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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.19 No.4 pp.924-931
DOI : https://doi.org/10.7232/iems.2020.19.4.924

The Impact of the Board’s Characteristics on the Relationship between the Asymmetry of Information and the Fair Value of the Share in Jordanian Commercial Banks

Haitham Edris Almubaideen*
Isra University-Accounting Department, Jordan
*Corresponding Author, E-mail: halmubaideen@iu.edu.jo
October 14, 2020 November 30, 2020 December 4, 2020

ABSTRACT


This study aimed to know the impact of the characteristics of the Board of Directors on the relationship between the asymmetry of information and the fair value of the shares in Jordanian commercial banks. To achieve the objective of the study, it is necessary to know the effect of the asymmetry of information on the decisions of current and future shareholders and investors, and then to study the effect of the characteristics of the board of directors on the fair value of the share. For this reason, the method of analyzing time-series analysis (Panel Data) has been used, based on a sample of 13 Jordanian commercial banks listed in the Amman Financial Market. The study period is 2015-2019, and four banks were excluded for failing to meet the study conditions. The study was based on two models; the first one aimed to examine the effect of the relationship between asymmetric information and the fair value of the share, while the second model aims to study the relationship between the effect of the characteristics of the Board of Directors on the relationship between asymmetry of information and fair value. It was found that there is a problem of information asymmetry among investors in commercial banks, and the level of asymmetry was different from one bank to another and from year to year. The problem of information asymmetry is caused by the failure to deliver financial information to all parties in a timely manner. The most important recommendations Independent board members should be increased because of their positive impact on the relationship between information asymmetry and fair value, The need to increase the number of females on the boards of directors of Jordanian commercial banks to increase gender diversity and make the decisions of the boards of directors more indicative.



초록


    1. INTRODUCTION

    The process of communicating information to users of annual financial statements and internal and external stakeholder’s decision makers in a timely manner is a subtle process and has a significant impact on future investor decisions. The difference in information provided, directly and indirectly, and the conflict of interest between shareholders and the Board of Directors greatly affects the fair value of the company’s shares, thus fluctuating its market value and the market value of the stock is less than its fair value (Kanagaretnam et al., 2007). The role of the Board of Directors is to provide annual financial information, data and reports in a transparent and fair manner and disclosures that help all parties to make their future decisions by providing appropriate information that honestly represent the Bank’ s financial position.

    Due to the impact of information asymmetry on the quality of annual financial statements, some Jordanian legislation have taken care of the need to form a board of directors, which is characterized by qualitative characteristics, independence and gender diversity and the size of the board of directors, which help in making appropriate administrative decisions (Song et al., 2010).

    The separation of ownership from management has led to agency problems. Since agents (managers) may not perform work that is in the interests of clients (shareholders), management may engage in utilitarian behavior through which decisions are taken in their own interests or result in the transfer of wealth from one party to another. In order to ensure that the administration performs the supposed tasks in accordance with the agency’s theory, the client and the agent bear the costs of the agency, which includes the costs of supervision and the client’s responsibility to control the conduct and actions of the agent (Muller et al., 2011).

    1.1 The Problem of Study and its Questions

    The problem of the study is the asymmetry of information and therefore its reflection on the fair value of the shares of Jordanian commercial banks. The question is if there is a role for the characteristics of the Board of Directors and its composition on the relationship between the asymmetry of information and the fair value of the share?

    1.2 The Problem of this Study, Therefore, is to Answer the Following Question

    • 1. Does the asymmetry of information provided by the Board of Directors affect the fair value of the share?

    • 2. Do the characteristics of the Board of Directors represented in (Independence of BOD, Percentage of females) affect the reduction between the asymmetry of information and the fair value of the share?

    1.3 The Study Objectives

    The importance of this study is to highlight the characteristics of the Board of Directors (the independence of the Board of Directors and the percentage of females) and the asymmetry of information and their impact on the fair value of the shares of Jordanian commercial banks to ensure their continuity, reach the fair value of the share and reduce the problem of conflicts of interest.

    The Study objectives can be summarized as follows:

    • 1. To show the impact of the information asymmetry on the fair value of the shares of Jordanian commercial banks.

    • 2. To show the impact of the characteristics of the Board of Directors (Independence of BOD, Percentage of females) on the relationship between the asymmetry of information fair value of the share.

    1.4 The Importance of Study

    The importance of this study stems from the illustrating the impact of the asymmetry of information on the fair value of the shares of Jordanian commercial banks, and from the attempt to measure new variables; such as the academic qualifications, number of females in the Board of Directors and the independence, one of the fair value of the share, which reflects how Jordanian commercial banks are managed. Are the characteristics of the Board of Directors reflected on the fair value of the share?

    1.5 Procedural Definitions and Indicators used in the Analysis

    Information asymmetry: ”This problem is that corporate management usually has more information than investors have, and this problem results in market failure if the management discloses the information they have to mislead investors” (Landsman, 2007).

    Fair value: The value that would be received to sell an asset or paid to settle a liability on the date of measuring a normal and regular transaction between parties dealing in the market in current market conditions (IFRS13).

    Characteristics of the Board of Directors: The Board of Directors is the cornerstone in supervising the organization and forming control systems, in addition to exercising its role as an agent for shareholders (Sharaf et al., 2020). It also monitors senior management and continuously evaluates its performance. The characteristics of BOD; such as its size, independence and separation of the Chairman duties from the General Manager’s duties play an important role in raising BOD efficiency and achieving its goals (Sharaf et al., 2020).

    Independent member: a member of the board of directors who is not related to the company or any of the employees of the senior executive management in it or any affiliate company or with the auditor of the company any material interest or any relationship other than that related to his contribution in the company, under which there may be a suspicion of bringing any benefit, whether material or moral That member may influence his decisions or exploit his position in the company.

    The independence of a member of the board of directors shall be denied if the natural or legal member of the board of directors or the representative of the legal member applies to him in any of the following cases: -

    • 1. If he worked or had worked for the company or any affiliate company during the last three years prior to the date of his candidacy for membership in the Board.

    • 2. If one of his relatives worked or had worked in the executive management of the company or any affiliate company during the last three years prior to the date of his candidacy for membership in the Board. (A guide to corporate governance rules for joint stock companies listed on the Amman Stock Exchange)

    • 3. If he or one of his relatives has a direct or indirect interest in contracts, projects and engagements that are concluded with the company or any affiliate company, the value of which is equal to or greater than (50,000) dinars.

    • 4. If the member or representative of the legal member or one of their relatives is a partner of the company’s external auditor or an employee thereof, or if he was a partner or his employee during the three years preceding the date of his candidacy for membership in the Board.

    • 5. If the member or representative of the legal member has control over the company by owning 10% or more of the company’s capital

    1.6 The Boundaries of the Study

    The study is limited to:

    • Human Boundaries: it is limited to Jordanian commercial banks excluding Islamic banks.

    • Spatial boundaries: The study was limited to Jordanian commercial banks.

    • Time boundaries: The study will cover the financial period from 2015 to 2019.

    2. LITERATURE REVIEW

    The Case of Banks and Insurance Companies, Board of directors has an important role in leading success of companies’ performance. The board has very distinct functions and responsibilities within the organization. Basically, it is the role of the board of directors to hire the CEO or general manager of the business and evaluate the overall direction and strategy. Boards have major tasks, as stated in different regulations, such as responsibilities of top management and its performance assessment, its strategic objectives and risk management, in addition to organizing the relation with different stakeholders. Recently, there have been considerable discussions among academic researchers about differences and diversity of the board of directors, which gained a wide range of interest through studies conducted and points of views given because of their impact on firm performance. The current study aims at examining the impact of board diversity on the financial performance through investigating all banks and insurance companies listed in Amman Stock Exchange. These included 15 banks and 23 insurance companies for the financial period (2010- 2015). Descriptive results revealed a poor representation of females and PhD holders as members in the board of directors compared to an acceptable representation of other members who are foreigners and master degree holders. In contrast, boards of directors show a high representation of non-executive member

    • 1. This study aimed to find out the extent of the influence of the independence of the board of directors on the market value, as the presence of independent external directors, the better the performance of the company was and the agreed objectives were achieved. 1996 is a unique company for the period (2466 and the study sample includes -), and the 2014 study found that there are A positive relationship between the independence of the board of directors and the market value of the company.

    His study investigates whether board characteristics affect the value relevance of fair value Estimates in financial firms under International Financial Reporting Standard (IFRS) 13. Specifically, the study will focus on whether a better and more efficient monitoring of managers, after the adoption of this new regulation, has an effect on the information quality of fair values. IFRS 13 requires firms to disclose a fair value hierarchy containing three levels, in a post IFRS 13 era, board independence and gender diversity have a positive effect on the value relevance of fair value estimates (Level 3). In addition, firms with larger boards have lower information quality of firmgenerated fair value estimates. Moreover, initial analysis shows that all fair values are value relevant to investors and the adoption of IFRS 13 has blurred the lines between the three levels in the fair value hierarchy. Hence, IFRS 13 has successfully reduced the information asymmetry related to fair value estimates.

    This study aimed to examine the characteristics of key corporate governance that affect both the quality of profits and profit management of Jordanian companies. The study sample included (73) financial companies listed on Amman Stock Exchange (ASE) that were listed during the study period (2012-2017). The study used the number the number of board members, the duplication of the CEO, the components of the board of directors, the number of the audit committee members, the components of the audit committee, the activity of the audit committee to measure the characteristics of corporate governance, absolute value and estimated benefits signal calculated through the modified Jones Model, which was used to estimate the quality of profits and profits management respectively.

    The results showed that the number of the audit committee members and the activity of the audit committee have a relationship with profits quality and profits management (Frankel and Li, 2004). For recommendations, the researcher recommended that the Jordanian financial companies have to reduce the number of Board members and modify the proportion of external and nonexecutive directors in both; the Board of Directors and the Audit Committee.

    3. PRACTICAL ASPECT

    3.1 Data Collection Methods

    The researcher relied on the following methods of data collection:

    The information used in the study was obtained through the financial reports that were obtained through the official website of the banks on the official website of the Amman Financial Market.

    The theoretical side of the study was obtained through researches published in refereed scientific journals, and previous studies related to the current study.

    3.2 Community and Sample of the Study

    The study included the 13 commercial banks of Jordan based on the bulletins of the Central Bank of Jordan. They were matched with the study criteria and time period of the study, provided that the Jordanian commercial bank must be listed on the Amman Financial Market for at least 150 trading days, and that the trading days in one year should not be less than 150 days during the study period and to have the necessary data to measure the variables of the study and should have full reports, and the fair value of the share are calculated according to for the market income. The data was collected by collecting data for each bank, the highest share price, lowest share price, and best offer for the share, by collecting (9,450) views, for trading in the shares of nine banks and for the fiveyear study period extending from (2015-2019).

    Four Banks were excluded because their trading days during the study period were less than 150 days.

    3.3 Methods of Statistical Analysis

    When analyzing the financial statements, the study relied on time series analysis, which examines the relationship between more than one variable for more than a year. The Banal Data software was used to analyze the data and extract the results.

    3.4 Study Variables

    The following equations will be used in this study:

    • FVit = a + INit

    • FVit = a + Init + Init * BIit + INit * BFit where as:

    • FV represents the fair value of the share

    • a: represents the fixed value in the Model

    • IN: represents asymmetry of information

    • B: Tendency to controlling and independent variables in the Model

    • BI: represents the independence of board members

    • BF: represents the percentage of females in the BOD.

    Descriptive Statistics shows the descriptive statistics of variables used in analyzing the relationship in this paper. Information asymmetry shows an average of around (0.0875). The average female board member is 3% percent, with a minimum value of zero and a maximum value of 23%. This finding supports the figures reported by previous works done in Jordan. Regarding board independence, the finding indicate that average is 34%. Regarding board size, the maximum values is 15 and minimum value is 8, while the average is 12. Regarding the dependent variable (fair value) the average is 2.5 JD.

    3.5 Data Analysis and Hypotheses Testing

    This chapter addresses the study data analysis and testing the hypotheses to answer the study questions. The researcher believes that measures of central tendency and dispersion were relied on to conduct the descriptive analysis of the sample data, in order to answer the study questions. The researcher also relied on multiple regression test to test the study hypotheses and find out the impact of the dimensions of the independent variable on the dependent variable. This is due to the low percentage of female representation on the board of directors.

    3.5.1 Multicollinearity Test

    To examine the multicollinearity problem, the variance inflation factor test (VIF) was used. Gujarati and Porter (2009), argued if VIF > 10, this implies that there is high multicollinearity. The findings in following Table indicate that the VIF values are not exceed 4.53, which is below the acceptable value of 10. This implies the multicollinearity is not a problem in this study.

    3.5.2 Heteroscedasticity and Autocorrelation Tests

    Heteroscedasticity and autocorrelation tests were used to check if the data were sufficient and the results are not misleading. To check for heteroscedasticity, Modified Wald test was used. Following Table reports the findings of the Modified Wald test. The findings indicate that there is no heteroscedasticity problem, where the p-value > 0.05. The Wooldridge test has been undertaken to examine whether there is an autocorrelation problem in the data. The results in following Table indicate that autocorrelation does exist, where the pvalue < 0.05.

    3.5.3 Empirical Results of Direct Relationship between Information Asymmetry and Fair Value

    In general, the Housman test compares fixedeffects to random-effects coefficients to decide which model is appropriate. If the p-value is significant, then the fixed-effects model should be applied since using random-effects would be biased. However, if the p value is insignificant, random-effects can be safely used. The finding of Housman test shows that the P-value is significant (P-value < 0.05). Thus, the REM model is more suitable than POLS regression model. Furthermore, the findings of Housman test indicate that the p-value is significant (p-value < 0.05); hence FEM is the best model for this study.

    The finding indicates that information asymmetry is negatively and significantly related to fair value. This implies that if the level of information asymmetry is decreased, the value of bank shares will increase. This finding is consistent with agency theory perspective which suggest that information asymmetry affect the firm value.

    • 1. Empirical results of the moderating relationship Using fixed effect model, the study examines whether corporate governance mechanisms (board independence (BI) and Female existence (FB)) moderated the relationship between information asymmetry (IA) and fair value.

    • 2. Board independence

    The Moderating Effect of Board independence on the Relationship between information

    The results in model (1) (direct relationship) show that there is a negative relationship between information asymmetry (IA) and Fair value. However, in model (2), when the board independence (BI) is entered into the regression, the results indicate that the relationship between IA and fair value is significant and negative at the 5% level; this is because board independence influences the level of information asymmetry. In addition, with respect to the moderating variable (board independence), the results show that there is a significant positive association between BI and Fair value. In model (3), when IA is interacted with board independence (IA*BI), the coefficient is significant. This result indicates that the moderating impact of board independence on the relationship between information asymmetry and fair value is positive and significant. These finding implies that the board of directors’ independence effect the relationship between information asymmetry and fair value. This finding is consistent with agency theory that argued that board independent members can decrease the effect of information asymmetry.

    3.6 Female Members

    The results in model (1) (direct relationship) show that there is a negative relationship between information asymmetry (IA) and Fair value. However, in model (2), when the female members (FE) is entered into the regression, the results indicate that the relationship between IA and fair value is significant and negative at the 10% level; this is because female members influences the level of information asymmetry. In addition, with respect to the moderating variable (female members), the results show that there is a significant positive association between BI and Fair value. In model (3), when IA is interacted with female members (IA*FE), the result indicates that the moderating impact of board independence on the relationship between information asymmetry and fair value is not significant. These finding implies that the board of directors' independence does not affect the relationship between information asymmetry and fair value.

    4. CONCLUSION

    Through the practical and theoretical aspects of this study, the study reached the following conclusions:

    • 1. Through the results of the study, it was found that there is a problem of information asymmetry among investors in commercial banks, and the level of asymmetry was different from one bank to another and from year to year. The problem of information asymmetry is caused by the failure to deliver financial information to all parties in a timely manner.

    • 2. The problem of information asymmetry cause some of the disadvantages addressed by the study, at the level of the market, including reducing the liquidity of finance through different returns among investors because of the difference in the delivery of information between investors and the different timing of delivery.

    • 3. The results indicate that the inconsistency of information is negatively and significantly associated with fair value. This means that if the level of information asymmetry decreases, the value of bank shares will rise. This result corresponds to the perspective of the agency theory which indicates that the information asymmetry affects the value of the company according to the theory of the agency and it consistent with the study of Jimi.

    • 4. These findings indicate that the independence of the Board of Directors affects the relationship between information inconsistency and fair value. This finding is consistent with the agency's theory that independent board members can mi- nimize the impact of information asymmetry.

    • 5. There is a positive effect of the board's independence on the relationship between information asymmetry and fair value, which means that the presence of independent members reduces the problem of information asymmetry and leading to an improvement in the market value of banks.

    • Study recommendations

    Through the findings reached, the following recommendations were made based on the results:

    • 1. We can reduce the problem of information asymmetry by applying governance rules, as it has a major impact on the problem of information asymmetry.

    • 2. Investors can benefit from the results of this study by making their investment decisions by relying on the results of this study.

    • 3. Independent board members should be increased because of their positive impact on the relationship between information asymmetry and fair value.

    • 4. The Jordanian Stock Exchange must require commercial banks to disclose fully to all parties and at the right time to all information, so that investors have full confidence in the policies of commercial banks and published information.

    • 5. The need to increase the number of females on the boards of directors of Jordanian commercial banks to increase gender diversity and make the decisions of the boards of directors more indicative.

    Figure

    IEMS-19-4-924_F1.gif

    The Model of the Study: It has been prepared by the researcher based on Jimi, Demetri and al-Shahed Studies.

    Table

    Number of trading days and the names of Jordanian commercial banks

    Represents the study variables

    Multicollinearity test

    Wald test for heteroscedasticity

    Wooldridge test for autocorrelation

    Regression results of the relationship between information asymmetry and fair value

    Asymmetry and fair value

    The Moderating Effect of female members on the Relationship between information asymmetry and fair value

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