Conference calls, information asymmetry, and governance structure

This study presents an empirical analysis of the relation between a set of corporate governance mechanisms and the quality of voluntary disclosure practices, as surrogated by conference call activity. We hypothesized that effective governance structure helps alleviate agency costs and foster an environment of greater transparency. We also hypothesized that an ex-ante commitment to more transparent disclosures enhances the effectiveness of both internal and external control mechanisms and allows the use of less-costly control systems.; Empirical analysis yielded a number of interesting results. Initiation of (and commitment to use) conference calls was associated with decreases in long-term bid-ask spreads, and increases in institutional ownership, after controlling for confounding effects and simultaneity bias.; We also found that firms with effective governance mechanisms are more transparent. More specifically, firms with a smaller board size, a higher percentage of outside directors on the board, a higher percentage of institutional ownership and more shareholder-empowering charter and bylaw provisions were more likely to use conference calls as part of their communication strategy.; Finally, conference call firms were negatively associated with the level of equity incentives needed to motivate managers. Results suggest that conference calls reduce agency costs, by enhancing the efficiency of direct control mechanisms and thereby substituting for more costly governance systems such as equity compensation.; Findings extend academic research by furthering our understanding of the link between financial disclosure decisions and corporate governance structure. Recent financial disclosure scandals emphasize the need for effective governance mechanisms and greater financial disclosure transparency. The study shows that the two are linked and that financial disclosures affect (and are affected by) the resulting governance structure.