1. Introduction
In an era marked by significant global economic and environmental challenges, the principles of legitimacy theory and corporate governance have gained heightened significance. Corporate governance is instrumental in fostering transparency in the interactions between a company and its stakeholders, mitigating information asymmetry, and curbing self-serving behaviours among board members. Legitimacy theory, similarly, posits a social contract between firms and society, requiring firms to demonstrate transparency and accountability to maintain their societal legitimacy. These principles are not just foundational for ethical business practices but are also crucial for advancing sustainable development within corporate strategies.
Annual activity reports, as critical tools for communication, provide financial and non-financial information that helps firms to enhance or restore their legitimacy [
1,
2]. The importance of these disclosures escalates as companies navigate the complexities of modern business environments and evolving stakeholder expectations towards sustainability [
3,
4,
5]. Profitability, in this context, influences the breadth and depth of disclosures, with more profitable firms often disclosing more extensively to showcase their success and uphold their competitive edge while aligning with sustainable practices [
6].
This study explores the mediating role of corporate governance in the relationship between net profit, equity, and voluntary disclosures, an area where these variables have previously been either understudied or analysed in isolation [
7,
8]. Specifically, we pose the following research questions:
R1: Does corporate governance mediate the relationship between net profit, equity, and voluntary disclosure?
R2: What proportion of the relationship between the independent and dependent variables is mediated by corporate governance?
Employing structural equation modelling (SEM) and mediation analysis, we analyse data from 82 firms across various sectors over a decade (2010–2020). We utilize methodologies such as the Baron and Kenny approach, the Sobel test, and the Monte Carlo test to dissect annual activity reports. Our findings reveal significant mediation effects, particularly the significant mediating role of corporate governance within the relationship between net profit and disclosure of social and board information, emphasizing the pivotal role of corporate governance in bolstering transparency and sustaining legitimacy amidst shifting economic pressures and societal expectations.
Our investigation addresses underexplored aspects of corporate governance, particularly its intermediary role in influencing the extent and nature of voluntary disclosures—critical in the context of evolving financial and ethical standards. This exploration is especially relevant as it examines the nuanced impacts of net profit and equity on disclosure practices in emerging markets. By highlighting these interactions, our study not only fills a significant gap in the literature but also offers practical insights for enhancing corporate disclosure practices, thereby fostering greater transparency and accountability across business sectors. The implications of this research extend widely, providing valuable insights for policymakers, corporate leaders, and regulatory bodies striving to refine governance frameworks to meet contemporary sustainability challenges [
9,
10].
The second section of our study (
Section 2) presents literature reviews related to legitimacy theory and hypotheses, while analysis results are stated in the third section (
Section 3). The final section, the forth section (
Section 4), presents the conclusion and a discussion.
3. Results
3.1. Descriptive Statistics
Table 2 presents the descriptive statistical results for the variables used in the analysis. The logEC amount for the sampled firms ranges from 5 million TL to 10 million TL, with an average of approximately 8 million TL. The logNP number for the firms varies from approximately 5 million TL to 10 million TL, with an average logNP of approximately 8 million TL.
In the mediator variable of corporate governance, it is observed that 55% of the 82 firms have female members on their board of directors. It is seen that 70% of the board members have a university degree, 60% have a master’s degree, and 34% have a doctoral degree. Regarding professional experience, the board members are shown to have a lot of financial experience (64%), followed by accounting experience (55%). Most of the firms, approximately 84%, have independent board members, while about 30% have foreign board members. The size of the boards in the sample firms ranges from a minimum of three to a maximum of fifteen members, with an average of seven members. The results are presented in
Table 3.
In the statistical results for the voluntary disclosure section, it is observed that SBDIL disclosure (mean 6.093) is more prevalent, followed by GSIL disclosure (mean 4.228). The average amount of disclosure for the FIL is 3.797, while the lowest amount of disclosure is for forward-looking information (mean 0.89). These results are presented in
Table 4.
In
Table 5, the observed values for constructs such as Corporate Governance (CG), Net Profit (logNP), Equity (logEC), and Voluntary Disclosure (VD) indeed surpass the corresponding diagonal values. This pattern suggests that the data exhibit discriminant validity, confirming that the constructs are sufficiently distinct from one another and capture the specific dimensions of the theoretical model being tested. The correlation coefficients are well below the commonly accepted threshold, indicating that multicollinearity does not pose a problem for our study.
3.2. Structural Equation Model Results
The standardised results of the model are presented in
Figure 2, while a more detailed version is shown in the table in
Appendix B. The “Structural” section of the table displays the results of the research model represented in
Figure 2. The “Measurement” section illustrates the relationship between the subdimensions of corporate governance (CG) that we specified and CG.
Upon examining the relationship between the mediator variable’s subdimension and CG, it is observed that only FMBD does not have a statistically significant relationship with CG at the 0.05 significance level (p = 0.083). However, the relationships of the remaining variables with CG are statistically significant. Furthermore, when examining the coefficients of the variables, it is evident that there is a positive relationship with CG, indicating the significance of board members’ educational level, professional backgrounds, as well as the presence of independent and foreign members, and board size in corporate governance.
Baron and Kenny [
57] suggested that there should be a significant relationship between the mediator variable and the independent variable in the mediation analysis. In this context, when examining the relationship between logEC and CV, it is observed that there is no statistically significant relationship between logEC and CV (
p = 0.189 > 0.05). Therefore, it has been found that there is no mediating effect in the relationship between the corporate governance and voluntary disclosure sections of equity, and Hypothesis 2 is rejected. There is a statistically significant relationship between logNP and CV (
p = 0.045 < 0.05). Due to the presence of a significant relationship between the independent variable and the mediator variable, only logNP was used as the independent variable in the Medsem analysis.
The STATA medsem analysis works with the command “medsem, indep (varname) med (varname) dep (varname) stand zlc rit rid”. In the medsem analysis, our criterion is that if CG is significant in both the Sobel and Monte Carlo test results, the mediating effect will be accepted. In addition, the results of the medsem analysis are presented with standardised values.
In the mediation analysis of CG between logNP and GSIL, a partial mediating effect was found since the relationship between GSIL and logNP and the Sobel test (
p = 0.059) were not significant. However, the Monte Carlo test result (
p = 0.059) was insignificant, indicating that CG does not mediate the relationship between logNP and GSIL. The results are shown in
Table 6.
The following steps are involved in using the Baron and Kenny method for mediation analysis:
STEP 1—CG:logNP (X -> M) with B = 0.167 and p = 0.045;
STEP 2—GSIL:CG (M -> Y) with B = 0.205 and p = 0.000;
STEP 3—GSIL:logNP (X -> Y) with B = 0.044 and p = 0.536.
Considering that both STEP 1 and STEP 2 yield significant outcomes while STEP 3 and the Sobel test do not, the mediation can be considered to be partial!
Zhao, Lynch, and Chen’s method for analysing mediation involves the following step:
Since neither the Monte Carlo test nor STEP 1 is significant, there is no effect indicating non-mediation (no mediation).
In the mediation analysis of CG’s mediating role in the relationship between logNP and FIL, a partial mediating effect was found since the relationship between FIL and logNP and the Sobel test (
p = 0.150) was not significant. However, the Monte Carlo test result (
p = 0.184) was insignificant, indicating that CG does not mediate the relationship between logNP and FIL. The results are shown in
Table 7.
Using the Baron and Kenny method for mediation analysis involves the following steps:
STEP 1—CG:logNP (X -> M) with B = 0.167 and p = 0.045;
STEP 2—FIL:CG (M -> Y) with B = −0.087 and p = 0.039;
STEP 3—FIL:logNP (X -> Y) with B = 0.239 and p = 0.003.
Given that STEP 1, STEP 2, and STEP 3 all show significant results, but the Sobel test does not, the mediation is considered partial. When the Monte Carlo test is not significant but STEP 1 is, we can use the method of Zhao, Lynch, and Chen for analysing mediation.
This indicates direct nonmediation (no mediation).
In the CG mediation analysis between logNP and FLIL, a partial mediating effect was found as the relationship between FLIL and logNP and the Sobel test (
p = 0.085) was not significant. However, the Monte Carlo test result (
p = 0.088) was insignificant, indicating that CG does not mediate the relationship between logNP and FLIL. The results are shown in
Table 8.
Using the Baron and Kenny method for mediation analysis involves the following steps:
STEP 1—CG:logNP (X -> M) with B = 0.167 and p = 0.045;
STEP 2—GSIL:CG (M -> Y) with B = 0.205 and p = 0.000;
STEP 3—GSIL:logNP (X -> Y) with B = 0.044 and p = 0.536.
Considering that both STEP 1 and STEP 2 yield significant outcomes while STEP 3 and the Sobel test do not, the mediation is categorized as partial.
Using the mediation testing method of Zhao involves the following step:
STEP 1—GSIL:logNP (X -> Y) with B = 0.044 and p = 0.536.
If the Monte Carlo test and STEP 1 are not significant, this indicates an absence of mediation effects (no mediation).
Table 9 shows the results of the medsem analysis for the disclosure of social and board information. According to both the Sobel test (
p = 0.047) and the Monte Carlo test (
p = 0.046), CG has a full mediating effect on the relationship between logNP and GSIL. When examining the RIT value, it is observed that CG accounts for 100% of the effects of logNP on SBDIL. In other words, corporate governance has a significant effect on social and board information disclosure regarding net profit. The RID result indicates that the indirect effect, that is, the mediating variable effect, is 343 times greater than the direct effect between the independent and dependent variables. Therefore, the H1 hypothesis is accepted.
Using the Baron and Kenny method for mediation analysis involves the following steps:
STEP 1—CG:logNP (X -> M) with B = 0.167 and p = 0.045;
STEP 2—SBDIL:CG (M -> Y) with B = 0.453 and p = 0.000;
STEP 3—SBDIL:logNP (X -> Y) with B = 0.000 and p = 0.997.
Given that STEP 1, STEP 2, and the Sobel test are significant, while STEP 3 is not, the mediation is regarded as complete!
Using the mediation testing methodology of Zhao, Lynch, and Chen involves the following step:
If the Monte Carlo test is significant but STEP 1 is not, this results in an indirect-only mediation (full mediation).
meaning that about 100% of the effect of logNP on SBDIL is mediated by CG!
This indicates that the mediated effect is approximately 343.1 times greater than the direct effect of logNP on SBDIL!
4. Discussion and Conclusions
Legitimacy theory, as [
57] pointed out, focusses on firms disclosing nonfinancial information to demonstrate their adherence to social norms and stakeholders’ expectations rather than financial information. Therefore, in this study, the mediating effect of corporate governance on the relationship between net profit and equity and voluntary disclosure was examined within the context of legitimacy theory.
According to the research results, there is no statistically significant relationship between corporate governance and equity. However, there is a statistically significant relationship between corporate governance and net profit with voluntary disclosure. According to the Sobel test results, corporate governance has a partial mediating effect on the disclosure of general and strategic information, financial information, and financial forward-looking information related to net profit. However, this mediating effect was not supported by the Monte Carlo test results. However, it is not possible to definitively dismiss this result as incorrect, as it is similar to the findings of Kent and Ung [
43], Zhang [
44], and Purbawangsa et al. [
45]. Our use of the Monte Carlo test aimed to provide a more robust simulation of possible outcomes, taking into account a wider range of variables and their distributions. This method is sensitive to the specific configurations of our dataset and the relationships among variables, which might explain why our results differ from studies that did not use this approach.
Recent studies have further elucidated the intricate dynamics between corporate governance and disclosure practices, providing a broader perspective on their interdependencies. Elmarzouky et al. [
58] demonstrate how key audit matters (KAMs) and corporate risk disclosure interplay to enhance financial transparency and stakeholder trust, emphasising the critical role of auditors in the governance framework. This relationship is crucial as it underscores the role of the governance mechanism in ensuring that auditors and managers align in their risk communication, potentially significantly reducing information asymmetry.
Similarly, the novel framework of Elmarzouky et al. [
59] for assessing COVID-19 disclosures reveals how pandemic-related information can influence the uncertainty of the annual report. This study highlights the importance of corporate governance during crises, as robust governance structures can mitigate increased uncertainty through clearer and more comprehensive disclosures. Furthermore, the investigation into whether KAM signals are associated with bankruptcy by Elmarzouky et al. [
60] offers critical insights into how governance-related financial distress indicators shape disclosure practices, enhancing our understanding of the predictive power of audit matters before significant corporate downturns.
The study on ESG disclosure by Norwegian firms provides empirical evidence linking ethical governance practices with financial outcomes, showing various impacts on financial performance metrics such as ROA and Tobin’s Q. This evidence suggests that, while ESG initiatives are generally seen as beneficial, their actual impact on financial performance can be complex and warrants careful consideration within corporate governance frameworks. Lastly, research on corporate governance and diversity management disclosure shows a positive correlation between diverse governance structures and the level of diversity management disclosure. This aligns with the broader discourse on the importance of inclusion in enhancing transparency and accountability within corporate governance.
An interesting point among our results is that corporate governance has a full mediating effect on the disclosure of social and board information related to net profit. Trotman [
61] suggested that firms would make more social disclosures to demonstrate adherence to social norms and mitigate societal backlash, and our findings support this assertion. However, the more notable aspect here is that the relationship between net profit and SDIL is entirely mediated by corporate governance. Our analysis result is significant for business in terms of information transparency and accountability, stakeholder approach, long-term sustainability, and corporate reputation and competitive advantage.
The full mediating effect of corporate governance on the relationship between net profit and the voluntary disclosure of social and board information improves the transparency and accountability of firms, contributing to their legitimacy and gaining trustworthiness. This situation indicates that companies with corporate governance avoid unethical behaviour or disregard social expectations to achieve high profits, thus developing a transparent communication channel with shareholders, stakeholders, and society. Furthermore, through transparent communication channels, companies with corporate governance demonstrate their concerns not only for the interests of their shareholders but also for those of stakeholders and society. Therefore, corporate governance helps to portray firms not only as profit-driven organisations but also as integral parts of society that consider social and environmental issues in their activities.
The analysis results suggest that firms with high profits and corporate governance aim for long-term sustainability by increasing their social and board disclosures. Pursuing short-term profit maximisation can lead to a long-term loss of legitimacy. The consequences of short-term profit seeking were evident in the bankruptcies of companies such as WorldCom and Enron, as well as in the financial crisis of 2008. During these times, accounting frauds were committed to portraying companies as highly profitable in the short term, leading to their bankruptcy and loss of legitimacy and, worse, undermining investor confidence in the market. However, our analysis results indicate that increasing the disclosure of social and board information through corporate governance contributes to firms’ long-term sustainability.
This study explores the mediating role of corporate governance on the relationship between net profit and various types of voluntary disclosure, within the theoretical framework of legitimacy theory. Our findings indicate that, while corporate governance does not directly influence equity, it plays a significant role in mediating the relationship between net profit and the voluntary disclosure of general, strategic, financial, and forward-looking information. In particular, the complete mediation effect of corporate governance on the disclosure of social and board information should be noted, which underscores the pivotal role of governance structures in improving transparency and accountability.
Furthermore, our analysis shows that robust governance frameworks significantly mitigate uncertainty during crises, such as the COVID-19 pandemic, thus maintaining the integrity of financial disclosures. This aligns with recent studies indicating that good governance can effectively reduce information asymmetry and build stakeholder trust during turbulent times. These findings not only substantiate the importance of integrating governance into corporate strategy, but also highlight the nuanced impacts of governance practices on firm transparency and stakeholder engagement.
Furthermore, the positive correlation we observed between different governance structures and the level of diversity management disclosure supports the claim that inclusivity improves corporate transparency and accountability, as suggested by recent studies on corporate governance and diversity management. This research further enriches our understanding of how governance mechanisms can be leveraged to foster an inclusive and transparent corporate environment, which is crucial for long-term sustainability and legitimacy.
Our study contributes to the discourse on corporate governance by illustrating how effective governance frameworks can enhance the quality of voluntary disclosures, thus supporting the legitimacy and sustainable success of firms. These insights are particularly valuable for policy makers and corporate managers in emerging markets like Turkey, where the improvement of corporate governance structures could significantly impact firm performance and stakeholder trust.
The findings of our study, which reveal the significant mediating role of corporate governance on the relationship between net profit and types of voluntary disclosure, carry substantial implications for both policymakers and corporate managers, particularly in emerging markets like Turkey.
The evidence that robust corporate governance leads to increased transparency and accountability suggests that there is a strong case for stringent governance reform. Policymakers are encouraged to consider regulations that improve disclosure requirements, particularly focussing on the quality and scope of the information disclosed. Developing specific guidelines that firms can follow to ensure that their governance structures support comprehensive disclosure practices can help establish a baseline for compliance and beyond. These guidelines should emphasise the importance of transparency in financial and nonfinancial reporting. Encouraging firms to engage stakeholders in discussions around governance practices can help ensure that these practices are not only compliant with regulations, but also aligned with stakeholder expectations, enhancing legitimacy and trust.
Managers should focus on strengthening their governance framework to foster a culture of openness. This includes ensuring that the board of directors is diverse and well equipped to oversee comprehensive disclosure practices. Investing in training programmes for board members and executives on the importance of transparency and accountability in enhancing firm performance can be crucial. This training should cover ethical considerations, the long-term benefits of transparency, and how to communicate effectively with stakeholders. Developing robust mechanisms to monitor the effectiveness of disclosure practices and make adjustments as necessary can help firms stay aligned with best practices and regulatory expectations.
Both groups should collaborate to establish and promote best practices in corporate governance and disclosure. This could involve regular forums, workshops, and collaborative platforms where challenges and innovations in governance practices are discussed. The encouragement of longitudinal studies that examine the impact of governance reforms on firm performance and stakeholder trust over time can provide deeper insights into the effectiveness of different governance strategies.
Our study underscores the critical role of robust corporate governance in enhancing transparency and accountability in financial and non-financial disclosures. Based on our findings, we recommend that firms adopt comprehensive governance frameworks that not only comply with current regulatory standards, but also exceed them to foster a culture of openness. Specifically, these frameworks should prioritise the enhancement of board diversity and the integration of ethical standards into daily business practices, which are instrumental in mediating the relationship between financial performance and disclosure quality. In addition, we urge regulatory bodies to consider these insights when updating or designing new disclosure standards. There is a substantial opportunity to strengthen regulations around social and board governance disclosures, ensuring that they reflect the evolving expectations of transparency and accountability from stakeholders.
Transparent communication channels developed through corporate governance and the legitimacy gained through long-term sustainability will also have a positive impact on firms’ corporate reputations. A firm that is perceived to act in line with the interests of society, as reflected in the net profit generated from its activities, will have a strong legitimacy, leading to a robust corporate reputation. This indicates the reliability of stakeholders, shareholders, and investors.
In conclusion, firms with corporate governance tend to make more social disclosures in their decisions, activities, and resulting performance to demonstrate adherence to social norms. This relationship underscores the importance of companies being managed not only based on their financial performance, but also considering social, environmental, and governance factors. This approach strengthens important elements such as long-term sustainability, social responsibility, and corporate reputation, ultimately improving the success of companies.
Our study found that corporate governance acts as a mediator in the relationship between net profit and the voluntary disclosure of financial information. Corporate governance did not have a direct impact on equity, but significantly influenced how profits are reported and disclosed. Corporate governance was found to partially mediate the relationship between net profit and the disclosure of general and strategic information, financial information, and forward-looking financial information. This partial mediation suggests that while corporate governance is a significant factor, other variables also play critical roles in these disclosures. Notably, corporate governance fully mediated the relationship between net profit and the disclosure of social and board information. This indicates that the presence of robust governance frameworks is crucial for the comprehensive disclosure of this type of information. The study also highlighted the importance of corporate governance during crises, such as the COVID-19 pandemic. Robust governance frameworks were shown to significantly mitigate the uncertainty in financial disclosures during these periods, emphasizing the role of good governance in maintaining stability and transparency under adverse conditions. The findings underscore the fact that effective governance can enhance corporate transparency and accountability. This is particularly evident in the stronger disclosure practices associated with firms that have solid governance structures.
Recognising the constraints of our study, we have carefully considered the potential impacts of the geographic and sector-specific composition of our sample, which predominantly includes firms from various sectors in Turkey. This geographic concentration may limit the generalisability of our findings to other regions with different economic, regulatory, and cultural dynamics. Furthermore, while structural equation modelling (SEM) provides a robust framework for analysing the relationships between corporate governance, net profit, equity, and voluntary disclosure, it may not fully capture the complex subtleties and qualitative aspects of corporate governance practices. These methodological considerations highlight the need for a cautious interpretation of our results and suggest the potential benefits of employing additional qualitative or mixed-method approaches in future studies to deepen the understanding of the underlying dynamics.
By exploring the impact in multiple countries, our aim is to assess the universality of our findings and to understand the variability in governance practices worldwide. Additionally, examining the influence of digital transformation provides a timely and relevant dimension to our study, considering the growing integration of technology in corporate governance and reporting. Lastly, analysing the temporal dynamics will allow us to capture the evolving nature of these relationships in varying economic climates, offering a more dynamic view of how corporate governance can adapt and respond to external pressures over time. These directions not only enrich our study, but also pave the way for a comprehensive understanding of the complexities involved in corporate governance and voluntary disclosure practices.