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Exploring the relation between corporate reporting and corporate governance

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Article · August 2017

DOI: 10.1108/JFRA-06-2016-0053

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 Journal of Financial Reporting and Accounting
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Exploring the relation between corporate reporting and

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corporate governance effectiveness
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Journal: Journal of Financial Reporting and Accounting

Manuscript ID JFRA-06-2016-0053.R3
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Manuscript Type: Research Paper

Keywords: Corporate governance, Corporate Reporting, Disclosure, Financial reporting

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 Page 1 of 25 Journal of Financial Reporting and Accounting
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3 Exploring the relation between corporate reporting and
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corporate governance effectiveness
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10 Abstract:
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12 Purpose: The purpose of this paper is to investigate the relationship between corporate
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governance effectiveness and information transparency. Hence, the paper seeks to extend
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15 prior information transparency research.
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17 Design/methodology/approach: This study uses a sample of 28 non-financial listed Tunisian
18 companies and covers an eight-year period from 2006 to 2013. To test the hypotheses of this
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20 research, a simultaneous equation system model was applied.
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22 Findings: The results obtained show that, for the Tunisians companies, corporate governance
23 practices have a significant positive effect on information transparency. The current study also
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24 provides evidence that pertinent information can improve corporate governance index.
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26 Research implications: The findings may be of interest to the academic researchers,
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28 practitioners and regulators who are interested in discovering the quality of corporate
29 governance practices in Tunisian context.
30
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31 Practical implication: The findings of this study can help Tunisian regulators in creating
32 corporate governance disclosure requirements. The findings also provide the African business
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community insights concerning the quality of corporate governance and corporate reporting.
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36 Social implication: This research helps also to inform regulators about the benefits of
37 disclosure more information to investors and to the firm. For instance, how the information
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38 can be a source of transparency and stability in the firms what favors the social environment
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of the firms?
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Originality/value: This paper extends the existing literature, by examining the causal
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relationship between corporate governance and information transparency.
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 Journal of Financial Reporting and Accounting Page 2 of 25
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3 1. Introduction
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5 Financial information transparency is a fundamental property of good governance practices.
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Financial information and corporate governance have been an object of research since the
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8 1960s, recently, researchers have shown an increased interest in studying the relationship
9 between corporate governance and disclosure information. Previous studies have reported that
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10 good corporate governance practices are aimed to improve communication policies with
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12 stakeholders and in particular the shareholders (Girard and Rakotonjanahary, 2005). Studies
13 of Li (2010) show the importance of corporate governance in improving the disclosure of
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14 reliable information. However, these rapid changes are having a serious effect on financial
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information, because information transparency is addressed to external users of annual
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17 reports; it is, then considered as an external governance mechanism which helps protect
18 against the managers’ opportunism. However, these users most often exert external control
19 over the firms. In this regard, corporate governance mechanisms would stand as a means
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21 whereby agency conflicts can be monitored and managers are inspired to behave and act use
22 with respect to shareholders’ interests.
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24 In corporate governance literature, the relative importance of financial information has been
25 subject to considerable debate; because an effective corporate governance practice should
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help reduces the managers’ opportunism behavior and reducing information asymmetry. The
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28 information disclosure should serve to allow shareholders to control and monitor leaders
29 through reducing information asymmetries. Consequently, information transparency can be
30 considered as a behavioral variable in so far as it constitutes the result of a predetermined
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32 choice. Indeed, the entireties of its arguments improve the existences of a causal relation
33 between information transparency and corporate governance effectiveness. In this case,
34 researchers have not treated this causal relationship in much detail. What is not yet clear is the
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impact of information transparency on corporate governance practices.
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This paper attempts to show that information transparency can affect corporate governance
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39 effectiveness. The major objective of this study was to investigate the nature of the relation
40 between corporate governance and financial information transparency. So, this paper intends
41 to determine the relation between corporate governance and voluntary disclosure, then the
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relation between corporate governance and earnings management, after the relation between
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44 corporate governance and accounting conservatism, finally, the relation between corporate
45 governance and earnings timeliness. Our main reason for choosing this topic is the importance
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of corporate reporting and corporate governance practices in the Tunisian context. In addition,
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48 the study of corporate governance and corporate reporting is of great importance in order to
49 provide tools that help to motivate manager for more transparency and attract foreign
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50 investors.
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52 The central question in this paper asks how corporate governance has an effect on financial
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54 information transparency and how this information can also change corporate governance
55 practices. Data for this study were collected using financial statements available on the Tunis
56 Stock Exchange (TSE) and Financial Market Council (FMC) websites. My main reason for
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choosing Tunisian firms is that Tunisian market is more and more expanding, especially from
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 Page 3 of 25 Journal of Financial Reporting and Accounting
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3 the socio-political events and revolutionary movements, such as those occurring in Tunisia
4 over the year 2011. In this context, several reform programs to modernize the financial
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market, promote the foreign investment, privatize the public firms and liberalize the trade, it is
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7 although the concept of corporate governance is still in a growing stage, and the Tunisian
8 regulators emphasized the necessity of disclosing relevant and reliable information by the
9 listed firms. In fact, the political reforms have provided an opportunity for Tunisia to develop
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11 a more transparent information and effective governance tend to help increase its economic
12 potential.
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14 Therefore, this study makes a major contribution to research on corporate governance by
15 demonstrating the nature of the relation between corporate governance and information
16 transparency on the one hand, and how corporate reporting can have an impact on corporate
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governance effectiveness. This paper has been divided into four sections, the first section
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19 deals with literature review, the second section attends to research method, the third section is
20 concerned with empirical analysis, and finally, the conclusion gives a brief summary and
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21 critique of the findings.
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23 2. Theoretical framework
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25 The relationship between corporate governance and corporate reporting is explained by two
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economic-based theories: agency theory and signalling theory.
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29 Agency theory is one of the well-known theories about corporate governance. In an analysis
30 of agency theory, Ross (1973) followed by Jensen and Mekcling (1976) introduced the
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31 agency problem. They considered the managers as the agents and the shareholders as the
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owners of the firms. Corporate governance research point out of two types of agency
34 problems concerned with a conflict of interest between managers and shareholders. The first
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35 type arises when the board is composed of individuals who make decisions that are in the best
36 interest of shareholders, but the interests of management are not aligned with those of the
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board and shareholders. The second type of agency problem arises when the board is
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39 composed of directors who are beholden to the CEO, but their interests are not aligned with
40 the interests of shareholders. In this case, corporate governance mechanisms serve to mitigate
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the agency problem and improve information transparency (Bushman et Smith, 2001; Shleifer
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et Vishny, 1997).
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45 On the other hand, signalling theory is presented by Akerlof (1970) and developed by Spence
46 (1973) to clarify the information asymmetry in the labor market. In this context, this paper
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47 highlights the important role of financial reporting in reducing the information asymmetry
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49 between managers and outside directors. Verrecchia, (1983) considers that as a result of the
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50 information asymmetry problem, companies signal certain information to investors to show

51 that they are better than other companies in the market. In this case, Signaling theory
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addresses information asymmetries between two parties where the sources of asymmetric
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54 information are mainly concerned with information quality (Stiglitz 2000). Verrecchia (2001)
55 claims that managers have better information than shareholders, but they are not always
56 expected to truthfully report information that is detrimental to their personal interests.
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 Journal of Financial Reporting and Accounting Page 4 of 25
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3 In view of all that has been mentioned so far, one may suppose that Boards with a higher
4 percentage of outside directors are assumed to be at an informational disadvantage when
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monitoring managers. However, in the absence of information asymmetries, boards are able to
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7 mitigate agency conflicts with managers. Similarly, one potential role of financial information
8 is to provide outside directors with reliable information to facilitate their monitoring of
9 management and, shareholders in their monitoring of directors. Overall, corporate reporting
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11 serves to reduce information asymmetries, with a variation in the governance mechanisms and
12 more corporate governance effectiveness that are associated with financial information
13 characteristics.
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15 3. Literature review
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There is a large volume of published studies describing the impact of corporate governance on
19 improving financial information. A number of studies have found that the implementation of
20 good governance practices would help in improving disclosure information (Li, 2010, Lim et
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21 al., 2007, Patelli and Prencipe, 2007, Cheung et al., 2008, Barako et al., 2006, Cheng and
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23 Courtenay, 2006, Arcay and Vazquez, 2005, Eng and Mak, 2003). There is an unambiguous
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24 relationship between corporate governance and financial information (Klai and Omri, 2011).
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30 Corporate governance index Information transparency
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34 H.3
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35 Accounting conservatism
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H.4
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Earnings management
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41 H.2
42 Earnings timelines
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44 H.1
45 Voluntary disclosure index
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49 Figure 1: conceptual framework
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53 2.1. Corporate governance and voluntary disclosure
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55 In recent years, there has been an increasing amount of literature on studying the relation
56 between corporate governance and voluntary disclosure. Forker (1992) claims that the
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presence of independent directors on the board can reduce voluntary disclosure. Noe (1999)
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 Page 5 of 25 Journal of Financial Reporting and Accounting
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3 proposes that the potential information disclosure led to a decline in sales. Chen and Jaggi
4 (2001) found that the presence of independent directors on the board about disclosure of
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financial information is quite significant.
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In another major study, Eng and Mak (2003) published a paper in which described corporate
9 governance and voluntary disclosure in Singapore, who found a positive relationship between
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10 government ownership and voluntary disclosure. Then, Arcay and Vazquez (2005) point out
11 that effort to adopt corporate governance has positively correlated with voluntary disclosure.
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Patelli and Prencipe (2007) mention the special situation of Italy, as an example of studying
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15 the relationship between voluntary disclosure and outside directors, the results showed a
16 positive relationship between the independent directors and voluntary disclosure. A previous
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17 study by (Donnelly and Mulcahy, 2008, Rouf, 2011, Chakroun and Matoussi, 2012) examined
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19 the relation between corporate governance characteristics and voluntary disclosure; the result
20 argues that corporate governance and voluntary disclosure are interrelated. Bushee and
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21 Friedman (2014) argue that institutional investors have several incentives that would
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encourage them to invest in firms that use better corporate governance mechanisms.
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24 Hassanein, and Hussainey, (2015) suggest that forward-looking financial information in UK

25 narratives contains some relevant information about firm performance. In the same vein,
26 Samaha et al., (2015) claims that board size, board composition, and audit committees are
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28 significantly and positively associated with voluntary disclosure. A recent study by Yang and
29 Zhou (2016) reports that board effectiveness is significantly and positively correlated with
30 voluntary disclosure. They found that firms with better governance mechanisms are more
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proactive in corporate disclosure. In her article, Agyei-Mensah (2016) concluded that board
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33 independence is significantly associated with internal control disclosure. This supports the
34 idea that independent directors help to improve the extent of disclosure and increase the
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35 transparency of information. Using 3SLS estimation on a panel data of 98 French firms,

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37 Nekhili et al. (2016) found that audit committee independence is positively related to the
extent of R&D voluntary disclosure.
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40 H.1 There is an interaction between corporate governance and voluntary disclosure.
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42 2.2. Corporate governance and earnings management
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44 A large and growing body of literature has investigated the relationship between corporate
45 governance and earnings management. Elghuweel et al. (2016) investigate the relationship
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47 between information quality and corporate governance characteristics concluded that these
48 mechanisms have an important role in improving the quality of information.
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50 Similarly, Xie et al.(2003) claim that corporate governance can reduce earnings management.
51 The results show that the presence of institutional investors to reduce the impact of earnings
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53 management. Man and Wong (2013) found that the effectiveness of governance mechanisms
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54 decreases earnings management in Spain.

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56 Iqbal and Strong (2010) employed the corporate governance index, concluded that firms
57 exhibiting low corporate governance index tend to increase earnings management. This view
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 Journal of Financial Reporting and Accounting Page 6 of 25
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3 is supported by Jiang et al. (2008) who adopted governance score and determined that a
4 higher level of corporate governance index are associated with lower discretionary accruals
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and higher information quality.
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In addition, Bekiris and Doukakis (2011) examined the relationship between corporate
9 governance and earnings management by using a corporate governance index. The results
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10 showed that an inverse relationship exists between corporate governance and earnings
11 management, and that corporate governance provisions may constrain incitation of managers
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13 to manage earnings, thereby increasing the credibility of financial statements. Likewise, Kang
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14 and Kim (2012) hold the view that earnings management is negatively influenced by
15 corporate governance index. Recently, González and García-Meca (2014) in America;
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Scholtens and Kang (2013) in Australia ; Di Meo (2014) suggests that strong corporate
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18 governance is able to reduce accounting manipulation. In 2015, Ramachandran et al. (2015)
19 describe the relationship between corporate governance mechanisms and earnings
20 management; they found that the nomination of an audit committee and a larger board reduce
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22 earnings management through discretionary accruals. Similarly, Azzoz and Khamees (2016)
23 found that the audit committee is significantly associated with earnings management. A recent
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24 study by Khalil and Ozkan (2016) reported that the high-quality auditor is effective in
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reducing earnings management.
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H.2 There is an interaction between corporate governance and earnings management.
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30 2.3 corporate governance and accounting conservatism
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32 More recently attention has focused on accounting conservatism. Surveys such as that
33 conducted by Watts (2003) have shown that accounting conservatism constitutes an effective
34 mechanism whereby can be reduced agency problem as it helps in reducing behavior
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opportunistic managers by reducing their ability to overstate earnings and net assets. Recent
37 evidence suggests that accounting conservatism is higher regarding firms which corporate
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38 governance practices is more developed (Beekes et al., 2004, Ahmed and Duellman, 2007,
39 Lara et al., 2009).
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In this context, Lafond and Roychowdhury (2008) along with Cullinan et al. (2012)
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discovered that accounting conservatism is negatively associated with managerial ownership.
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44 Ahmed and Henry (2012) found that firms which adopt good corporate governance practices
45 (audit committee, board independence, and institutional investors) pursue on accounting
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47 conservatism policy as an agency control instrument. Other studies have considered the
48 relationship between corporate governance effectiveness and accounting conservatism, Lei et
49 al. (2013) show that listed companies in China implement accounting conservatism practices
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50 in their accounting practices are more interested in corporate governance effectiveness (by an
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52 increasing percentage of independent directors). Likewise, Hamdan et al. (2012) found a
53 positive relationship between external corporate governance mechanisms (audit quality) and
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54 accounting conservatism, this association can be explained by the fact that big audit firms are
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able to improve their accounting conservatism level. In their study, Rahimah et al. (2014)
57 examine the association between board directors and audit committee with accounting
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58 conservatism. Elshandidy and Hassanein, (2014) claim that after the mandatory adoption of
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3 IFRS, independent directors are likely to put significantly more pressure on the management
4 to practice more accounting conservatism. Results from a panel data analysis for 300
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Malaysian listed firms observed from 2001 to 2007 show that boards with a higher proportion
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7 of independent directors are associated with conservatism. Santanu et al. (2015) found that
8 firms with weaker governance mechanisms adopt less conservatism. Recent evidence suggests
9 that audit committee expertise, a number of audit committee meetings and board
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11 independence are correlated with a higher level of accounting conservatism (Madah et al.
12 2016).
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16 2.4 corporate governance and earnings timeliness
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18 Much of the current literature on financial information pays particular attention to earnings
19 timeliness. Recently, some studies have shown that corporate governance practices can affect
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21 the earnings timeliness (Abdelsalam and Street, 2007, Afify, 2009, El-Masry et al., 2008). In
22 this context, Afify (2009) found a negative relationship between earnings timeliness and
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outside directors’ percentage. Like El-Masry et al. (2008) concludes that companies with a
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high number of outside directors are updated in their publications. Abdelsalam and Street
26 (2007) found that ownership concentration is likely to increase the annual report processing
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27 time. Moreover, Al-Ajmi (2008) reported that institutional ownership reduces annual report
28 publication
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By drawing on the concept of earnings timeliness, Clatworthy and Peel (2013) confirmed that
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32 the presence of a large audit firm, decrease more the time of information disclosure. The
33 largest audit firms usually spend a short time necessary to audit the financial statements as
34 compared to smaller audit firms. Similarly, Fauzi and Locke (2012) in Tunisian context, noted
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that large audit firms are more likely to reduce the period necessary for completing audit
37 reports. Besides, Al Daoud et al. (2014) proposes that annual report completion period is
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38 highly associated with of the auditor type. Recently, Alfaih (2016) have pointed out that firm
39 with a larger board, a greater number of independent directors and separate CEO–chairman
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41 roles are more likely to produce timely financial statements. Eslami and Jaz (2016) confirm
42 that there is a significant correlation between Board size and financial reporting timeliness in
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43 the firms. The results show that there is a significant relationship between institutional
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ownership, family ownership and concentration of ownership and the earnings timeliness. In
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46 her paper, Al Daoud et al., (2015) suggest that companies that have a higher percentage of
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47 outside directors take a significantly shorter time to prepare and issue their financial reports.
48 The results also show that companies that separated the CEO and chairman's roles are quicker
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50 in publishing, financial reports than companies combining the roles of CEO and chairman.
51 This study maintains that the good structures of corporate governance play a key role in
52 improving the quality of timeliness of financial reports.
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54 H.4 There is an interaction between corporate governance and earnings timeliness.

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3 The evidence presented in this section suggests that corporate governance and information
4 transparency (presented by voluntary disclosure, earnings management, accounting
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conservatism, and earnings timeliness) are related.
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8 1. Data and methodologies
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2.1. Data and variables ‘definition
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12 2.1.1 Sample Selection and Data
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This paper used a convenience sample of 28 Tunisian companies listed on the Tunisian Stock
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15 Exchange (TSE) relevant to the non-financial sector. The study period ranges from the
16 beginning of 2006 to the end of 2013. The sampling period starts in 2006, because law No
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2005-96 of 18 October 2005 on the strengthening of financial security in the Tunisian context
19 and because the 2006/2008 financial crisis has increased debate surrounding the corporate
20 governance practices and information transparency and thus, the current study may offer
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21 insights on the extent to which the recent financial crisis has affected corporate governance
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23 structures and information transparency practices among Tunisian listed companies. The
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24 sampling period ends in 2013 because it was the latest year for which the annual reports of
25 listed companies were published when the data collection started. Table 1 presents the
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distribution of the listed firms of our sample. Thus, 28 firms and 224 observations will make
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28 up our sample construct, as depicted in table 1 below our database has been collected from the
29 financial statements available on the Tunis Stock Exchange and Financial Market Council
30 (FMC) websites. A small sample was chosen because of the expected difficulty of obtaining
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32 data, especially concerning corporate governance practices.
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35 Insert table 1
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37 2.1.2 Variable definitions
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39 Voluntary disclosure index
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41 Various empirical studies propose a construction of voluntary disclosure index among which
42 the work elaborated by Botosan (1997), which has the basis for several other empirical
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44 studies. Based on several previous studies (Patelli and Prencipe, 2007), this study attempts a
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46 construct of voluntary disclosure index that rests on the Botosan index (1997) while including
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47 three information categories, namely: information on intangible assets, social and

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49 environmental information and governance information. The voluntary disclosure index
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51 consists of 83 items. In the checklist, each item scores 1 if it is disclosed and 0 if it is not
52 disclosed (Gul and Leung (2004). Voluntary disclosure index is the total of scores awarded
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54 for each item in the voluntary disclosure index. The disclosure index for each firm is then
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56 expressed in the form of a percentage.
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58 Insert table 2
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5 Corporate governance index
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The corporate governance index serves as a broad measure of firm-specific corporate
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8 governance, quality and reflects different governance attributes which are not legally required
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but considered as a “good” corporate governance practice. In this study, the CGI1 were
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11 prepared based on the procedure used by Standard & Poor (2002), Gompers et al. (2001) and
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13 Ezzine and Olivero (2013). The CGI is a composite of 12 items, covering 3 broad categories:
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15 board composition and functioning, ownership and control structure, and audit process. The
16 total score is a percentage of items proportion, which takes values equal to 1, if the items are
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18 satisfied and otherwise. The maximum index value is 100%. Table 2 shows the CGI applied
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20 to Tunisian firms.
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21 Insert table 3
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25 Accounting conservatism
26 To date various methods have been developed and introduced to measure accounting
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28 conservatism. In this study, accounting conservatism was prepared according to the procedure
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30 used by Khan and Watts (2009), based on measuring Basu (1997). According to Khan and
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31 Watts (2009), the asymmetry in the recognition of gains and losses is dependent on the
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33 characteristics of each firm (size, market-to-book ratio and debt level). Each year, we use the
34
following regression to estimate λ j coefficients:
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37 Xi,t /Pi,t-1 = β0+ β1D i,t + Ri,t(µ1 + µ2SIZEit + µ3MTBit + µ4LEVit) +Dit R i,t(λ0+ λ1SIZEi,t+λ2MTBi,t+ λ3LEVi,t)
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38 + (δ1SIZEit + δ2MTBit + δ3LEVit + δ4DitSIZEit + δ5Dit MTBit + δ6Dit LEVit) + εi,t (1)
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40 RN it = net income for the firm i in year t normalized by market capitalization at the
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42 beginning of the year;
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43 R it = dividend yield for the firm i in year t;

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45 D it = binary variable equal to 1 if R it <0 and 0 otherwise;
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47 SIZE: is the natural log of equity market value

48 M/B: market-to-book ratio
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50 LEV: leverage, defined as a long-term and short-term debt deflated by equity market value
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52 In this approach, the λ j coefficients estimated for each year. The level of conservatism for
53 each firm-year CONS it (C_ Score: (Khan and Watts, 2009) is then calculated using the
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55 following formula:
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CGI: corporate governance index

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3 C-SCOREit = β3 =λ0+ λ1 (SIZE) it + λ2 (M/B) it + λ3 (LEV) it (2)
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5 SIZE: is the natural log of equity market value; M/B: market-to-book ratio
6 LEV: leverage, defined as a long-term and short-term debt deflated by equity market value In this approach, the
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7 λ j coefficients is estimated for each year.
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The level of accounting conservatism level is dependent on the temporal characteristics (the λj
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11 coefficients estimate for each year) and firm-specific variables. The larger the c-score, the
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13 greater is the degree of conservatism.
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15 Earnings management
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17 There are many approaches in detecting earnings management, but the Accrual-Based Models
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19 are the most popular approaches. Analysis of earnings management often focuses on
20 management’s use of discretionary accruals. In these accrual-based models, researchers
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22 estimate the discretionary components of reported income. Healy (1985), DeAngelo (1986),
23
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24 Jones (1991), DeFond and Jiambalvo (1994), DeFond and Jiambalvo (1994). In this paper,
25 discretionary accrual was prepared according to the procedure used by Raman and Shahrur
26
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27 (2008). The Raman and Shahrur (2008) model is as follows:

28
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-1 = α0 -1) + α1 (∆ -∆ )/ -1 + α2 ( / -1) +
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31 α3 + α4 + it
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Where: for fiscal year t and firm i, TA represents the total accruals defined as the difference between earnings
34
and operating cash flows, Ait-1 represents total assets in t–1, DREV it is the change in revenues from the
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35 preceding year (REVt – REVt–1), DREC it is the change in net accounts receivables from the preceding year
36 (REVt – REVt–1), and PPE it stands for the gross value of property, plant and equipment, ROA it represents the
37 return on assets of firm i in year t, BM it denotes the book-to-market ratio of firm i in year t.
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40 Earning timeliness
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42 T PERIOD: measured by the number of days between the end of the year and publishing of
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43 the financial statements (Banimahd and al, 2012; Oladipupo and al, 2013; Paurali and al,
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45 2013).
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47 Insert table 4
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49
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50 2.2 Regression models

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52 To understand the causal relationship between corporate governance and information
53 transparency, we develop our null hypotheses based on the theoretical work of Girard and
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55 Rakotonjanahary (2005) argues that corporate governance mechanisms affect financial
56 transparency. This increased of information transparency improves internal corporate
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3 governance mechanisms. Bhagat and Bolton (2008) theoretical model predicts that better
4 governed firms have higher performance.
5
This review of the interrelationships among corporate governance, voluntary disclosure,
6
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7 earnings management, accounting conservatism and earnings timeliness suggests that, from
8 an econometric viewpoint, to study the causal relationship between corporate governance and
9 information transparency, one would need to formulate a system of simultaneous equations
fF
10
11 that specifies the relationships among the abovementioned variables. We specify the
12 following system of five simultaneous equations:
13
in
14 Corporate governance effectiveness= ƒ (voluntary disclosure, earnings management, accounting conservatism,
15 earnings timeliness, Z1, ε1) (1)
16
Voluntary disclosure = ƒ (Corporate governance effectiveness, earnings management, accounting conservatism,
an
17
18 earnings timeliness, Z2, ε2) (2)
19
Earnings management = ƒ (Corporate governance effectiveness, voluntary disclosure, accounting conservatism,
20
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earnings timeliness, Z2, ε2) (3)
21
22
Accounting conservatism= ƒ (Corporate governance effectiveness, voluntary disclosure, earnings management,
23
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earnings timeliness, Z4, ε4 ) (4)

24
25 Earnings timeliness = ƒ (Corporate governance effectiveness, voluntary disclosure, earnings management,
26
accounting conservatism, Z5, ε5) (5)
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27 CGI: Corporate governance index composite of 12 items, covering 3 broad categories: board composition and functioning, ownership and
28 control structure, and audit process. VDI: Voluntary disclosure index composite of 83 items p, which takes a value 1 if each item is
29 disclosed, and 0 otherwise; scaled to have a value between 0% and 100%. EM: Earning management: The discretionary accruals (DA) (
30 model of Raman K and H Shahrur (2008)), CONS: Accounting conservatism: C_ Score: Khan and Watts (2009); ET: Earnings timeliness:
po

31 T PERIOD: measured by the number of days between the end of the year and publishing of the financial statements ( Banimahd and al,
2012; Oladipupo and al, 2013; Paurali and al, 2013); LEV: Total liabilities to total assets; MB: Ratio market-book : market value / book
32
value; FSIEZ: Log of firm’s total assets
33
34 Where the Z i am vectors of control variables2 and instruments influencing the dependent variables and the εi are
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35
the error terms.
36
37
To date various methods have been developed and introduced to estimates simultaneous
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38
39 equations. We use a two-stage (2SLS) as a regression result, then we use a three-stage (3SLS)3 least
40 squares approach as a robustness analysis. This is consistent with causation running from the
41 exogenous component of governance effectiveness to higher transparency information.
42
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43
44
45
46
d

47
48
49
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50
51
52
53
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2
54 Control variables are: leverage, firm size and ratios market-book.
55 3
56 Three - stage least squares, the first work on models P. and M. Balestra Nerlove 1966, to use methods of
complete information, they need to understand the entire model and assume that the model is globally
57
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identifiable. Therefore it is assumed that all equations are identified or identified.

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3 4. Empirical results
4
5 4.1. Descriptive statistics
6
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7 Table 3 presents the summary descriptive statistics. For each variable, we present the
8 difference between good corporate governance practices and bad corporate governance
9
practices 4 using the Mann-Whitney U test5.
fF
10
11
12 Insert table 5
13
The Mann-Whitney U tests in Table 4 indicate that there are not significant differences
in
14
15 between firms with good corporate governance and firms with bad corporate governance with
16 respect to voluntary disclosure index, earnings management, earnings timeliness, accounting
an
17
18 conservatism. The result can be explained in part by the same behavior of firms’ sample, since
19 they are listed on the stock exchange, have with the obligations and formalities for the
20 publication of information6, plus they have an interest in publishing the maximum information
ci
21
in order to keep their visibility and transparency to the public. So even if these different at
22
23 governance practice, their attitude in terms of disclosure and quality of information is the
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24 same.
25
26 4.2. Regression analysis
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27
28 The results obtained from 3SLS and 2SLS7 regression of simultaneous equation system are
29
presented in In Table 5. Prior to presenting the simultaneous equations results, it seems
30
essential to check the endogeneity of the model’s variables through application of the
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31
32 Hausman test8. The Hausman test indicates that all our equations show a chi-square
33 significant at the 1% level (p = 0.000). This implies that the exogeneity hypothesis of the
34
model’s variables is confirmed.
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35
36
37 Insert table 6
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38
39 The first model presents the impact of financial transparency on corporate governance index.
40 The results, as shown in table 5, indicate that accounting conservatism has a significant
41 positive impact on corporate governance index. This finding is in agreement with (Watts,
42
2003, Beekes et al., 2004, Ahmed and Duellman, 2007, Lara et al., 2009) which suggested
an

43
44
45 4
We subdivide the sample through the median basis of corporate governance index, two group of firms will
46 presented, the first group with good governance practices and the second groups with bad governance practices.
d

47
5
48 The Mann-Whitney U test is used to compare differences between two independent groups when the dependent
49 variable is either ordinal or continuous, but not normally distributed.
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50 6
The disclosure requirements in Tunisia derived mainly from the Commercial Companies Code and Law No. 96-112 of 30
51
December 1996.
52
53 7
Also notice that 2SLS and 3SLS coefficients are identical. This is because the system is just identified.
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54
55 8
Implementation of simultaneous equation approach requires certain conditions to be verified, namely, the
56 existence of endogeneity among variables. This condition consists in checking the existence of endogeneity
57
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among variables through applying the Hausman test (Davidson and Mackinnon, 2004).
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3 that accounting conservatism is higher regarding firms which corporate governance are more
4 effectiveness, this result may be explained by the fact that conservatism reduce the agency
5
problem, so it helps in reducing behavior opportunistic managers and reinforcing corporate
6
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7 governance practices. However, there were no significant relation between the voluntary
8 disclosure index, earnings management, earnings timeliness with corporate governance index.
9 These finding do not support the previous research. It is difficult to explain this result, but it
fF
10
11 might be related to the context of this study. Then, further analysis showed that control
12 variables (firm size, leverage and market-to-book ratio) have a positive significant impact on
13 corporate governance index a possible explanation for this might be that a large firm size,
in
14
with a higher debt level are characterized by good corporate governance.
15
16
The second model proposes the impact of corporate governance index, earnings management
an
17
18 and accounting conservatism on the voluntary disclosure index. The result indicates that no
19 significant relation was found between the corporate governance index, earnings
20 management, accounting conservatism and the voluntary disclosure index. The most striking
ci
21
22 result to emerge from the data is that earnings timeliness has a positive effect on the voluntary
23 disclosure index. These findings may help us to understand that more the period between the
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24 end of the year and publishing of the financial statements is longer, more the voluntary
25
disclosure level is low. An implication of this the possibility that firms that voluntarily
26
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27 increased reporting frequency, increased earnings timeliness. These results agree with the
28 finding of study of Butler et al. (2007). The third model provides the impact of corporate
29 governance index, conservatism and earnings timeliness on earnings management. Contrary
30
to expectations, this study did not find a significant relation between the corporate governance
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31
32 index and earnings management. However, these findings of the current model do not support
33 the previous research. The fourth model presents the impact of corporate governance index,
34 earnings timeliness and earnings management on accounting conservatism. What is
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35
36 interesting in this system of simultaneous equation is this model. Statistical tests revealed that
37 almost all variables are significant. A positive relation between the corporate governance
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38 index and accounting conservatism, as mentioned in the literature review, corporate

39
40
governance mechanisms affect the level of accounting conservatism. This finding is in
41 agreement with Watts (2003) finding which considered that accounting conservatism was
42 affected by a series of governance factors. This also accords with the idea of Beekes et al.
an

43 (2004), Lobo and Zhou (2006), (Ahmed and Duellman, 2007, Ramalingegowda and Yu,
44
45 2012). It is apparent from table 5 that the relation between voluntary disclosure and
46 accounting conservatism is not static but dynamic. Consequently, voluntary disclosure and
d

47 accounting conservatism seems to be complementary. These findings confirm a causal link

48
between voluntary disclosure index and accounting conservatism. These results provide
49
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50 further support for the hypothesis that voluntary disclosure and conservatism play a common
51 role in reducing information asymmetry between firms and creditors. In fact, the negative
52 relationship between accounting conservatism and the voluntary disclosure index is in
53
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54 agreement with Lafond and Roychowdhury (2008) findings, which suggest that conservatism
55 reduces the extent of information asymmetry by increasing the speed with which negative
56 information is revealed in the earnings numbers. Then, there was a negative relation between
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earnings management and accounting conservatism. This finding corroborates the ideas of
58
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3 Watts (2003) who suggest that that opportunistic financial reporting is counterbalanced by
4 accounting conservatism. This result may be explained by the fact that firms with lower
5
levels of earnings management appear to have a greater level of accounting conservatism. A
6
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7 significant negative relation was found between accounting conservatism and earnings
8 timeliness. A possible explanation for this might be that more firms characterize by a higher
9 level of accounting conservatism, less are the earnings timeliness. Further analysis showed
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10
11 that control variables (firm size, leverage and market-to-book ratio) have a significant impact
12 on accounting conservatism. The association between firms’ size and leverage are negative; a
13 possible explanation for this might be that firms size and leverage, decrease accounting
in
14
conservatism level. However, a positive relation was found between accounting conservatism
15
16 and market-to-book ratio. Finally, what is interesting in the fifth equation that accounting
an
17 conservatism has a negative impact on earnings timeliness. In summary, these results show
18 that only the accounting conservatism is seen as a factor strongly related to corporate
19
20
governance index. This suggests a causal link may exist between accounting conservatism and
ci
21 corporate governance. Taken together, these results suggest that corporate governance
22 effectiveness may cause the accounting conservatism. This finding offers empirical support
23
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for our multi theoretical framework (agency theory and signaling theory), which suggests that
24
25 the corporate governance effectiveness and lesser information asymmetry that is usually
26 minimized agency problems (agency theory) and improve financial transparency (Jensen,
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27 1993; Jensen & Meckling, 1976). Therefore, managers will not only be expected to make
28
more voluntary and transparency disclosures, including corporate governance practices to
29
30 meet the informational needs (signaling theory). Furthermore, potential political interference
po

31 and conflict of interests’ problems between shareholders and government that is often
32 associated with government ownership can be minimized through increased information
33
34 transparency. However, more research on this topic needs to be undertaken before the
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35 association between corporate governance and information transparency is more clearly

36 understood. In fact, the finding of this study relevant economics consequence, for example,
37
several political reforms provides an opportunity for Tunisia to develop more effective
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38
39 governance help to improve its economic potential. So this paper can be valuable for Tunisian
40 policy makers as it can provide a basic framework for future political reforms regarding
41 corporate governance. Indeed, economic freedom and good governance may well stimulate
42
economic growth.
an

43
44
45 4.2 Robustness analysis
46
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47 The study carries out additional analyses to investigate the robustness of our findings. In the
48 context, to address potential endogeneity problems that may arise from a simultaneous
49
Ac

50 relationship between corporate governance effectiveness and information transparency proxy

51 (voluntary disclosure, earnings management, accounting conservatism and earnings
52 timeliness). We use 3 SLS as a robustness analysis. Similarly, the results of 3 SLS regression
53
are essentially the same as the 2 SLS regression from the same table (table5), suggesting that
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54
55 the study’s findings are generally robust to potential endogeneity problems that may arise
56 from the existence of a simultaneous link between corporate governance practices and
57
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3 information transparency proxy. Overall, the evidence emerging from the study’s additional
4 analyses makes the authors reasonably confident that the study’s findings are robust.
5
6
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7
8 5. Conclusion
9
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10
The purpose of the current study was to determine the relationship between corporate
11
12 governance effectiveness and corporate reporting. In this context, this study proposes a new
13 corporate governance index based on corporate governance mechanisms’ in Tunisian firms.
in
14 We, then, test empirically by a simultaneous equation system model, the correlation of
15
16 corporate governance index and corporate reporting describe with voluntary disclosure index,
an
17 accounting conservatism, earnings management, and earnings timeliness. The results reveal
18 that corporate governance index is significantly and positively associated with accounting
19 conservatism. However, no significant effect is revealed between voluntary disclosure index
20
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21 and corporate governance index.
22
23 This present study makes a practical, social, theoretical and economic implication. In fact,
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24 practically the findings of this study can help Tunisian regulators in creating corporate
25 governance disclosure requirements and provide the African business community insights
26
concerning the quality of corporate governance and corporate reporting. Socially, this
Re

27
28 research helps to inform regulators about the benefits of disclosure more information to
29 investors and to the firm. For instance, how the information can be a source of transparency
30
and stability in the firms what favors the social environment of the firms? Theoretically, this
po

31
32 study confirms that corporate governance issues arise wherever contracts are incomplete and
33 agency problems exist. Our finding claims also that information asymmetry problem can
34 result with referees on information transparency such as a more conservatism and a less
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35
36
earnings management
37
Economically, in this study several political reforms have provided an opportunity for
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38
39 Tunisia to develop more effective governance helps to improve its economic potential.
40 Indeed, economic freedom and good governance may well stimulate economic growth.
41
42 While our research makes several noteworthy contributions, tow limitations need to be
an

43
44
considered. First, with a small sample size, caution must be applied, as the findings might not
45 be generalized. Second, the corporate governance index needs to include more cognitive
46 proxies.
d

47
48 This research has thrown up many questions in need of further investigation. Further work
49
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needs to be done to validate our developed measure of corporate governance index and
50
51 voluntary disclosure index. If the causal relationship, it’s confirmed between corporate
52 reporting and corporate governance, then it should be included more cognitive proxies for
53 example managers’ remuneration.
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54
55
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23 Scholtens, b. & kang, f. C. 2013. Corporate social responsibility and earnings management:
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24 evidence from asian economies. Corporate social responsibility and environmental management,
25 20, 95-112.
26 Shleifer, A., & Vishny, R. W. 1997. A survey of corporate governance. The journal of
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finance, 52(2), 737-783.
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29
Spence, M. 1973. Job market signaling. The quarterly journal of Economics, 355-374.
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Stiglitz, J. E. 2000. Capital market liberalization, economic growth, and instability. World
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33 development, 28(6), 1075-1086.
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Verrecchia, R. E. 1983. Discretionary disclosure. Journal of accounting and economics, 5, 179-
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36 194.
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Verrecchia, R. E. 2001. Essays on disclosure. Journal of accounting and economics, 32(1), 97-
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39 180.
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41 Watts, r. L. 2003. Conservatism in accounting part i: explanations and implications. Accounting
42 horizons, 17, 207-221.
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43 Xie, b., davidson, w. N. & dadalt, p. J. 2003. Earnings management and corporate governance: the
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role of the board and the audit committee. Journal of corporate finance, 9, 295-316.
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Yang, J. H., Liu, S., & Zhou, D. 2016. Voluntary Financial Disclosure on Social Media: Does
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4 Table 1 : Selection sample
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Initial sample 77
7 Financial firms (34)
8 Firms with insufficient data (15)
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Final sample 28
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Total observations 224
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Table 2: Information category for a voluntary disclosure index
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Information category Number of items
16 Categories of information about the Botosan grid analysis (1997)
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17 1- General corporate information 16
18 2- Financial review 14
19 3- Non financial information 13
20 4- Future prospects 10
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21 5- Analysis and discussion of management 13
22 Categories of information added to the analysis grid Botosan (1997)
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6- Information on intangible assets 4
24 7- Social and environmental information 7
25 8- Governance information 6
26 Total 83
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29 Table 3: Corporate Governance Index (CGI)
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31 governance mechanisms Items Measures

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33 Board size 1 : more than 5 directors
0 : otherwise
34 Board the CEO 1: accumulation of both functions
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35 Composition and chairman separation 0: dissociation

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37 Presence of external directors 1: existence of outside directors
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38 0: otherwise
39 Percentage of external directors 1 : more than50%
40 0 : otherwise
Existence of audit committee 1 : existence of audit committee 0:
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otherwise
42 Audit-firm size 1 : auditor is a member of the Big 4
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43 audit process 0 : otherwise

44 1 :auditor is an expert
45 Auditor specialization 0 : otherwise
46 Audit opinion 1 : company receives a qualified opinion
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47 0 : otherwise
48 Co-commissary 1 : company is audited by second
auditor and more
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0 : otherwise
50 Ownership concentration 1 : capital percentage held by the
51 largest shareholder is less than 30%
52 Ownership structure 0 : otherwise
53 Presence institutional investors 1 : existence institutional investors
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54 0 : otherwise
55 Fraction held by institutional investors 1 : 1: over 20%
0 : otherwise
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CGI = Firm i item value / Total items (12 items).

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5 Table 4: Summary of variables definitions and measurements
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7 Variables Measures
8 CGI Corporate governance index composite of 12 items, covering 3 broad
9 categories: board composition and functioning, ownership and control structure,
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10 and audit process.
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VDI Voluntary disclosure index composite of 83 items p, which takes a value 1 if
12 each item is disclosed, and 0 otherwise; scaled to have a value between 0% and
13 100%.Annex 1
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14 EM Earning management: The discretionary accruals (DA) ( model of Raman K
15 and H Shahrur (2008))
16 CONS Accounting conservatism: C_ Score: Khan and Watts (2009)
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ET Earning timeliness: T PERIOD: measured by the number of days between the
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end of the year and publishing of the financial statements ( Banimahd and al,
19 2012; Oladipupo and al, 2013; Paurali and al, 2013)
20 LEV Total liabilities to total assets
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21 MB Ratio market-book : market value / book value
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FSIEZ Log of firm’s total assets
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26 Table 5: Mann-Whitney U test result
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28 Variable Groupe N Z P(z)
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30 (1) Good governance
101 0,422 p= 0,673
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31 VDI
32 (2) Bad governance
123
33 (1)Good governance
101 -0,026 P=0,979
34 EM (2)Bad governance
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35 123
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37 (1)Good governance
101 -1.129 P=0,258
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38 AC
(2)Bad governance
39 123
40 (1)Good governance
101 0.280 P=0,779
41 ET (2)Bad governance
42 123
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fF
Table 6: 3 SLS/ 2SLS results of simultaneous equations

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3SLS 2SLS
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(1) (2) (3) (4) (5) (1) (2) (3) (4) (5)
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11 CGI VDI EM AC ET CGI VDI EM AC ET
12

cia
CGI - -0.067 -0.016 0.449 0.002 - -0.067 -0.016 0.449 0.002
13 (0.287) ns (0.497) ns (0.000)*** (0.981)ns (0.287) ns (0.497) ns (0.000)*** (0.981)ns
14 VDI -0.005 - -0.015 -0.310 -0.084 -0.065 - -0.015 -0.310 -0.084
15 (0287) ns (0.947) ns (0.004)*** (0.931)ns (0287) ns (0.947) ns (0.004)*** (0.931)ns
16
17
18
EM -0.123
(0.497) ns
-0.130
(0.947) ns
-
lR -0.030
(0.992)ns
-0.142
(0.961)ns
-0.123
(0.497) ns
-0.130
(0.947) ns
- -0.030
(0.992)ns
-0.142
(0.961)ns

19
20
21
AC 0.015
(0.000)***
-0.038
(0.391) ns
-0.01
(0.992) ns
-

ep -0.274
(0.000)***
0.015
(0.000)***
-0.038
(0.391)ns
-0.01
(0.992) ns
- -0.274
(0.000)***

or
ET 0.000 -0.115 -0.007 -0.335 - 0.000 -0.115 -0.007 -0.335 -
22
(0.981) ns (0.004)*** (0.961) ns (0.000)*** (0.981) ns (0.004)*** (0.961) ns (0.000)***
23

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24 LEV 0.172 -0.038 0.053 -0.462 0.043 0.172 0.121 0.053 -0.462 0.043
25 (0.002)*** (0.931) ns (0.009)*** (0.000)*** (0.625)ns (0.002)*** (0.042) ** (0.009)*** (0.000)*** (0.625)ns
26 FSIZE 0.093 0.121 0.005 -0.059 0.020 0.093 0.007 0.005 -0.059 0.020

g
27 (0.000)*** (0.042)** (0.201) ns (0.005)*** (0.298)ns (0.000)*** (0.544)ns (0.201) ns (0.005)*** (0.298)ns
28
29 MB 0.267 0.007 -0.001 0.075 -0.024 0.026 0.047 -0.001 -0.024

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0.075
30 (0.000)*** (0.544) ns (0.290) ns (0.000)*** (0.000)*** (0.000)*** (0.306 ns (0.290) ns (0.000)*** (0.000)***
31 R-square 0.336 0.140 0.054 0.547 0.144

d
32
33 Endogeneity χ2=143.43*** χ2=2354.25*** χ2=162.59*** χ2=157.54*** χ2=2457.45***
34

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test
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7 Corporate governance index Information transparency
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11 H.3
Accounting conservatism
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15 H.4
Earnings management
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18 H.2
19 Earnings timelines
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21 H.1
22 Voluntary disclosure index
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26 Figure 1: conceptual framework
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