Transparency and Disclosure, Company Characteristics and Financial Performance: A Study of the Emerging Libyan Stock Market

Corporate scandals and financial crises have focused attention on corporate governance (CG), including the quality of transparency and disclosure (T&D). Although many empirical studies have been carried out on CG in developed countries, an insignificant portion of that literature is focused on T&D in developing countries.

Taking a sample of 27 financial companies, this research looks at the issue of T&D in Libya. Employing both primary and secondary data, the study covers the period 2005-2008 during the emergence of the Libyan Stock Market (LSM). The research objective, questions and hypotheses are mapped onto a research framework that includes antecedent and subsequent variables of T&D.

Firstly, the study uses time-series data to provide empirical evidence relating to the level of T&D in annual reports by Libyan financial companies. The results reveal that overall T&D, three categorises and most of the twelve subcategories showed a statistically significant increase over the period under review, but that it was still low in Libya compared to other countries (developed and developing) when applying Standard & Poor’s (S&P) data, and variation in levels of T&D from company to company in Libyan.

Secondly, this research analyses and explores the consequences of six characteristics on the level of T&D in annual reports. The characteristics being; listed status, ownership structure, company size and age, type of industry and audit peer reviews. The results revealed that T&D and three categories in general associated with all variables displayed a statistically significant increase during the examination period of four years. All corporations tested conformed to
this rule with the exception of large companies, although the results were mixed statistically when tested with twelve subcategories. Furthermore, companies listed in LSM provided more T&D than those not listed, the public sector provided more T&D than the private sector, the banking sector provided more T&D than the insurance sector and companies with audit peer reviews provided more T&D than those without. Whilst small companies provided more T&D than other companies, and the variation in levels of T&D for different age groups was unclear.

Thirdly, the research investigates the relationship between fourteen variables related to T&D practice and three accounting measures of financial performance: return on capital employed(ROCE), return on equity (ROE) and return on assets (ROA). The study finds that there is a relationship between four variables and ROCE, two variables and ROE, and three variables and ROA. However, only one variable (disclosure of material foreseeable risk factors) has a relationship with all three financial performance measures. Disclosure on the corporate governance framework has the most impact on ROCE and ROA, while disclosure relating to major share ownership and voting right has the most impact on ROE.

The thesis makes several contributions. It adds to the limited literature on T&D in developing countries, especially to a transition economy like Libya’s. In doing so, it provides a benchmark for further studies of T&D by Libyan companies. In particular, it pioneers the use of S&P’s T&D index methodology in Libya, which enables a comparison with T&D in other countries. A notable feature of the research is the relatively comprehensive set of variables used, including “audit peer review” as a corporate characteristic that might affect the level of T&D, and the exploration of the possible relationship between fourteen variables of T&D and three financial performance measures.

Future research should be able to build on this study and perhaps examine other company characteristics (e.g. size/type of auditor, and external auditor’s reviews that are limited to quarterly reviews), use other measures of company performance (e.g. Tobin's Q or specific elements such as competitive strategy, corporate culture or business ethics) or include samples from other industries as the Libyan economy and stock market develop.