Factors influencing corporate governance disclosures: evidence from Alternative Investment Market (AIM) companies in the UK

Abstract

This study examines the relationship between company and ownership characteristics and the disclosure level of compliance with Quoted Companies Alliance (QCA) recommendations on corporate governance in Alternative Investment Market (AIM) companies. We report clear evidence that compliance increases with company size, board size, the proportion of independent non-executive directors, the presence of turnover revenue, and being formerly listed on the Main Market. However, we find that shell and highly geared AIM companies disclose relatively lower levels of corporate governance than recommended under QCA guidelines. Our findings suggest that market regulators should review the potential impact of the quality of corporate governance in these companies on the future vibrancy of AIM. We find no evidence that ownership structure or the type of Nominated Advisor is related to disclosure of compliance with QCA guidelines. Overall, in a lightly regulated environment such as the AIM market, it seems that companies will ultimately pursue a cost–benefit strategy in voluntarily complying with good corporate governance practice.

Keywords:

• corporate governance
• voluntary disclosure
• Alternative Investment Market (AIM)

Acknowledgements

Financial support from ICAS is gratefully acknowledged. The paper has benefitted from the comments of participants at the 16th Annual Global Finance Conference ‘Global Financial Crisis, Risk, Derivatives, Structured Finance and New Financial Architecture’, held in Honolulu in April 2009 and the participants at the School of Business and Management Seminar held at the University of Padua in March 2009. We thank Professor Antonio Parbonetti, Dr Giovanna Michelon and the two anonymous referees for their helpful comments.17

Notes

The latest review in 2010 resulted in the revised Combined Code being renamed as the UK Corporate Governance Code.

Companies are not required to meet minimum capitalisation requirements nor to have a trading record.

Data from LSE AIM statistics.

Listing in European Union countries means listing by a competent authority and admission to trading on a recognised investment exchange (RIE). The LSE has not applied to the Financial Services Authority, the competent authority in the UK, for AIM to be granted RIE status (see 2007 Budget Note Number 37).

The other two categories reviewed in disclosure literature by Verrecchia (2001) are association-based and efficiency-based disclosure. Association-based disclosure research examines capital market consequences arising from reported disclosures. Efficiency-based studies investigate disclosure arrangements which are preferred unconditionally, i.e. without prior knowledge of the information.

The EU Takeovers Directive (2004/25/EC) which came into force in May 2004 has largely followed the recommendations in the Winter Report. Subsequently, EU Directive 2006/46/EC was adopted in June 2006. This Directive included measures covering corporate governance statements for publicly traded companies.

The LSE gives as examples ‘an investment bank, a corporate finance firm or an accountancy firm’.

A typical governance structure for a company on the Main market would incorporate a balanced board of executive and independent non-executive directors; key board committees including audit, remuneration and nomination committees; and splitting the roles of CEO and Chair.

The period investigated for this study was before LSE Rule 26 came into effect on 20th August 2007. Rule 26 requires AIM companies to maintain corporate websites providing information on specific financial and governance matters.

Data from LSE Main Market Statistics Website.

Data from LSE Website.

An alternative proxy to represent gearing, namely the book value of long-term debt as a percentage of the book value of long-term debt and market value of equity was used. The results of this test (not reported) were quantitatively similar to the ones reported in Table 6.

The van der Waerden method converts the ranks from a standard Kruskal-Wallis one-way analysis of variance to normalised scores.

To check for robustness, we substituted the variable LogAssets which represents the company size, with an alternative proxy, the log of market capitalisation. The results of this test (not reported) were quantitatively similar to the ones reported in Table 6.

A shareholder has an obligation to disclose to the company if his/her holdings amount to 3% or above of the total voting rights and capital in issue (Financial Services Authority, Disclosure Rules and Transparency Rules, 5.2.1 (1)).

The ICB was used to broadly represent four industry sector variables, namely Natural Resources, Manufacturing, Financial Services and Non-Financial Services. The results not reported here show that the coefficients from the dummy variables are insignificant (p>0.05).

The QCA issued revised Guidelines for AIM companies in 2007 which have no material differences from the earlier guidelines issued by them in 2005 on which this analysis is based.