1. Introduction
Firms’ inadequate disclosure because of the ineffectiveness of corporate governance characteristics, such as corporate board diversity (gender, ethnic and educational diversities), was highlighted among the primary reason for many corporate financial failures in the world [
1,
2,
3,
4,
5,
6,
7]. For the past few decades, capital market regulators, investors, and academicians have been searching for the reasons behind the frequent corporate financial distress around the world since the prominent case of Enron and Anderson was exposed. According to Ferrari et al. [
8], the scandals mentioned above could have been prevented if a boardroom was diversified by incorporating a significant number of women as executives in these companies. In the same vein, Fidanoski et al. [
9] found that, on average, companies with well-educated board members, especially in account and finance, are more profitable and overvalued in the market. In addition, it has been widely accepted that board diversity is very little explored in corporate governance literature, mainly in the developed capital market, with inconsistent results, and it has been highlighted as a future research topic [
4,
10]. Nonetheless, there is a need to probe whether it has any significant impact on developing economies such as that of Nigeria due to a disparity in economic development [
9,
11]. A recent systematic literature review conducted by Khatib et al. [
12] reported that voluntary disclosure and governance association had been overlooked.
Voluntary disclosure (VD) denotes the free choices on the part of managers in the release of information to users in the annual reports. It comprises social, environmental, and intellectual capital disclosures. More precisely, it includes different types of information, such as financial, social, historical, environmental, and intellectual capital information [
12,
13]. However, VD improves the quality of mandatory disclosure, as it is in the best interest of all users of financial reports, in addition to reducing information asymmetry, and thus reducing the cost of external financing through reduced information risk, and enhancing its market value [
14]. However, even with many current developments, some studies proved that many countries still lagged behind in VD practices that draw the attention of regulators and other stakeholders [
15,
16,
17]. For instance, a comprehensive study of Nigerian quoted firms discovered that the level of voluntary disclosure reported from Nigerian listed companies was low, with the average index for 2014 being 45% [
18].
Nigeria is a federal republic in West Africa, neighbouring Chad and Cameroon in the east, Benin in the west, and Niger in the north. It contains 36 states, and Abuja as the Federal Capital Territory. Nigeria accounts for almost one-fourth of Sub-Saharan Africa’s population and is the world’s 20th largest economy, with more than USD 5900 billion and USD 1 trillion in terms of nominal GDP and purchasing power parity, respectively, as of 2017. Furthermore, Nigeria is Africa’s largest producer and holds the second-highest level of oil reserves on the continent, after Libya [
19], and ranks 13th in the world in terms of oil production. This study’s emphasis is on the Nigerian context because certain ethnicities dominate specific areas. For example, Hausa/Fulani control politics, and Igbo people dominate business and economics, while Yoruba people dominate the civil service sector. Therefore, having directors from all three of the main ethnic groups, including Hausa/Fulani, Igbo and Yoruba, is beneficial for commercial reasons. Nigeria is an extremely ethnically diverse multinational state with over 250 ethnic groups and over 500 languages [
20]. Therefore, ethnically diverse boards are able to bring different ideas and solutions to ethnic issues. Board members have a responsibility to link the disclosure decisions offered by the firm with investors’ behaviour and background. This is because investors belong to many ethnicities that have their own beliefs, cultures, and values regarding investment decisions. The situation becomes worse when boards are unable to understand their investors’ backgrounds and beliefs, which may lead to poor disclosure decision making.
Nigeria started to promulgate CG laws, legislation, and code relating to disclosure, transparency, and accountability in 2003, following the enactments of similar acts in many countries, such as the Cadbury Report, 1992, in the UK, and the Sarbanes–Oxley Act 2002 in the US. Compliance with the code of CG helps to prevent corporate scandals, fraud, and potential civil and criminal liability of the organization. It also enhances the reputation of the organization and makes it more attractive to customers, investors, suppliers, and other stakeholders [
21]. Unfortunately, according to the report of the ROSC Team of the World Bank in 2011, Nigeria’s entities are considerably non-compliant with accounting standards. In contrast, Okike et al. [
22] suggested that despite the variety of policies and regulatory interventions, Nigerian firms’ practice of corporate governance in Nigeria is grossly inadequate. However, many studies highlighted some factors responsible for the weakness of the CG, which include weak CG regulatory and enforcement mechanisms in Nigeria. Hence, conducting a study on CG code compliance is imperative. This is because it is strongly believed that weak corporate governance can allow opportunistic behaviour from managers, while, strong CG is expected to resolve any possible agency problem, such as managerial opportunism.
Codes of CG are the set of best practices’ recommendations regarding boards issued to address deficiencies in country governance systems by recommending a set of norms aimed at improving transparency and accountability among top managers and directors and reduce risk taking [
23,
24]. The current research model arises from the understanding of the literature implying that there is a need for more studies to be carried out in BD areas. Future research was encouraged to incorporate other intervening variables within the association between BD and VD. For instance, Denis and McConnell [
25] suggested that examining the interrelationships between external and internal corporate governance mechanisms could provide a complete understanding of firm-specific internal governance mechanisms, such as the board. Consequently, improvement in the research framework can be counted as one of the significant contributions of the study. While the incorporation of a moderation analysis is rarely found in the area of BD research, this research proposes a ground for future research by demonstrating that it is possible to explore beyond a direct relationship. Thus, the model explains how CG code compliance interacts with BD, and thus possesses an impact on VD.
Other contributions include the ability to discover the VD level, the compliance level to CG code, and more important factors determining the VD level of the Nigerian listed companies. In addition, the link between BD and VD is relatively new in Nigeria. Most of the studies conducted focused on the UK, United States of America, Canada, India, South Africa, and Malaysia. Hence, findings from this study will assist in building a comprehensive international understanding of the linkage between corporate board diversity and firms’ voluntary disclosure as a continuously growing concept. Furthermore, Nigeria was chosen to investigate this issue because the legal system and cultural practices differ among the nations [
26]. While some countries share a single culture and language, others such as Nigeria have more than 200 ethnic backgrounds. Hence, the effects of CG practices on voluntary disclosure can be expected to differ between developing and developed countries.
To date, there is a lack of evidence that links the CG regulatory code compliance within VD studies. However, the present studies followed a few previous studies that used CG code compliance as a moderator variable in CG studies. For instance, García-sánchez [
27] conducted a study titled: “Do financial experts on audit committees matter for bank insolvency risk-taking? The monitoring role of bank regulation and ethical policy”. After using regulatory code compliance as a moderator in their study, it concludes that the association between the existence of financial experts on audit committees is stronger when the banking sector CG compliance is weaker. In the same vein, Kabara et al. [
28] investigated the moderating effect of CG code compliance on the relationship between the audit committee (AC) and VD. However, both studies focused on AC and financial disclosure. Cheng and Courtenay [
29] also maintained that the presence of an external corporate mechanism, the regulatory regime, enhances the strength of the association between the proportion of independent directors and the level of voluntary disclosure. Finally, some scholars believed that CG compliance could strengthen the quality of management disclosure reports [
14,
30,
31,
32]. Nevertheless, some studies used CG code compliance as an independent variable in CG and disclosure studies [
33].
Thus, this research is unique in the sense that it tries to associate an explicit role of CG code compliance in companies when evaluating the relationship between corporate governance variables. Moreover, analysis in Nigeria can be achieved using advanced econometric methodologies to explore the moderating effect and the causality of corporate board diversity, as well as its impact on voluntary disclosure. To address this gap, the current study proposed that CG compliance (measured via index) could moderate the association between BD (as explanatory variables) and VD (the dependent variable).
The paper is sketched as follows:
Section 2 reviewed the relevant literature from previous empirical research, showing how the variables used in this study related and influenced one another. We discuss the study variables’ methods, data, and measures in
Section 3 and demonstrate the empirical results and discussions in
Section 4. We present the findings of the study in
Section 5 and conclude in
Section 6.
3. Research Methodology
This paper adopts an ex post facto research design. Hence, annual reports of 67 companies listed in the Nigerian stock exchange from 2012 to 2017 were used as a sample to investigate the effect of CG code compliance in the relation between gender, education, and ethnic diversity (independent variables) and VD (dependent variable). The independent variables were measured on a ratio scale basis with the exception of ethnic diversity, which is based on a dichotomous scale. To measure voluntary disclosure, a checklist was prepared by the authors based on Meek, Roberts, and Gray’s work [
71], which has been widely utilized in prior studies [
72,
73]. The study checked individual components of the VD from onset alongside the mandatory regulations in Nigeria. Therefore, modifying the existing index was necessary to attain the checklist with items applicable to the Nigerian situation (see
Appendix A and
Appendix B). Meek’s VD checklist was subjected to a thorough selection to remove those that are mandated. The list was then sent to the experts (senior academics and professional accountants) for selection and validation. Lastly, 27 items were screened as a result of their response, which became the final list consistent with Adelopo [
74], who used only 24 disclosure items to conduct a study on VD practices on Nigerian listed firms. Therefore, the expected disclosure from individual companies is 162, (i.e., 27 × 6), which is then expressed in percentage. The total voluntary disclosure index (TVDI) is then computed for each sample firm as a ratio of the total disclosure score to the maximum possible disclosure by the firm. Moreover, each disclosure item was given equal weight in the index, consistent with prior studies [
75].
Similarly, the moderating variable is the level of firms’ compliance with Nigeria’s CG code of 2011. The requirements of the code were used to construct a compliance index, the total of which provided the moderating variable of the study. The compliance checklist consists of 14 items from three components of laws as follows: First, the board of directors (composition and structure)—four items; second, board committees (i.e., audit committee)—six items; and lastly, accountability and reporting (disclosures)—four items, thus making up the fourteen items. The choice of a few compliance requirement items is consistent with previous researches on compliance, such as that of Mariri and Chipunza [
76], who used only nine items to study the impact of code compliance on the sustainability of South African companies. Moreover, using the unweighted method, the total number of points expected from each firm for the adoption of the Nigerian Code of CG of 2011 is 84 (14 × 6 items) scores, coding one ‘1′ if the company adopts it, and zero ‘0’ otherwise, which is consistent with the work of Larcker et al. [
30]. The CG compliance checklist followed the same procedure for validating the VD index.
3.1. Sampling
There were 116 non-financial listed firms available on the Nigerian stock exchange website as at 31 December 2017. The non-financial firms used for the data are from the following sectors of the Nigerian economy: agriculture, conglomerate, construction/real estate, consumer goods, healthcare, ICT, industrial goods, natural resources, oil and gas, and services. This study used the secondary source of data from 67 non-financial firms that were extracted for six years 2012–2017 (i.e., 402 firm–year observations) using a purposive sampling technique. The sample of 67 firms arrived after deducting 16 companies that did not provide financial reports as of 31 December 2017 and 33 firms without complete necessary data for this study from the 116 non-financial firms listed. These firms were excluded from the sample due to the unavailability of the annual reports. Given that this information was not readily available from the published annual reports, these missing values could not be obtained feasibly from other sources. The exclusion of these firms from the sample is unlikely to affect the conclusions of this study on the basis that the remaining firm–year observations were still sufficient to construct a large sample, as shown in
Table 1 below.
3.2. Variables
This study uses VD as the dependent variable, with gender, education, and ethnic diversities as independent variables, board size and leverage as control variables, and CG regulatory code compliance as a moderating variable. Gender (GD) is measured as the proportion of female directors in the boardroom [
77]. Education (ED) is the proportion of directors on the board with business, accounting, and or finance backgrounds [
46,
78]. Ethnic (ETHD)-dummy variable is 1 if the board consists of both Northern and Southern Nigerians, and 0 otherwise [
52,
79]. Control variables include board size (BODSIZE), which is equal to the total number of directors in the boardroom [
16,
80]. Another control is leverage, which is measured as long-term debts divided by capital equity [
81].
The dependent variable: voluntary disclosure (VD) is measured as the total number of points awarded for VD, i.e., strategic, financial, and non-financial information (coding one “1” if the company discloses and zero “0” otherwise) [
71,
72]. The moderating variable (CG regulatory code compliance (REG)) is the total number of points awarded for the Nigerian code of CG regulatory compliance of 2011 (coding one “1” if the company adopts it and zero “0” otherwise).
Control variables: this study controls for the firm CG characteristics board size and leverage because various studies have reported their influence on VD [
3,
81,
82,
83,
84]. The fact is that VD can vary widely across industries; hence, the study included year dummies and firms’ effect (size) in the GMM analysis. In addition, the adoption of the GMM analysis approach by this study was meant to account for the biased results. The details for the measurements are reflected in
Table 2 below.
3.3. Justifications for Choice of the Analysis Technique
The major reason this study employed the dynamic GMM approach, which is superior to the standard fixed effects estimate, is that when the dynamic relation between the variable of interest and the independent variables is significant, standard fixed-effects estimators are biased [
85]. In addition, it is argued that any corporate financial decisions are likely to be dynamic. For instance, past action may be important firm attributes that may determine current action. Nguyen et al. [
86] argue that GMM estimation methods provide the most reliable empirical evidence, especially when investigating the effects of corporate governance on financial disclosure performance. This study based its justification on the premise that the voluntary CG disclosure behaviour may be jointly and dynamically influenced by unobserved company-specific heterogeneities [
87], which simple OLS regression may fail to ascertain. However, the justification for the suitability of applying the GMM approach in this study is based on the arguments from the literature that described that the application of traditional the ordinary least squares methods to estimate parameters in a dynamic model that includes firm-specific effects and a lagged dependent variable would produce biased coefficients [
88]. Therefore, this study applies the panel system GMM because it is recognized as one of the best methods to estimate parameters of the target voluntary disclosure in the presence of firm-specific effects and a lagged dependent variable [
88]. Moreover, the Hausman test has been conducted and the results confirm the existence of endogeneity (Prob > chi
2 = 0.5639).
Similarly, two-step GMM is asymptotically more efficient than the one-step estimation, as it controls the measurement errors by incorporating the orthogonality settings on the variance–covariance matrix [
89]. Moreover, endogeneity in the relationship between corporate governance and disclosure can result from unobservable heterogeneity (that arises due to unobservable factors that affect the disclosure level and all explanatory variables). Furthermore, VD
it-1, GD
it, ED
it, ETHD
it, BODSIZE
it, LEVERAGE
it are used as instruments. This study used a panel dataset that has a short time dimension (T = 6) and a larger company dimension (N = 67), which in line with the requirements of using GMM estimation. Moreover, many previous researches in reputable journals on CG and disclosure also used GMM analysis techniques (see recent studies on CG [
86,
90,
91,
92]).
It should be noted that, in order to confirm that the CG regulatory compliance is really a moderating variable in this study, the effects of the independent variables on the intervening have been tested as suggested and the result indicated that the null hypotheses are not rejected in all the variables with exception of the relationship between the ETHD (independent) and REG (moderator).
3.4. Model Specification for the Study
In order to measure the direct effect and the moderation analysis, the equations below were designed:
First model equation (direct relationship):
Second model equation (indirect relationship):
where:
VD = voluntary disclosure index (total number of voluntary items disclosed by a firm) that are for firm i in period t, respectively.
VDit-1 = the lag value of the voluntary disclosure index (total number of voluntary items disclosed by a firm) that are for firm i in period t, respectively.
GD = gender diversity for firm i in period t,
ED = educational diversity for firm i in period t,
ETHD = ethnic diversity for firm i in period t,
BODSIZE = board size for firm i in period t,
LVRG = leverage for firm i in period t,
REG = CG code compliance for firm i in period t,
GD × REG = interaction between CG compliance index with gender diversity
ED × REG = interaction between CG compliance index with educational diversity
ETHD × REG = interaction between CG compliance index with ethnic diversity.
θi = industry effects.
η
i = the unobservable firm-specific effects, consistent with Matemilola et al. [
92].
α is the intercept while γ, β, and δ are the primary coefficients to be estimated, and εit is the error term.
5. Discussion and Implications
The system dynamic panel GMM analysis (
Table 5 and
Table 6) supports the findings of this paper. It is also consistent with a previous study by Larcker et al. [
30], who provide empirical evidence that CG compliance have an important effect of strengthening the level of relationship between board attributes such as independence and the extent of VD. In addition, the theoretical approach used in this study reinforces the validity of agency theory and signalling theory in explaining the impact of board diversity, CG compliance and corporate disclosure. By examining the interaction effect of corporate governance compliance on board diversity, the result indicated that, in Nigeria, regulatory compliance played a significant role in enhancing the relationships between board diversity (i.e., gender and ethnic) and voluntary disclosure. Likewise, it affirmed the existence of a positive and significant relationship between the board diversity attributes and VD.
Board diversity could decrease the agency problem, asymmetry of information, and the possibility of collusion through management using their role of monitoring and controlling management practices effectively, thus improving voluntary disclosure. Additionally, VD has become a signalling means, where firms disclose more information beyond the compulsory requirement to signal their good compliance with the regulation and better performance, which is in line with arguments of agency and signalling theories. Specifically, the results of the direct relationship (from model 1) provide evidence on the positive and significant association between ethnic diversity and VD, while the second model revealed the positive influence of educational background diversity on voluntary disclosure. Hence, Nigerian investors will expect more transparency through supplementary disclosure from firms with a well-diversified board of directors. Conversely, the result of a direct relationship in the first model indicated the existence of a negative insignificant relationship between GD and VD. This result is consistent with those of Akpan and Amran [
100], who examined the relationship between board characteristics and company performance in Nigeria and reported that the appointment of women is window-dressing as the percentage is too small for a meaningful positive effect on company performance. Additionally, some scholars such as Matsa and Miller [
94] reported that the negative influence of gender diversity is attributable to the lack of professional and talented women in certain sectors and specialization.
Correspondingly, this study has provided a great picture of how CG compliance enhances the relationship between board diversity and firms’ VD. The empirical findings have direct implications for Nigerian firms in the selection of directors that comprise different ethnic backgrounds, are well-educated and inclusive of females. Since voluntary disclosure is becoming a global phenomenon, the listed firms in the Nigerian market may have to do more by following the regulatory codes of corporate governance, and it is equally important to disclose their contribution on social and environmental matters. Thus, it is in the firms’ best interest that qualified and competent women are co-opted onto boardrooms to realise benefits related to such diversity of the board.
In this regard, policymakers and regulators could encourage companies to have more diversity on the boards. Although the overwhelming majority of CG codes around the world enforce companies to include female directors on the board, our result emphasises the significance of another type of diversity role in upgrading the level of corporate disclosure. Another point to be considered as social and empirical contributions of this study is that it brings more awareness to aid investors. This is mainly through access to the company’s additional information, which can give prospective investors a better chance to make investment decisions wisely, i.e., by revealing strategic information such as disclosure of specific external factors affecting firm prospects, in addition to the capital market data. Moreover, as the study revealed the level of VD of the Nigerian listed firms in their annual reports, it may help the government to ascertain the level of CG activities among Nigerian firms. Hence, organizations may gain a strategic edge from the result of this study, and it provides a potential benefit to businesses, policymakers, and the entire stakeholders.
6. Conclusions
This paper discovered the impact of CG compliance on the relationship between board diversity and voluntary disclosure. The study’s second contribution will be through concrete findings. We use a system GMM that is robust and a superior approach, and a sample of 67 firms listed in the Nigerian stock exchange for the period 2012–2017. Based on the findings, we conclude that CG compliance enhances the significant positive influence of board diversity on the firms to increase the level of voluntary disclosure of more information in their annual report. Therefore, it is recommended that board diversification (especially in terms of ethnic background and education) and CG compliance should be encouraged in firms to obtain more voluntarily disclosed information, which invariably boosts the confidence of all users of accounting information in addition to reducing information asymmetry and thus reducing the cost of external financing through reduced information risk, as well as enhancing their market value. To the best of the researchers’ knowledge, the current study is among the few attempts at explicitly examining the effect of CG regulatory compliance on board diversity and voluntary disclosure in corporate governance studies, especially in a developing economy such as that of Nigeria.
Nonetheless, this study has some limitations, among which the non-inclusivity of unlisted and financial organizations in the study is the foremost. Financial institutions were excluded because they have their distinct CG regulations. Since this study was conducted exclusively on non-financial listed firms, the results should be interpreted thoughtfully. Moreover, the study period is only six years, which is small compared to the size and age of the Nigerian capital market. The study also used a few boards’ diversity proxies. However, future research shall extend the present study by considering other relevant determinants of board diversity such as the financial experience of a female director, integrity, and commitment of director, among others. Future research may also consider including both unlisted and financial firms into their model with an extended scope of more than six years for more robust results.