3. Research design
3.3 Variable descriptions
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3.3 Variable descriptions Dependent variable
This study focuses on the effect of the board links on conference calls and tests whether firms with board interlocks are more likely to hold conference calls.
Following prior literature that either distinguish firms that hold conference calls and those that do not (e.g., Frankel, 1999) or measure the frequency of calls (e.g., Bowen, 2002), I use two measurements to capture the firms decision to hold conference calls:
(1) a dummy variable that equals to 1 if a firm holds conference call in a year, and 0 otherwise (CALL); and (2) the frequency of conference calls (NCALL). I include calls listed on the Market Observation Post System but exclude invited and overseas calls.
Independent Variable
(1) Board links
I include two variables to measure the board links between the focal firms and other call firms: (1) a dummy variable that equals to 1 if the focal firm is connected to other call firms through interlocked directors, and 0 otherwise (DLINK); and (2) the number of other call firms that are tied to the focal firm through interlocking directors (LINK). For example, if a focal firm has three directors that are tied to other call firms, one of which sits on board of three other call firms simultaneously, another sits on board of four other call firms, and the other sits on board of five other call firms, the number of other call firms tied to the focal firm is five (DLINK=1; LINK=5).
(2) Independent board links
To test hypothesis 2, I further distinguish the board positions of interlocked
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independent directors and 0 otherwise (INDLINK).Control Variables
(1) Firm characteristics
I control firm characteristic including firm size (SIZE), profitability (ROA), leverage (LEV) and market-to-book value (MB). Donnelly and Mulcahy (2008) document three reasons why larger firms tend to have higher level of voluntary disclosure. First, it is less costly for large firms to disclose detail information because they are assumed to produce more information for internal purpose. Second, as larger firms are more closely watched by various government and regulatory authorities, better financial reporting may lessen undesired pressure from the government. Third, larger firms need more funds from external capital markets.
Increasing disclosure may increase investors’ confidence and facilitate the liquidity of a company’s shares, which make external financing easier. Many studies also identify that company size is positively associated with holding conference calls (e.g., Land and Lundholm, 1993; Frankel et al., 1999; Tasker, 1998). Thus, I measure size (SIZE) by using the natural log of total sales and predict that firm size has a positive effect on the likelihood of holding conference calls. Frankel et al. (1999) show that firms that hold conference calls have higher return on assets than firms that do not, suggesting that firms that hold conference calls have better profitability. The measurement of profitability (ROA) is net income divided by total assets at the end of that year and it is expected to be positively associated with holding conference calls.
Eng and Mak (2003) indicate that debt is a mechanism for controlling the free cash flow and find that firms with lower debts tend to disclose more information. I
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measure a firm’s leverage (LEV) using total liabilities divided by total asset at the end of year and expect that leverage is negatively associated with conference calls.
Tasker (1998) uses a composite measure based on market-to-book ration to measure financial statement informativeness. Frankel et al. (1999) find that firms with higher market-to-book ratios are more likely to hold conference calls, suggesting that
“growth” firms are more likely to voluntary disclose firm-specific information. I also control for the market-to-book ratio (MB) and expect that firms with higher MB are more likely to hold conference calls.
(2) Corporate governance
I include directors’ shareholdings (DSHARE), institutional shareholdings (ISHARE) and the shareholdings of the largest ten shareholders (LSHARE) to control for corporate governance mechanism. Empirical evidence from Ruland et al. (1990), Eng and Mak (2003) and Chin et al. (2007) indicate that higher directors’
shareholdings are associated with a lower level of voluntary disclosure. Eng and Mak (2003) argue that when the managerial ownership is low, there is a greater agency problem and outside shareholders will increase their monitoring in managers’
behaviors in order to reduce agency problems. Hence, managers have incentives to voluntary disclose information to reduce agency costs caused by information asymmetry. I expect that firms with higher directors’ shareholdings (DSHARE) are less likely to hold conference calls. Diamond and Verrecchia (1991) find that institutional investors encourage more disclosures to reduce information asymmetry, which could further increase the liquidity of firms’ securities. Tasker (1998) argues that firms with little or no institutional ownership are less likely to hold conference calls since firms use calls to communicate with all the institutional investors and analysts simultaneously. Therefore, I expect that institutional shareholdings
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(ISHARE) would increase the probability that a firm decide to hold conference calls.
Eng and Mak (2003) argue that more monitoring is required when share ownership is diffused. Bushee et al. (2003) argue that firms with more dispersed investor base are likely to experience greater pressure from shareholders to broaden their disclosure practices and are more likely to provide open conference calls. Consistent with this conjecture, they find a negative association between the number of investors and a firm’s probability to open conference calls. Thus, I expect that firms with higher dominant shareholdings are less likely to hold conference calls. I measure the level of dominant shareholdings by using the total shareholding of the largest ten shareholders (LSHARE). Table 1 summarizes the definitions and expected direction of all variables.
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Table 1. Variable descriptions
Variables Description Expected
Direction Independent variables
CALL Dummy variable that equals to 1 if a firm hold conference calls in a year, and 0 otherwise
NCALL The number of conference call that a firm hold in the year Dependent variables
DLINK Dummy variable that equals to 1 if the focal firm connected to
other call firms through interlocked directors, and 0 otherwise + LINK The number of other call firms that are connected to the focal
firm through board interlocks +
INDLINK
Dummy variable that equals to 1 if the focal firm connected to other call firms through interlocked independent directors, and 0 otherwise
+
Control variables: Firm characteristics
ROA Net income in year t divided by total assets +
SIZE Nature log of a firms sales +
LEV Total liabilities divided by total assets -
MB Market value divided by book value +
Control variables: Corporate governance
DSHARE Directors’ shareholdings -
LSHARE Shareholdings of the largest ten shareholders -
ISHARE Institutional shareholdings +
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