Essays on Governance Through Disclosure: : Evidence from Reporting Outcomes in UK

Guedes Soares, Leonor and Young, Steven and Ghaly, Mohamed (2025) Essays on Governance Through Disclosure: : Evidence from Reporting Outcomes in UK. PhD thesis, Lancaster University.

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Abstract

In this thesis I investigate the impact of disclosure as a governance tool that shapes firm behavior on reporting outcomes of firms traded in the London Stock Exchange. Chapter 1 introduces this thesis. Chapter 2 investigates the impact of a gender pay transparency policy implemented in the UK on antecedents of pay equality by asking whether firms respond to the mandatory disclosure of the gender pay gap ratio by adopting internal employment policies (designated as Employment Equity Actions – EE actions). Such policies are recommended by UK Government guidelines and their effectiveness in contributing to workplace gender equality is supported by research in psychology, human resources and management. Their adoption is expected to represent a key step to reducing the gender pay gap as it addresses its causes and allows me to analyze the effectiveness of the disclosure mandate through the lens of the regulator. Results show a slight increase in the adoption of EE actions and provide evidence that firms that disclose gender pay gap metrics adopt more actions than those that do not disclose the metrics. However, the effect is economically insignificant. I conclude that while the adoption rates of EE actions have increased, the policy’s effect seems to have been limited. Chapter 3 asks whether the presence of an independent board Chair affects corporate disclosure by testing whether Chair commentary is incrementally informative beyond management commentary. I leverage the UK setting where London Stock Exchange Traded firms operate under the UK Corporate Governance Code that recommends the separation of Chair and CEO positions and the appointment of a non-affiliated board Chair. High compliance with both provisions has a direct consequence on narrative disclosure: UK annual reports not only include performance commentary authored by management but also include a letter to shareholders authored by the board Chair. I develop and test the hypothesis that Chair commentary is incrementally informative beyond management commentary by 1) testing whether the explanatory power of Chair tone is higher than that of the explanatory power of management tone on the regression of realized earnings on tone and 2) testing whether the Chair commentary carries incremental information beyond management when predicting one-year ahead earnings. Both tests confirm my hypothesis that Chair commentary is incrementally informative beyond management commentary. My hypothesis identifies two non-mutually exclusive roles that may explain incremental informativeness of Chair commentary: monitoring and information. I continue in this chapter to explore the monitoring role of the Chair by partitioning the sample using earnings losses as a proxy for management incentives for obfuscation and impression management. The monitoring hypothesis predicts that the incremental informativeness will be more pronounced where the incentives for impression management are more acute. I do not find evidence that earnings predictability is higher for loss firms; indeed, results reveal that incremental predictive ability of Chair tone is due mainly to profitable firms. This unexpected result prompts me to conduct additional tests. I find that the monitoring role of the Chair manifests in Chair tone that is more pessimistic relative to management when there are incentives for impression management. I also find that the predictability of management commentary is weaker when the Chair is more negative than management. Based on these results, I conclude that Chair commentary plays a monitoring role in reporting but it is limited to, and focuses mainly on, weak realized earnings performance. The Chair’s monitoring role over corporate reporting does not appear to explain the incremental predictive ability of their commentary, nor the fact this effect proves particularly strong for profitable firms. I therefore proceed by testing whether the iii predictiveness of Chair commentary among profitable firms is consistent with an information role. I find evidence consistent with the information role arising from two separate functions: confirmation and resource provision. However, my tests are unable to distinguish between information resulting from confirmation or information resulting from resource provision. I seek to distinguish between these alternative information explanations in Chapter 4. Chapter 4 asks how the information role of the board Chair affects Chair-authored commentary by adopting a topic modeling approach to examine the content of Chair and management commentary and variation therein. Consistent with evidence that the board Chair may support the management team (Boivie et al., 2021), I predict that if the information role of the board Chair primarily derives from serving a confirmation function, then Chair-authored commentary should disclose a content that is closely aligned to that disclosed by management. This implies that there should be a substantial level of topic overlap between Chair and management commentary and that the incremental predictability of Chair commentary should be, at least partially, explained by topics that feature in management and Chair commentary. Conversely, consistent with the evidence that independent board Chairs provide resources in the form of knowledge and expertise (Krause et al., 2016), I posit that the information role of the board Chair arises from serving a resource provision function if Chair commentary largely discusses content that is not mentioned by management. This implies that the level of topic alignment should be low and that the incremental predictability of Chair commentary should be, at least partially, explained by the disclosure of topics that are exclusively discussed by the board Chair. I find consistent evidence that the information role is explained by the confirmation function of Chair commentary and modest evidence suggesting that it equally arises from both functions. Chapter 5 concludes this thesis.