Privatization and Corporate Disclosure: The Influence of Ownership Changes, Governance Reforms and Regulation on Corporate Disclosure Practices in Jordan

Abstract

Privatization is an economic policy used by more than a hundred countries worldwide so as to promote the use of markets to allocate resources. Privatization leads to major changes in the ownership structures of firms. Also, governments executing privatization programs have significantly changed their corporate governance systems and disclosure rules (Megginson & Netter 2001). Jordan is one of the developing countries that had recently embarked on a privatization program which resulted in the reduction of the state’s ownership from around 15% when the privatization program commenced in 1997 to less than 6% in 2003 largely absorbed by foreign investors. In addition, privatization in Jordan led to major corporate governance and disclosure regulation reforms. This study empirically examines the impact of privatization on corporate disclosure in Jordan using a novel approach through three channels. First, changes in ownership from the state to private owners who have distinct incentives and abilities to monitor management. Second, changes in corporate governance systems which enhance the quality of corporate disclosure. Jordan reformed its corporate governance system which was incorporated in the 1997 Company Law, the 1997 Temporary Securities Law and the 2002 Securities Law. Third, changes in disclosure regulation so as to improve mandatory disclosure compliance. Jordan, through the enactment of the new Company Law and Securities Law, mandated the adoption of the full version of the IAS/IFRSs and imposed sanctions for non-compliance. The analysis utilized both cross-sectional regression models and panel data techniques. Panel data was used to account for the dynamic effect of ownership changes resulting from privatization and the resulting governance and disclosure regulation reforms by comparing disclosure in 1996 to that in 2004 (one year before privatization and one year after). The study used the annual reports of the years 1996 and 2004 of 80 public non-financial listed Jordanian companies. The analysis revealed that while state ownership was a significant determinant of the level of voluntary disclosure, the transfer of ownership to foreign investors produced a significant positive influence on voluntary disclosure. Also, governance reforms through strengthening investor protection had significant influence on voluntary disclosure. Finally, disclosure regulation reforms, and one of the governance mechanisms, the mandate of audit committees, produced a significant influence on mandatory disclosure. Overall, this study showed that privatization had successfully influenced corporate disclosure in Jordan both voluntary and mandatory.