УДК 33

The information disclosure and its assessment of Joint Stock companies

Тувшинтор Лагнай – кандидат экономически наук Национального университета Монголии, Школа бизнеса (Монголия)

Доржпалам Оюунцэцэг – кандидат экономически наук Национального университета Монголии, Школа бизнеса (Монголия)

Готов Отгонсурэн – кандидат экономически наук Национального университета Монголии, Школа бизнеса (Монголия)

Abstract: Effective information disclosure provides external benefits, including protecting stakeholders' interests, attracting investments, enhancing reputation, and increasing overall trust in the market for Joint Stock Companies (JSCs). Internally, it improves performance, ethical conduct, and overall management and leadership of the company through an accountability and control environment. The interest of shareholders and customer trust, as well as the implementation of laws and company accountability, are all expressed through information disclosure. Withholding or obscuring public information disclosure directly and negatively affects decision-making by stakeholders. Hence, this study aims to assess the state of information disclosure of JSCs using data provided by the Mongolian Stock Exchange (MSE) on the TOP-20 JSC companies operating in Mongolia.

Keywords: Joint Stock companies, information disclosure, assessment.

Introduction

The issues of information distribution, disclosure, and assessment are grounded in agency theory. Specifically, Nash (provide full name or additional context) conducted a study that explained non-cooperative relations within this theory. The balancing or controlling of information by the parties with no conflict of interests on securities trade is essential in market development, hence the roles of rating organizations (Kisgen, Credit Ratings, and Capital Structure, 2006). In recent years, disclosure requirements have increased to verify an organization’s performance and compliance, where disclosure of the information is essential to many stakeholders, such as investors, shareholders, regulators, government agencies, and communities  (Hamzeh Al Amosh, 2021). 

Furthermore, the distribution, confidentiality, scarcity, and objectivity of information are studied by other scholars using the game and its related theories. For instance, signaling theory by Spence, provides explanations via the labor market, the lemons theory of information inequality by Akerlof, and moral hazard theory by J. Stiglitz on the insurance market. The overall purpose of these theories was to seek optimization within the information problems. While the disclosure of financial information affects the ownership structure and outside representation in the company board (Francis Longstaff, 2005), an increase in disclosure is positively related to the improvement of the organizational structure of the company (Paul M. Healy, 1999). Moreover, there is a link between the external representation in the board and falsified financial reporting (Morgan.J., 2003), and an increase in disclosure positively drives the stock performance of the company (Sengupta, 1998). Crawford, V.P., and Sobel, based on their research on information scarcity, derived the “Strategic information transmission model” or so-called “Chief talk mode” which occurs between the information sender and a party absentee of information  (Vincent P. Crawford, 1982). Based on the Crawford, V. P, and J. Sobel (1982) study, Battaglini, M. (2002), Aumann, R.J. and S. Hart (Hart., 2003), Krishna, V. And J.Morgan (Vijay Krishna, 2005), Ottaviani, M. And P.N. Sorensen  (Ottaviani M., 2006), Kartik. N, M. Ottovanii, Marco and F.Squintani (2007), Mullainathan, S., J.Schwartzstein and A.Shleifer (2008) published their works on “the efficiency of transmission from sender to receiver of information in the light of information inequality and disclosure, and the relationship between the value of the company and the information disclosure”.

Research Methodology

This research aimed and attempted to construct a questionnaire best suited to reveal the state of information disclosure of the JSCs using questionnaire methods employed by credit rating agencies such as Moody’s, S&P, and Fitch, as well as localized assessment methods deployed by Financial Regulatory Committee (FRC) of Mongolia and the MSE.

For the assessment technique, the Likert scale was used, which is a unidimensional psychometric scale that is popular among researchers to collect respondents’ attitudes and opinions. Overall, 540 responses are collected using 29 questionnaires to determine the state of information disclosure for JSCs, where the information disclosure is divided into 4 categories:

  • General information;
  • Financial reports;
  • Performance reports and annual reports;
  • Dividend policy.

The study employs quantitative as well as qualitative research methods for the secondary quantitative data and investigated factual materials of TOP-20, namely financial reports, performance reports, and other related documents provided by MSE.  

Information disclosure assessment of joint-stock companies in Mongolia

Current laws and regulations relevant to the information disclosure of JSC.                      

Table 1.                      

Laws relevant to the study

Date

Relevant rules and regulations  

Date

The law on securities market[1]

Dec 12, 2002

The information disclosure regulation for issuers of securities

Dec 17, 2015

The company law[2]

Oct 16, 2011

The regulation on providing info online by the issuer of securities

Jan 28, 2017

The law on accounting[3]

Jun 19, 2015

 

The MSE registration regulation, and annex “Registration Agreement”

Jan 15, 2018

The public information disclosure law[4]

Dec 17, 2021

The regulation on General Shareholders’ meeting announcement and its supervision

Dec 14, 2018

 

 

The Corporate Governance Codex

Mar 23, 2022

Resource: Collected data by the researcher.

These universally abiding laws and regulations define the very general framework to follow for the legal entities, which means it is up to them to be responsible to the shareholders and investors of the company and take initiatives in specifying and disclosing many of the potentially relevant information.

Assessment of information disclosure – General information.                                        

Table 2.

№

Questions

Answers

Notes

1

Whether the company published its information disclosure procedure on its webpage

0 No

No publishing

2 Yes

Published

2

Whether the company defined its vision, mission statements, strategic goals, objectives, and values, and disclosed them publicly

0 No

No disclosure

1 Partial

Partially disclosed

2 Yes

Disclosed in full

3

Whether the company owns a webpage

0 No

No

2 Yes

Yes

4

Whether the company publishes its annual report on its webpage

0 No

No publishing

1 Partial

Submits to MSE only

2 Yes

Publish

5

Whether the company discloses its restructuring and reorganization

0 No

No disclosure

2 Yes

Disclosed

6

Whether the company announces the annual GSM via its webpage

0 No

No

2 Yes

Yes

7

Whether the company discloses the decisions of the annual GSM

0 No

No

2 Yes

Discloses regularly

Resource: Collected data by the researcher.

Disclosure of general information. MSE ТОP-20 JSCs.   

image001                                                          

Figure 1. 

Resource: Collected data by the researcher.

With 7 questions and a total of 140 answers, only 35% have “Yes” or “2 scores,” 15% have 'Partial' or ‘1 score,’ and the rest of 49% have “No” or “0 scores,” indicating that almost half of the companies do not disclose crucial information, such as vision and mission statements, strategic goals, and objectives, restructuring efforts, etc.

Assessment of information disclosure –Financial reports.                                                           

Table 3.

№

Questions

Answers

Notes

1

Whether the company discloses the comprehensive financial reports

0 No

No disclosure

1 Partial

Partially disclosed

 

2 Yes 

 

Balance sheet, profit, and loss statement, shareholders’ statement, cash flow statement, and additional clarifications

2

Whether the company prepares the financial reports according to IFRSs

0 No

Not according to IFRSs

2 Yes

According to IFRSs

3

Whether all the required information is disclosed via additional clarifications

0 No

Only formal clarifications

2 Yes

All the required info is delivered via additional clarifications

4

Whether financial reports are disclosed monthly, quarterly, semiannually, or annually

0 No

No disclosure

1 Partial

Semiannually

2 Yes

All monthly, quarterly, semiannual, and annual reports are disclosed

5

Whether the following analytic information is estimated and disclosed (ROE, ROA, P/E)

0 No

No such info

1 Partial

Sometimes

2 Yes

ROE, ROA, and P/E are estimated and disclosed

6

Whether audited financial reports are disclosed

0 No

No disclosure

1 Partial

Only audited financial statements

2 Yes

Audited financial reports with opinions are disclosed

Resource: Collected data by the researcher Financial reports.       

image002                                                                                                                        

Figure 2.                                                                                           

Resource: Collected data by the researcher.

With 6 questions and 120 total answers provided, little more than half 54.1% gave “Yes or 2 scores” and the rest of 21.6% and 24% gave “Partial or 1 score” and “No or 0 score”, respectively. It is commendable for most of the companies preparing their financial results in IFRS. However, answers reveal they need to be better at assessing the results and reporting them.

Assessment of information disclosure – Performance and annual reports. 

Table 4.

№

Questions

Answers

Notes

1

What are the contents of the annual report?

0 No

Only performance information

1 Partial 

Performance and financial reports are included

2 Yes

Performance reports, financial reports, governance, and shareholders’ structures are included

2

Whether salaries and remunerations of the board members are informed in the report

0 No

No such info

1 Partial 

Partially presented

2 Yes

The entire information is annually presented

3

Whether salaries and remunerations of the senior management are informed in the report

0 No

No such info

2 Yes

Presented annually

4

Whether shared ownership info of the senior management is presented in the report

0 No

No such info

2 Yes

Presented annually

5

Whether information on board members is placed on its website

0 No

Not placed

1 Partial 

Only names

2 Yes

Information such as names, educational and professional backgrounds, skills, and experiences are informed

6

Whether information on significant transactions is presented in the performance report

0 No

No such info

1 Partial 

Only total sums are presented

2 Yes

Presented each in detail

7

Whether changes in finance, investment, and performance activities are informed promptly

0 No

No

1 Partial 

Only informs on changes in general

2 Yes

Informs in detail in a timely manner

8

Whether information with the potential to affect the reputation of the company is presented

0 No

No

2 Yes

Presented

9

Whether changes in the company structure are informed

0 No

No

2 Yes

Informs

10

Whether information on beneficiaries (true owners) is presented in the report

0 No

Not presented

2 Yes

Presented

11

Whether information on majority shareholders is presented in the performance report

0 No

No

2 Yes

Presented

Resource: Collected data by the researcher.

The performance reports and the annual report.    

image003                                      

Figure 3.        

Resource: Collected data by the researcher.

With 11 questions and a total of 220 answers, only 14.1% of responders gave “Yes” or “2 scores” another 28.2% gave “Partial” or “1 score”, and the rest or more than half (57.7%) gave “No” or “0 scores”, which indicates that even TOP-20 companies of MSE only provide limited and very generalized information via their annual reports and preferring to leave absent significant portions of available information.

Assessment of information disclosure – Dividend policy.                                      

Table 5.

№

Questions

Answers

Notes

1

Whether the company discloses its dividend policy publicly

0 No

No

2 Yes

Disclosed

2

Whether dividend per share information is disclosed publicly

0 No

Not disclosed

1 Partial

Only the total dividend amount is disclosed

2 Yes

The total amount and dividend per share are disclosed

3

Whether reasonable explanations are provided to the shareholders if the board decides to not allocate dividends

0 No

Sees no need to explain

2 Yes

Explanations are given citing the reasons

Resource: Collected data by the researcher.

Dividend policy.                                                                                          

image004           

Figure 4.

Resource: Collected data by the researcher.

With 3 questions and a total of 60 answers from the TOP-20 companies, only 20% responded with a “Yes” or “2 score,” and another 11% with “Partial” or “1 score.” The vast majority (68%) of respondents gave a “No” or “0 score,” which is indicative of a lack of disclosure in the area of dividend policy.

Assessment matrix of the information disclosure for respondent companies.          

Table 6.

Categories

General information

Financial reports

 

Performance reports and the annual report

Dividend policy

0 score

69

29

127

41

1 score

21

26

61

7

2 score

50

65

32

12

Total score

140

120

220

60

Resource: Collected data by the researcher.

Summary and conclusions

Game theory, moral hazard, signal, and lemon market theories all deal with information disclosure problems on the market where widespread unequal or misleading information is persistent. Mongolia is advancing in introducing a better information disclosure environment via the implementation of laws and regulations such as the so-called “glass account” law for government activities and purchases /www.shilendans.gov.mn/ /www.tender.gov.mn/. However, it must be noted that these activities are state-sanctioned efforts that are enforced only on all public institutions. Private and public companies should take the information disclosure initiative to be more responsible for their investors and shareholders.

Effective and objective information disclosure helps stakeholders of the company to assess correctly the state and strategic performance of the company as a whole and instill trust in its long-term stability. It helps investors and shareholders to witness openly the creation of value for their wealth and contribution to society by the company and hence, grants easy and cheap access to the company for funding via the securities market.

As potential investors base their decision to invest on publicly disclosed information, it is important to pay a duly attention for any company to the state of information disclosure, and this situation is aimed to be assessed by this study, which finds that the information disclosure needs to be much better for TOP-20 companies of MSE. The study finds that even top public companies restrict their financial and performance information that could otherwise be available to the public.  

Proposals:

  1. The companies need to disclose their performance, and financial and non-financial information consistently on time and for that must establish a supervising unit responsible for setting the system, control, and accountability.
  2. Public companies need to produce an annual aggregate report based on their annual performance report, disclose it publicly, and make it available online.
  3. Webpage utilization needs to be active where companies place the management and all other relevant information that is publicly admissible.  

References

  1. Francis Longstaff, S. M. (2005). Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market. Journal of Finance VOL. LX.
  2. Hamzeh Al Amosh, S. F. (2021). Ownership structure and environmental, social and governance performance disclosure: the moderating role of the board independence. Journal of Business and Socio-economic Development, Vol. 2 No. 1, 49-66.
  3. Kisgen, D. J. (2006). Credit Ratings and Capital Structure. Journal of Finance, VOL. LXI, NO. 3, 1035-1072.
  4. Kisgen, D. J. (2006). Credit Ratings and Capital Structure. Journal of Finance8 VOL. LXI, NO. 3.
  5. J., a. P. (2003). An analysis of stock recommendations. Journal of Economics, Vol. 34, No. 1 (Spring, 2003)., 183-203.
  6. (2015). OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition.
  7. OECD. (2017) Disclosure and Transparency in the State-Owned Enterprise Sector in Asia: Stocktaking of National Practices.
  8. Paul M. Healy, A. P. (1999). Stock Performance and Intermediation Changes Surrounding Sustained Increases In Disclosure 1999. View issue TOC, Fall 1999, 485-520.
  9. Sengupta, P. (1998) Corporate Disclosure Quality and the Cost of Debt. The Accounting Review, No. 73, 459-474.
  10. State Great Khural of Mongolia. (2011.). The company law. https://legalinfo.mn/.
  11. State Great Khural of Mongolia. (2021). The public information disclosure law. https://legalinfo.mn/.
  12. State Great Khural of Mongolia. (2001). Law of accounting. https://legalinfo.mn/.
  13. State Great Khural of Mongolia. (2013). The law on the securities market. https://legalinfo.mn/.
  14. Vincent P. Crawford, a. J. (1982). Strategic Information Transmission. Econometrica, Vol. 50, No. 6 (Nov. 1982), 1431-1451 .
  15. http://www.standardandpoors.com/home/jp/jp.
  16. http://dx.doi.org/10.1787/9789264244160-en. 

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