporate governance matters have been a reaction to crisis situations, seeking to restore trust and confidence in the markets. In the United Kingdom, the Cadbury code (1992) was the response to a number of corporate and financial scandals that occurred in the late 1980s, such as the Guinness scandal. In Continental Europe, the OECD Principles issued in 1999 were a reaction to the Asian financial crisis in 1997 and 1998. The accounting fraud in major companies like Enron and Worldcom, the access to privileged information and the episodes of tax evasion, have increased the debate on this issue. The aforementioned cases have raised serious questions about the adequacy of the existing solutions to a wide range of problems, such as strengthening the credibility of financial information and the efficiency of the supervisory systems of listed companies.
In this regard, with the aim of providing mechanisms to protect investors' rights and interests, as well as enabling markets to control managerial actions, national and supranational entities with legislative and regulatory powers have been publishing "Codes of Best Practices for Corporate Governance". Seeking to transpose corporate governance to the domestic context, in 1999 the Portuguese Securities Market Commission (CMVM) approved a set of Recommendations on Corporate Governance. Since then, the CMVM recommendations on corporate governance have been constantly evolving with regard to their content and regulatory environment. With the recent publication of Regulation No. 4/2013 of 18 July of 2013, there are now more than fifty CMVM recommendations with a direct impact on the corporate governance of companies in general, and on the governance of listed companies in particular.
In Portugal, companies issuing shares to trade on a regulated market are legally required to provide information on whether they comply with the recommendations contained in the Corporate Governance Code and to explain when they do not. The "comply or explain" approach, with origins in the United Kingdom, has been adopted by most European countries, as it was considered that listed companies should be required to include a coherent and descriptive statement in their annual reports identifying the fundamental pillars of their corporate governance structures and practices.
Considering the relevance and timeliness of corporate governance, this study aims to analyse the determinants of the level of corporate governance disclosure (CCD) by Portuguese companies listed on Euronext Lisbon between 2005 and 2011, a market characterized by a strong concentration of ownership and a civil law legal system which provides weak legal protection for investors. The motivation for this study stems from: (a) the importance of corporate governance disclosure for well-functioning capital markets and better investor protection; (b) the reduced amount of theoretical and empirical research in Portugal about the governance of companies.
To answer the question "what are the determinants of the level of corporate governance disclosure?" we divided the hypotheses into three groups: ownership structure, company management and supervisory structures and other specific company characteristics. We expect to contribute to the understanding of this problem, aiming to provide evidence on the determinants of the level of corporate governance disclosure.
The information used to assess companies' corporate governance practices was acquired both from annual reports and corporate governance reports, since these are the main documents published by companies to disseminate information to corporate stakeholders and because the release of an annual corporate governance report is mandatory for all companies listed on Euronext Lisbon.
The remainder of the paper is organized as follows. The next section discusses the relevant prior literature. Section 2 develops the research hypotheses. Section 3 outlines the sample, the research methodology and defines the variables used in the empirical analysis, while section 4 presents and discusses the main results. Finally, section 5 concludes the paper.
2 Literature review
Verrecchia (2001) argues that there is no comprehensive theory that explains the disclosure of information phenomena. Dye (2001) disagrees in part with what is stated by Verrecchia (2001) and considers that there is a theory about voluntary disclosure framed by Game Theory, under the premise that a company will disclose favourable information and hide unfavourable information.
Verrecchia (2001) suggests three categories of disclosure research in accounting: association-based disclosure, discretionary-based disclosure and efficiency-based disclosure. In the first category, the main study objective is to analyse the effects of disclosure on changes or disruptions in investor behaviour. In the second category, in which this study is framed, the main objective is to explain how managers and/or companies exercise discretion with regard to the disclosure of information about which they have an understanding. In the third category, studies on efficiency-based disclosure investigate which information is unconditionally preferred and most efficient in the absence of prior knowledge of the information.
Research on voluntary disclosure relies on information asymmetry theory and complements the positive theory of accounting in the attention given to capital market motivations for accounting and disclosure decisions (Healy and Palepu, 2001). These studies assume that managers have more information on the expected results than outside investors and suggest that, depending on how the accounting and auditing regulations works, managers will seek an equilibrium between accounting options and disclosures, namely between disclosing more information to the market or managing the disclosure for contractual, political or corporate governance reasons.
Within the corporate governance framework, the OECD and regulators in many countries consider corporate governance structures and the disclosure of information as important ways to protect institutional investors and to improve the efficiency of capital markets (OECD, 1999). Given that the disclosure of information is selective and all forms of management manipulation cannot be avoided, an appropriate corporate governance structure may force managers to increase the level of disclosure.
Deciding whether corporate governance disclosure should be voluntary or mandatory is a central concern to regulators. The "comply or explain" model is the most common one used worldwide (Europe, Australia, New Zealand, Singapore, Hong Kong and many other countries). That means that companies are not required to comply with every rule in the Corporate Governance Code, but must justify non-compliance situations. As a result, the individuals or entities to which information is addressed will use it to make their decisions. Also, rules compliance will influence share price and the capital market reputation of companies.
However, governance practices differ significantly across countries (Doidge, Karolyi & Stultz, 2007). Although each country issues recommendations on corporate governance addressed to all listed companies, the level of compliance varies significantly across companies (Gompers, Ishii & Metrick, 2003). This variation suggests that compliance with corporate governance codes is, in part, a discretionary choice. In fact, governance codes in many European countries such as Portugal are voluntary and non-binding (OECD, 2009).
In this case, the disclosure of information on governance practices is a good indicator of the quality of the corporate governance structure (Lokman, Mula & Cotter, 2014). According to Berglof and Pajuste (2005), the disclosure of corporate governance practices increases corporate transparency and reduces the incidence of fraud. Donnelly and Mulcahy (2008) point out that the existence of appropriate corporate governance structures minimizes the risk of managerial expropriation generated by information asymmetry.
The definition of corporate governance has been associated with the "principal-agent" or "agency" problem, which occurs when there are conflicts of interests between shareholders, managers, creditors and employees of a company, caused by the separation of ownership and control. The voluntary disclosure of information plays an important role in the management of relations between the various stakeholders in a company. In Portugal, the existence of an overwhelming majority of small and medium-sized companies and a strong ownership concentration has led to changes in the way of analysing agency relations. If, on the one hand, in companies where agent and principal roles overlap, the moral hazard is higher, since there is no moderator of the principal's actions (Chung, 1993), on the other hand, the supervising of management is more efficient and enables incentives to be more aligned, since the managers and controlling shareholders are often the same people, with only one prevailing aspiration, which is to create value for the company in the medium and long term (Abreu, 2013). A high level of ownership concentration...