Report on the Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

Abstract of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

The proposed study will evaluate the causal effect of sustainability reporting (SR) practices on stock returns and liquidity among Saudi listed firms before and after implementation of IFRS. The association between the research variables will be moderated by corporate governance mechanism. An increasing number of sustainability reports are published worldwide, but in the Kingdom of Saudi Arabia (KSA), the SR by listed companies is quite low and research on SR is still found scant. The data for this study, covering the period 2015–2019, will be derived from the annual reports (or sustainability reports?) of 155 firms that are publicly traded on the Saudi Stock Exchange. The firms will be scored to ascertain the extent and quality of their sustainability reporting. A panel regression model will be used to establish the relationship between SR, stock returns, and liquidity and the analysis will be conducted using STATA version 14 software. This study will contribute to expanding the existing SR literature regarding stock returns and liquidity and will propose a modified sustainability measurement framework applicable to the Saudi Arabian context. This study will also have some profound policy insights to the policymakers, regulators and investors of the Saudi firms for making prudent investment decisions and improving the stock market through efficient voluntary disclosure.

This study is basically about the evaluation of the casual effects of sustainability reporting or SR practices on stock return in the organizations of Saudi after and before the implementation of IFRS. The corporate governance mechanism will be moderated among the research variables associations. Now there is a lot of number of reports on sustainability around the globe but if talking about the Saudi Arabia (KSA) the sustainability reports about the listed organizations are much lower and researches are still on going about sustainability. In this proposed study the data is covering the time of 2015 to 2019 about the annual reports of these years or which can also be called as sustainability reports of almost 155 companies that are trading publicly in the stock exchange of the Saudi Arabia. The companies will get scoring according to the extent and quality of the sustainability reporting. In order to establish the relationship among SR, stock returns as well as the liquidity, the panel regression model is needed and through the STATA version of the 14 software, the analysis will be done. This proposed study aims to expand the already present Sustainability literature about the liquidity and stock exchange and will also help in modifying the sustainability framework that is quite applicable to Saudi Arabian context. This report will also give insights on profound policy for the policy makers, investors of the companies as well as the regulators in order to make a prudent decision for the investment and thus can help in improving the market through the effective disclosures. This study is basically about the evaluation of the casual effects of sustainability reporting or SR practices on stock return in the organizations of Saudi after and before the implementation of IFRS. The corporate governance mechanism will be moderated among the research variables associations. This proposed study aims to expand the already present Sustainability literature about the liquidity and stock exchange and will also help in modifying the sustainability framework that is quite applicable to Saudi Arabian context

Introduction of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

International financial reporting standards (IFRS) are required in most MENA emerging markets to attract international investors and enhance corporate transparency and disclosure (Pacter 2014 report). IFRS Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions. () IFRS adoption increase the visibility of the firms and therefore exposed to potential cost i.e., political cost. One remedy to overcome these costs is to disclosure more voluntary information. Therefore, IFRS adopting firms are more likely to increase voluntary information and hence increase the SR disclosure (Hubert2011) IFRS adoption or convergence attracts the attention of foreign investors. Foreign investors, especially from the UK and US, may not only look for financial performance but also for environmental and social performance. Therefore, the firms which expect foreign investment, merger, and geographical expansion may disclosure more voluntary information upon IFRS adoption (Xi et al. 2016)

In most MENA emerging markets, the strategy to enhance corporate transparency and disclosure is to utilize international financial reporting standards (IFRS) (Pacter 2014 report) transparency is given under IFRS standards due to increasing international comparability, financial information quality, and enabling investors. Under IFRS standards, the market participants are informed about economic decisions. With the implementation of IFRS, the visibility of the firms has been increased and it also improved political cost and potential cost. Another alternative to overcome the issues of cost is to disclose voluntary information. The firms having an implementation of IFRS are increasing voluntary information with increasing SR disclosure. The foreign investors are often attracted by the convergence and adaptation of IFRS. Foreign investors, particularly from united states and the United Kingdom consider all the factors equally including financial performance, social performance and environmental considerations. Considering the facts, the firms expect more expansion in a merger, foreign investments, and geographical expansion with the voluntary information about the adaptation of IFRS (Xi et al. 2016).  

4.1. Theoretical Contribution of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia.

 Moreover, Azevedo, Santos and Campos (2016) suggest that there is a lack of consensus on the relationship between returns and sustainability. They further note that there is a knowledge gap in the literature as previous studies cannot conclusively answer whether corporate sustainability influences stock performance. Against, that background, this study will extent the scope of the stakeholders’’ theory is examining the nexus between SR and stock return & liquidity in the context of a developing countries like KSA which was previously oversighted.

Secondly, the study attempts to explore the moderating of the role of corporate governance on the causal relationship between sustainability reporting and the stock return and liquidity in Saudi Arabia. A large number of studies concerned with SR and stock return and liquidity have been conducted using US and UK data. However, studies based on data from Middle Eastern countries, are relatively limited in comparison with those in developed and Asian countries. The limited studies on SR in developing countries, and specifically in the KSA, have resulted in a significant gap between foundation theories and practical applicability. Specifically, the investigation of KSA Sustainability reporting before and after IFRS adoption and their effect on stock return and liquidity has not been addressed in the literature. Moreover, according to the literature, Saudi Arabia received limited attention in research work pertaining SR practices or the stock return and liquidity. Thus, a different perspective could be obtained from developing countries such as Saudi Arabia, which in numerous respects are different, and this might extent the scope of the signalling theory, legitimacy theory and the agency theory pertaining the moderating role of corporate governance mechanism on the casual relationship between SR practices and stock return and liquidity. The current study could provide interesting, new primary evidence from a country that has a different business environment and regulations and is considered to be representative of Middle Eastern and Arabic countries.

Azevedo, Santos, and Campos (2016) researched the lack of consensus between the relationship of sustainability and returns. The researchers further identified the gap of knowledge in the literature. The previous researches are not capable to provide a response for influences of corporate sustainability over the stock performance. On the contrary, the present research is extended towards the scope of stakeholders. The theory defines the nexus between the stock return and SR and liquidity in the developing countries. The report mainly considers KSA as research pivot country. Besides that, present research explores the role of corporate governance in the moderating the causal relationship between the liquidity, stock return and SR in Saudi Arabia. A number of researchers worked on these three factors for the united states and united kingdom data sets. However, the research gap is higher for the middle eastern countries and limited work has been done for the comparison of all these factors in Asian countries and Saudi Arabia. The significant research gap is observed in the developing countries particularly in KSA about the foundations and practical implementations of the theories. In literature, there is a significant gap between the analysis of sustainably and the impact of IFRS on the liquidity and stock return. In previous research work, limited considerations are observed for Saudi Arabia and the effect of liquidity and stock return on Saudi Arabia. To reduce the research gap, there are different possible perspectives that could be done for Saudi Arabia and to respond to the research issues. The work could be highly acceptable when dealing with agency theory, signalling theory, and legitimacy theory. These theories pertain the moderating role of corporate governance with the casual relation between liquidity and stock return. The current study provides interesting researches about the primary evidence from the country, regulations, and environment from the perspective of the middle eastern and Arabic countries.        

The study will seek to establish whether IFSR disclosures have had significant effect on stock return and liquidity. Since KSA universally adopted the standards in 2017, the study will employ it as a dummy variable in the model, in order to establish whether there will be significant changes in stock return and liquidity after its adoption. Before its mandatory requirement in all listed firms, IFRS was already adopted in banking and insurance companies and some studies such as Almodel (2016) had already shown that accounting standards alone did not achieve the desired goals. It is therefore, important to examine its behavior in a model of SR.

The results of the present study will be established for the IFRs disclosure and how significantly it will impact the liquidity and stock return. KSA universally adopt the standards in 2017. The research will employ certain variables in the model and will define the identified changes in liquidity and stock return after the adaptation. The mandatory requirement of the research work is to enlist all the firms that have already implemented IFRS such as insurance companies and banking. Almodel (2016) worked on the accounting standards alone and desired outcomes were not established in the report. Considering it, it is now important to reconsider the IFRS model to analyse behaviour.

The study contributes to the literature by adopting a multiple-theoretical framework to interpret the empirical findings and to understand sustainability disclosure behaviour in depth. It has been noted that existing studies on SR usually is characterized by diverse and inconsistent findings due to a lack of a comprehensive theoretical reference point (Hooghiemstra 2000). More recently, Spence et al. (2010) found that researchers describe stakeholder theory as the dominant and most useful theory in explaining sustainability reporting practice. However, Tavares (2018) found that the legitimacy theory is the dominant theory used in accounting and sustainability reporting studies, but it is related to the other theories. However, Hahn (2012) argue that the majority of literature on sustainability reporting does not refer to any theory at all. Therefore, this study contributes by explaining how to use multiple theories in interpreting the empirical findings.

The research contributes toward the established researches with the adaptation of multiple theoretical frameworks and interprets understanding sustainability and empirical findings. In previous researches, the SR model is characterized by inconsistent and diverse findings and lack of comprehensive reference point (Hooghiemstra 2000). In another research of Spence et al (2010), it was concluded that stakeholder theory is dominant and provide a comprehensive understanding of sustainability disclosure. Tavares (2018) concluded that legitimacy theory is the dominant theory that is used in the studies of sustainability. Hahn (2012), on the contrary, argued that sustainability reporting is more important as it does not depend on any particular theory. Their research contributes to the explanation of multiple theories with empirical findings.    

This study examines sustainability disclosure practices during a period of considerable corporate reform, particularly in the stock market during vision 2030 issued in 2016. The period of this study is characterised by significant corporate reforms in the KSA stock market, including the adoption of IFRS in 2017, the issuing of a CG code in 2006, the updating of the CG code in 2016, the Saudi Stock Exchange opening to foreign investment in 2016 and the new Saudi Company Act established in 2015. The study is crucial for promoting an understanding of sustainability disclosure in the annual reporting of firms in the KSA. However, the Saudi market has the largest stock exchange in the GCC and Arab region ( ); it is characterized by weak legislation and rules that dictate accounting and auditing professional operations in the KSA ( ). In addition, most of the enforcement and regulatory bodies are still in development ().

The research identified the practices of sustainability during the considerable reforms of corporate. It considers the stock market vision of 2023 that was issued in 2016. The research period can be characterized with the corporate reforms of KSA stock market and adaptation of IFRS in 2017. The CG code was issued in 2016 and updated in the same year. In 2015, the Saudi company act with new considerations was updated. The research is crucial for the promotion and understanding of sustainable disclosure that is mentioned in the annual reports of firms of KSA. In Arab regions and GCC, the Saudi market is having the largest stock exchange. The research characterizes the weak legislation with conditions of rules that indicate the operation of accounting and auditing process in KSA. Majority of the regulatory bodies and enforcement are under development.

4.2. Methodological Contribution of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

This study makes a significant methodological contribution to sustainability disclosure studies in Saudi Arabia by applying the latest version of the GRI framework—GRI4 index. This study will use a recent and long period (2015-2019) which cover the period of before and after the IFRS adoption in Saudi. also, will use a comprehensive disclosure index (GRI) consisting of 88 disclosure items; while the most of the literature has selected only one or two years and small items to explain the effect and this has not provided a beneficial explanation. However, using a longer period of time, as this research will help to provide a more in-depth explanation which could lead to more accurate findings. Furthermore, by investing the moderating role of corporate governance mechanism on the subject nexus it will illuminate the desired role of corporate governance practices that can lead to better liquidity and higher stock return. Against that background, this study will serve a methodological base for future studies that will be indented on examining the causal relationship between SR on stock return and liquidity with the balanced moderating role of corporate governance.

The present research is having significant methodological contribution in the advanced studies of sustainability disclosure and implementation of latest GRI framework in Saudi Arabia. The latest GRI framework here is GRI 4 index. In this research, the long period (2015-2019) is considered that cover both after and before conditions of IFRS adoption in Saudi Arabia. The comprehensive disclosure indexT (GRI) in the present consideration consists of 88 disclosure items. All the factors are analysed for a specific time range. The results of the research will provide a complete explanation of accurate findings and future implications. Besides that, the moderating roles are considered for the mechanism of corporate governance under the nexus. The results define the desired roles of corporate governance practices with higher stock return and liquidity. The research fills the gap based on methodological conditions and in future, it will be interesting to find a relation between liquidity and stock return in the corporate governance.

Kasim (2015) claims that investors in the stock market conduct technical and fundamental analyses using information derived from movement of earnings, dividend prospects and expected risks and interest rates and the movement patterns of stock to determine the stock prices of companies. The financial statements also help investors understand the company’s performance as they provide a summary of the financial and non-financial information. Moreover, quality information is essential for market liquidity (Kasim (2015). Therefore, this work will provide a framework that can provide quality information to give investors effective, timely and reasonable pertaining to and relevant to the KSA capital market disclosure rates. Hence, it will be helping to make good investment decisions when selecting good performance stocks of firms that are reporting on SR practices.

Kasim (2015) claimed that investors of stock market work with fundamental and technical analysis with the usage of information derived from the dividend prospects, movement of earnings, interest rates, patterns of movement in stocks and expected risks associated with the stock prices of the companies. The investors can be assisted by the usage of financial statements with an understanding of the performance of the company on the basis of financial and non-financial information. They also concluded that quality information is important for market liquidity. The present work provides a well-defined framework with the quality of information. The results are valuable for the effective investment, reasonable pertaining, and time-relevant disclosure rates of the KSA capital market. The outcomes are effective in identifying the decisions of good investment and selection of good performance in the stock market on the basis of SR model practices.

Corporate governance of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

Corporate governance has many definitions; a wide definition of corporate governance is ‘the manner in which firms are controlled and in which those responsible for the direction of firms are accountable to the stakeholders of these firms’ (Dahya et al., 1996: 71). Accordingly, the definition confirms the role that management should accept responsibility for their institution.

The internal and external network of relationships can be managed by the mechanism of corporate governance (Aguilera & Jackson, 2003; Money & Schepers, 2007). Corporate governance was explained by Donnelly and Mulcahy (2008:416) as ‘a set of control mechanisms that are especially designed to monitor and ratify managerial decisions, and to ensure the efficient operation of a corporation on behalf of its stakeholders’. Corporate governance is effected by societal values and norms (Mackenzie, 2007), as along with political and legal legislations.

Corporate governance can be defined in many ways such as corporate governance is a way in which firms are controlled and it provides a direction to firms. The corporate governance is responsible to the stakeholders for the firms (Dahya et al 1996: 71). This definition confirms that management is having a role and responsibility for the direction of the firms. In this way, the external and internal network of relationship can be managed under the defined mechanism of corporate governance (Aguilera & Jackson, 2003; Money & Schepers, 2007). Donnelly and Mulcahy (2018: 416) defined corporate governance as a set of control mechanism that is mainly designed to ratify, monitor and evaluate managerial decisions. It provides an efficient control mechanism for effective operations in the companies for stakeholders. Machenzie 2007 also defined corporate governance mechanism as effected by the norms, legal legislation, political legislation and values.

The conventional breadth of corporate governance is a means of governing and regulating companies (Cadbury, 1992), as well as managing agency conflicts, in order to maximise the value for shareholder (Gill, 2008), has been evolved to encompass companies’ CSR behaviour and the harmony between social and economic aims (Balasubramanian, 2012; Buchholtz et al., 2008). Social responsibility is starting to become a key component of corporate governance, and it is on board of director and CEO’s agendas (Spitzeck, 2009). Effective corporate management captures its importance in terms of managing the needs of not just shareholders but moreover, a broad range of stakeholders as well (Pava & Krausz, 1996), especially as ignoring the expectations of stakeholders may be an obstacle to achieving the company's goals (Kolk & Pinkse, 2010). As a result, CSR is becoming more integrated with corporate governance, adding the social perspective into the decision-making process and taking into account the interest of clients, employees and society in the same vein as shareholders (Gill, 2008). 

The conventional breadth of corporate governance can be defined as a process of governing and regulating the companies. The process is effective for the management of conflict and maximizes the value of shareholders (Cadbury 1992, Gill 2008). It evolved to improve CSR behaviour and harmony is between the economic aims and social conditions (Balasubramanian, 2012; Buchholtz et al., 2008). Similarly, social responsibility is a key item of corporate governance that involve working collectively under CEOs agendas and board of directors. The most important factor is the effective corporate management that is the management of needs and shareholders under the broad range of working with stakeholders (Pava & Krausz, 1996).it considers the expectation of stakeholders and what are the issues and hindrances that reduce the process of achieving goals of the company (Kolk & Pinkse, 2010). Incorporate governance, CSR is becoming an integrated aspect with the additional social perspective and help in the decision-making process. The other factors are interests of customers, employees, clients and society (Gill 2008).

Monitoring levels are likely to be improved by corporate governance, which subsequently, provides shareholders with better assertions (Chen & Nowland, 2010). Assurance is provided to shareholders due to its effectiveness, giving more guarantees that management is working for their best interests and that suitable value and operations will be maintained on a long-term basis. Consequently, companies illustrating better corporate governance practices tend to be less risky and have a higher firm’s value (Chen et al., 2010). On the other hand, governance weakness may have an impact on companies' transparency and result in weak financial reporting (Cohen, Krishnamoorthy, & Wright, 2004). And since SR  is considered an indication for transparency (Quaak, Aalbers, & Goedee, 2007), thus, weak practices of corporate governance results in weak engagements of SR.

Corporate governance improved the monitoring levels in the manifold and enables the shareholder to reach one step ahead of assertions (Chen and Nowland, 2010). A shareholder is provided with the assurance with guarantees of management and working interest under the operations. Based on the facts, the companies having better practices of corporate governance are getting more benefits in the market with a higher value of firm and low-risk factors (Chen et al. 2010). Besides that, governance weakness can limit transparency and financial reporting (Cohen, Krishnamoorthy, & Wright, 2004). SR model considers the indication of transparency and weak practices of corporate governance result as weak working engagements of SR (Quaak, Aalbers, & Goedee, 2007). 

SR and IFRS of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

The International Financial Reporting Standards (IFRS) is an international accounting framework to guide in organizing and reporting financial information (IAS). The aim of the IFRS is to ensure transparency, consistency and comparability of financial statements globally. There are six underlying principles of qualitative financial information. The first is relevance, which refers to the information that can make a difference in the user’s decisions. The second one is faithful representation which implies that the data should be useful by representing the phenomenon it purports to represent faithfully. Third is comparability which asserts that the information should be more useful if it can be compared to similar information from other entities or periods. The fourth is timeliness, which imply that the information is available for the decision-makers when required to facilitate capable information making processes. Understandability is the fifth principle which posits that the preparation of information and reports should be done by knowledgeable individuals who classify, characterize and present the information concisely (Amelio, 2016). The last is verifiability of the information where the different knowledge and the independent observers can come to a consensus that there is faithful depiction of information.  Therefore, the IFRS is non-compulsory for the social and environmental aspects of reporting, with the principles of the framework being compulsory for the preparation of financial statements. The International Accounting Standards Board IASB considers the environmental reports outside of financial statements as outside the scope of IFRS, but provides guidelines on the recognition and measurements of financial statements related to environmental protection under IAS 16 and 37 (Jose, 2017).  Large enterprises are however, mandated under the Directive 2014/95/EU to harmonize the accounting process by providing provisions for non-financial statements on the environmental, anti-corruption, social and employee-related matter and human rights issues (Amelio, 2016). This aspect is vital for the IFRS as it mandates specific groups of companies to prepare social balance reports which is critical for international comparability.

Yip and Young (2012) conducted a study to determine whether mandatory adoption of the IFRS in the EU improves information comparability of financial information. They found that convergence and higher information quality are the main drivers of comparability improvement. The findings by Horton, Serafeim and Serafeim (2012) suggest that adopting IFRS may be correlated to unobservable factors resulting in a decline in the forecast errors leading to a decline in the capital market. Horton, Serafeim and Serafeim (2012) adoption of the IFRS was found to result in the improvement of information intermediation in the information environment in terms of quality and accounting comparability. Similarly, Lourenco and Branco (2015) also reported that the adoption of IFRS positively impacted the quality of information, its use, comparability and predictability. The effects were reported to rely on the country and company characteristics like the enforcement levels as well as company.

Research of Yip and Young (2012) determined all the mandatory adoption of IFRS for the improvement of EU information and financial information. The report found convergence with high quality of information that provides comparability and improvement. Horton Serfeim and Serafeim (2012) suggested that usage of IFRS is correlated to the unobservable factors and result as a decline in the errors of forecast in the capital market. Their results also found improvement in the information intermediation, information environment, accounting comparability, and quality terms. Lourence and Branco (2015) reported all the conditions that provide a positive impact on the processes under the implication of IFRS. The results reported that all the factors relay on the characteristics of the company and country such as enforcement levels in the companies.   

Amelio (2016) also investigated the connection between the IFRS and social responsibility to assist in demonstrating the values gotten from the indicate of company performance from a social responsibility and sustainability point of view. The findings revealed that the IFRS’s financial statements were not adequate to communicate a firm’s social responsibilities and sustainable values. They concluded that the connection between IFRS and sustainability is weak.

Amelio (2016) determined the connection between social responsibility and IFRS to assist the values and indication of the performance of the company. The findings also revealed the financial statements of IFRS that are not adequate to communicate sustainably values and social responsibility of firms. Reports revealed that the relationship between sustainability and IFRS is not strong.

Jose (2017) discussed the need for adopting standardized reporting standards. He contends that there is a lack of a common set of standards acceptable globally. The development of the IFRS conceptual framework, is critical in upholding and enhancing the fundamental qualitative characteristics of financial information as well as its sustainability factors. Inherent to its success is the need for transparency, quality and relevance, consistency and comparability (Amelio (2016, Masoud, 2017). Agostino, Drago and Silipo (2010) also examined the influence of mandatory application of IFR on the value relevance of accounting information to the shares of banks in the EU. The value relevance of the disclosed information was found to be higher with the highest increment being in Italy and Germany while the U.K recoded the smallest incremental effect. The findings show that the IFRS requires a higher disclosure rate than local regulations.

Jose (2017) determined the need for the implementation and adopting the standards of the standardized reporting process. The contents were considered that show lack of acceptability at global levels. The development of the framework and fundamental conditions are under the qualitative characteristics. It is inherent to the success under the quality, relevance, and transparency (Amelio (2016, Masoud, 2017). On the same basis, Agostino, Drago and Silipo (2010) worked to measure the influence of all the mandatory applications of IFR with the condition of value relevance and accounting information of shares in the EU. The value relevance of the disclosed information was identified as higher with the increasing rate for both Germany and Italy but opposite to them, UK records were recorded with the smallest incremental effects. The findings of IFRS provides higher disclosure rates as compared to the local regulations.

Lee (2019) set out to examine whether adoption of the IFRS in emerging markets like Korea has an impact on sustainability earnings. The researcher acknowledged that there are mixed evidence on the effects of IFRS on sustainable accounting information. The managed earnings post and pre the IFRS were tested in Korean listed firms and the findings indicated that the managed earnings were less post IFRS. It further revealed that there was an improvement in the comparability of financial statement post the IFRS. Overall, it was found that in competitive industries the effects of IFRS on sustainable accounting information was more pronounced.

Lee (2019) worked on getting data that if adoption of IFRS in markets can affect the sustainability earnings like in Korea. Many researchers worked on that and concluded that there are confusing and mixture of data about impacts of IFRS on sustainability earnings. In Korea, before and after the IFRS the managed earnings were tested about the listed companies and the study evaluated that the managed earnings were low after the IFRS. The improvement in financial statement after the introduction of IFRS is revealed. It was researched that in the competitive industry the impacts of IFRS ae more common on the sustainability accounting information

IFRS adoption increase the visibility of the firms and therefore exposed to potential cost (i.e., political cost). One remedy to overcome these costs is to disclosure more voluntary information. Therefore, IFRS adopting firms are more likely to increase voluntary information and hence increase the CSR disclosure. (Hubert2011) also there are several IFRS related to sustainability matters “IFRIC 3 deals with emission allowances and is related to trans-boundary matters. IFRS 8 defines segmental and geographical disclosures. IAS 38 deals with the impairment of emission rights (intangibles). IFRS 6 (effective January 2009) deals with exploration for and evaluation of mineral resources. IFRIC 1 addresses changes in existing decommissioning, restoration, rehabilitation and similar liabilities. IFRIC 5 provides for rights to interests arising from decommissioning, restoration and environmental rehabilitation funds. As regards liabilities arising from past events, IAS 37 deals with provisions, contingent liabilities and state-contingent assets. In short, the IASB already has the basis on which environmental information at the corporate level can be reported” [15]. The application of these accounting Standards may require additional environmental information. (Smith et al. 2014). IFRS adoption or convergence attracts the attention of foreign investors. Foreign investors, especially from the UK and US, may not only look for financial performance but also for environmental and social performance. Therefore, the firms which expect foreign investment, merger, geographical expansion may disclosure more voluntary information upon IFRS adoption. (Xi et al. 2016) IFRS also encourages voluntary disclosures. IASB has issued “management commentary”, which states that firms adopting IFRS should provide additional information on not monetary business aspects of the firms. However, this is not mandatory (Elbannan2016). Hence, this study will examine differences in stock performance before and after IFRS adoption in Saudi Arabia.

The visibility of the companies is more due to the adoption of IFRS and thus also exposed to the potential expenses like political cost. Disclosing more voluntary information is one of the ways to overcome these expenses. Thus, we can see that companies who adopt IFRS are kore available for increasing the voluntary information and ultimately more CSR disclosure. (Hubert2011) linked with sustainability matters there are some IFRS “IFRIC 3 is linked with the emission allowances and is also linked with trans boundary matters, geographical and segmental disclosures are more explained by IFRS 8. Impairment of the emission light is related to the IAS 38 (intangibles). IFRS 6 (effective January 2009) is related to the mineral resource’s exploration as well as evaluation. IFRIC 1 addresses changes in existing decommissioning, restoration, rehabilitation and similar liabilities. IFRIC 5 gives rights of the interests that is because of decommissioning, restoration and the rehabilitation of the environment funds. Talking about the liabilities   that came from past incidents, IAS 37 is related to provisions, contingent liabilities and state-contingent assets. IASB precisely has the base on information of environment at the level of corporate that can be reported as well [15]. It was researched that in the competitive industry the impacts of IFRS ae more common on the sustainability accounting information.

The more environmental information maybe needed for the application of these accounting standards. (Smith et al. 2014). The foreign investors are attracted toward the convergence and adoption of IFRS. The investors from UK and US may not only search for the financial performance but they also look for the social as well as the environmental performance. Thus, we can say that those companies which expect from foreign investors, geographical expansion, merger may cause more disclosure of the voluntary information of the IFRS adoption (Xi et al. 2016) IFRS also inspire for the voluntary disclosure. The management commentary is issues by IASB which says that the company’s adoption for IFRS give more information on the company’s not monetary aspects of the business. Thus, this is nor compulsory (Elbannan2016). Thus, we can say that those companies which expect from foreign investors, geographical expansion, merger may cause more disclosure of the voluntary information of the IFRS adoption

The International Financial Reporting Standards (IFRS) is a framework of international accounting that provides patterns to the management for financial information management. The objective of IFRS implementations in the organization and firms is to ensure the comparability, transparency, and consistency in the financial statements. There are six principles related to the qualitative financial information and these principles are discussed further in this document. The relevance is the very first principle as well as it also refers to the information which induces an impact on the decision of users. The faithful representation is the second principle implied on representation of phenomena as well as the data under the condition of faithful terms. The comparability is third principle that provides information after having comparisons with conditions, periods and entities. The timelines are very important fourth principle implied on the information available for the decision-makers to overcome as well as facilitate capable information related to the outcomes as well as decisions. The fifth principle is understandability that provides information about the preparation of reports as well as ways to characterize, classify, and develop information concisely (Amelio 2016). Sixth and last principle verifiability that is the identification of differences in the information based on knowledge and consensus. The faithful depiction of information is considered in this type of principle.       

Based on the principles it can be concluded that IFRS is non-compulsory for environmental and social perspectives. The reports of the international accounting standards board (IASB) considers all the reports related to environmental factors and outside of financial statements. IFRS provides guidelines for the measurement and recognition of financial statements under the protection of IAS 16 and 37 (Jose, 2017). Directive 2014/95/EU is used in large enterprises to harmonize the process of accounting with the provisions of non-financial statements. The provisions of statements are under the social, environmental, anti-corruption and human rights-related issues. The aspect of IFRS is vital for the specific groups of companies and prepare reports on social balancing

Stock return of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

The returns of stock market majorly links to the price at the certain company shares are stock trading. According to Foster (1986), there are several organizations that are competing in the market securities on the securities types. Furthermore, these types of security offered on some notable terms and conditions as well as expected returns from the security. On the other side, Leftwich and Holthausen (1983), and Beaver (1998) gave their views and explained that the managers can have effective, accurate and better information on the future performance in their current company rather than external stakeholders like shareholders and investors, financial institutions, suppliers and government.

Disclosure strategies present potentially important means for corporate managers to report their knowledge to outside investors, even if capital markets are efficient (Healey & Palepu 1993).

This will reduce the risk of miss-allocation of resources in the capital markets and the economy but the extent to which the risk is mitigated depends on credibility of the information on the firm‟s economy. The credibility of management disclosures is enhanced by regulators, standard setters, auditors and other capital market intermediaries (Healy & Palepu, 2001). Also with the copying of disclosures and information passed on to the market by one company to another more information is released to the market and this reduces the conflict between managers and outside investors. Eventually this will result to market efficiency and hence value of the share reflecting the information relayed to the market (Velashani & Mehdi, 2008).  

Barry & Brown (1984-1986) noted that when the disclosure is imperfect the risk of forecasting future returns is borne by the investors from their investments. If the risk is non-diversifiable then the investor will demand a higher return for the investment for bearing the information risk. Thus firms with high level of disclosures and hence a lower level of information risk have low cost of capital as opposed to the ones with lower level of disclosure.

The idea that more voluntary disclosure can increase liquidity is demonstrated by Hong and Huang (2005) who present a model in which managers undertake costly investor relation activities to enhance the liquidity of their shares. Frost, Gordon, and Hayes (2006) examine the association between stock exchange disclosure and market development among 50 international exchanges. They find that the strength of the disclosure system (disclosure rules, monitoring, and enforcement) is positively associated with market development, a composite measure that includes two liquidity measures. This result suggests that greater disclosure may result in larger more active markets in which investors are more willing to participate. Hence, we expect greater voluntary disclosure to improve liquidity.

The price at which company’s share are trading on are related to their stock market returns. According to Foster (1986) the kind of security that they offer, companies compete on that basis and the criterion and expectation from that security. According to Beaver (1998), Holthausen and Leftwich (1983) managers know better about their companies and their future work rather than the outsider investors and shareholder or stakeholder like government of suppliers or any financial institute. The price at which company’s share are trading on are related to their stock market returns. In order to report the data to outsider investors the important means are the disclosure strategies of the corporate manager, even if the capital markets are potentially efficient. This happen to reduce the danger of miss- allocation of the resources in the markets but to which extent those dangers are going to reduce depends on the credibility on that information of the economy of the company. The regulators, auditors and other capital intermediates help in enhancing the credibility of the manager disclosure (Healey & Palepu 1993). It also help with passing the information and copying the disclosure to the market to one company to the other company and thus many information’s are released to the market and this help in decreasing the fight between manager and outside investor which ultimately result into the efficiency of the market (Velashani & Mehdi, 2008). In order to report the data to outsider investors the important means are the disclosure strategies of the corporate manager, even if the capital markets are potentially efficient. This happen to reduce the danger of miss- allocation of the resources in the markets but to which extent those dangers are going to reduce depends on the credibility on that information of the economy of the company. The regulators, auditors and other capital intermediates help in enhancing the credibility of the manager disclosure

Stock Liquidity of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

The stock liquidity is very crucial and significant factor for the capital markets operation. As stated by Chordia et al. (2003), the stock liquidity is one of the most significant market quality parameters. The stock liquidity is a term which is discussed and explained several times in to the contemporary financial markets while not only too difficult to understand but this term is very crucial to define. A common interpretation for stock liquidity is the speed and ease with which a share can be sold without impacting drastically its stock’s price. In other words, a stock can be defined as liquid in the concurrent presence of willing buyers when there are sellers. To elaborate more, this balance in this trade-off will not affect the market price since there is always sufficient demand to cover the supply. Quite more recently, Brunnermeier (2009) recognizes three characteristics in liquidity. Firstly, the bid-ask spread, the loss that the trader has in a direct purchase and sale of an asset. Secondly, the market depth, which constitutes of the number of units the trades can deal without affecting the price. Finally, another characteristic is market resiliency that can be defined as the time that it takes the price to recover after a shock. Hameed et al. (2010) support that during financial crisis periods, liquidity can vanish. This specific friction in the market, called illiquidity has triggered the attention of not only investors, traders and regulators but also academics.

There are several factors that can influence liquidity as suggested by previous studies. There is an   extensive amount of both theoretical and empirical evidence of the association between liquidity and volatility. Indeed, evidence from the most recent 2008 financial crisis as well the 2010 flash crash proves that during those periods when uncertainty increased, thus volatility skyrocketed, liquidity vanished from the markets and stock prices fell dramatically. Moreover, prior literature supports also an association between the two. Amihud & Mendelson (1980) document that when market volatility is high, liquidity is low. Stoll (1978) is consistent with Amihud, since he finds that bid-ask spread in a risk averse market increases with volatility. Also, Pastor and Stambauch (2003) find that volatility negatively influences liquidity. However, further literature based on information-based models, proves that the relationship between liquidity and volatility can be either negative or even positive. According to Tinic (1972) the relation is found to be positive. Moreover, Chordia et al. (2001) finds also a positive relation between market liquidity and trading activity.  Another relation is that of stock size and liquidity. Many studies report that small stocks are more illiquid. There is also evidence arising from literature that small stocks are more illiquid as documented by Pastor and Stambauch (2003). Investor’s behavior is another factor that influences liquidity. Investors are prone to follow either optimistic or pessimistic views. Benos (1998) claims when there is an abundance of over-optimistic investors in the market then the liquidity increases.

The idea that more voluntary disclosure can increase liquidity is demonstrated by Hong and Huang (2005) who present a model in which managers undertake costly investor relation activities to enhance the liquidity of their shares. Frost, Gordon, and Hayes (2006) examine the association between stock exchange disclosure and market development among 50 international exchanges. They find that the strength of the disclosure system (disclosure rules, monitoring, and enforcement) is positively associated with market development, a composite measure that includes two liquidity measures. This result suggests that greater disclosure may result in larger more active markets in which investors are more willing to participate. Hence, we expect greater voluntary disclosure to improve liquidity.

Finally, following prior studies, it seems fair to suggest that there is a link between asymmetric information and market liquidity. For instance, Chae (2005) documents that market liquidity decreases when there is severe asymmetric information. Likewise, Suominen (2011) testifies that liquidity traders start trading more timidly and make use of limit orders more often to guarantee a price since their uncertainty rises. As Amihud, Mendelson and Pedersen (2005) state in their study, public market are characterized by transparency and regulation regarding disclosure, thus reducing information gap and increasing liquidity.

In Saudi Arabia, the Saudi Vision 2030 drawn up in 2016 envisions the development of an advanced financial and capital market that is accessible from any part of the globe, enabling higher funding opportunities and triggering economic growth. It also envisions the continuous facilitation of the Saudi government of the access to investing and trading in stock markets and listing private Saudi firms and state-owned ones like Aramco. This calls for the need to deepen liquidity in Saudi capital markets to support the role of the debt market and open avenues for derivatives market. In this regard, a greater level of ownership could influence liquidity as retail investors are expected to be net sellers with more foreign capital injected to the market. In the current times, the retail investors constitute 85% of the trading, despite the fact that ownership accounts for only 1/3rd of the market (Al Rajhi Capital, 2014).

The factor of liquidity is considered as quite focal in the functions of capital markets and in reference to Chordia et al, it is considered as one of the most critical attributes of quality of market. It is a terminology that is often found in discussion in the area of contemporary financial markets however it isn’t very easy to understand but also to elaborate. A very common explanation can be given as a brief representation for liquidity of stock is the velocity and flexibility with which a share can be sold extracting the chance of impacting its stock price. In other context, a stock can be elaborated as the liquid present in the same dimension where attractive buyers are involved at the time of selling. To define more briefly this balance among the trade-off will not be in a position to impact the price of the market since there is always an enough demand in the market which could easily cover the supply. In the recent times Brunnermeier have endorsed three important attributes present in liquidity. In the first case bid-ask spread, second factor is the loss which trader suffers from the direct purchase and sale of its goods, the depth of the market, finally the last factor is resiliency of market that can be elaborated as the space of time it needs to get back in the same position after a loss.

There can be many types of critical factors that can bring impact on the liquidity as referenced by previous studies. They can find a huge amount of theories and evidence of empirical formulations which is a clear evidence of the connection among liquidity and volatility.  Definitely, the most recent example or evidence is from the financial crisis of 2008 and also the flash crash which occurred in 2010 which is clear indication that during this time span when the level of uncertainty takes a hike , volatility values goes up, liquidity vanishes from the market and the prices of the stock goes down dramatically. However, literature from the past have supported this association that in the time when market volatility goes up liquidity goes below.

Stakeholder Theory of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

Under this theory, optional disclosures, including disclosure of sustainability practices, affect equity prices equally for all market participants (Kim et al., 2014). Hence, it can be assumed that disclosure of sustainability practices will be valuable to stakeholders and will affect stock prices and directly reflect on market share prices and returns (Aerts et al., 2008).

Stakeholders are more viable to regard the company’s CSR commitment honestly and predictable when on the other hand the managers are working very hard to make their companies more viable and transparent, which ultimately strengthen the goof company-stakeholder relationships. This theory is explaining the optional disclosure and the disclosure of the sustainability practices that has impact on equity prices that are equal for all the participants of the market (Kim et al., 2014). Thus, we can say that stakeholders have share some value about the disclosure of the sustainability practices and thus eventually effect the stock prices too (Aerts et al., 2008).

In summary, the theory suggests that corporations should not only be profit minded when doing business, but also they must ensure that all activities carried out by them should not affect the community negatively (Anbumozhi, Chotichanathawewong, & Murugesh, 2011).

This theory give the evidence that corporations should not keep their mind on profit when they are dealing with their business but they should also keep an eye on the activities that they do should not have the negative impact on the community (Anbumozhi, Chotichanathawewong, & Murugesh, 2011).

Furthermore, when managers work hard to make their companies more transparent, stakeholders will be more likely to regard firm’s CSR commitment as genuine and predictable which may strengthen even more the good firm-stakeholders relationships. Indeed, managers seeking stakeholders support and cooperation have incentives to use transparent communications strategies. In fact, low transparency is likely to lead to doubts about firm’s commitments and may result in less motivated and more cynical shareholders. Hence, under the stakeholder theory, we expect CSR to be positively related to stock price informativeness.

Stakeholders are more viable to regard the company’s CSR commitment honestly and predictable when on the other hand the managers are working very hard to make their companies more viable and transparent, which ultimately strengthen the goof company-stakeholder relationships. Managers always search for the support of the stakeholders and also the company’s incentives to use transparent communications strategies. This theory is explaining the optional disclosure and the disclosure of the sustainability practices that has impact on equity prices that are equal for all the participants of the market

Signalling Theory of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

According to signalling theory, the senders (managers) hold private information about the firm, and the receivers (stakeholders) already have some information about the firm, but would like to have this private information as they think that this information may help them to make better decisions. Thus, information asymmetry between managers and stakeholders arises, and this problem may have a negative influence on the firm’s transparency. Consequently, managers have incentives to enhance transparency and prove their ability to manage the different activities of the firm. Voluntary disclosure is one of the signalling means, whereby firms disclose more information than is mandatorily required by laws and regulations in order to signal that they are better than other firms (Campbell et al., 2001). Stakeholders who receive these signals and interpret them as expected by managers may reward the managers with favourable consequences, such as an increase in the firm’s market value or a reduction in its cost of capital (Connelly et al., 2011; Cotter et al., 2011; Omran and El-Galfy, 2014).

In accordance with the signalling theory, managers are senders who have access to private information about an organization. While stakeholders are perceived as receivers of this private information (limited information) as they consider that private information can support better decisions. Therefore, the information asymmetry problem arises between shareholders and managers of a firm. Such issues cause problems for the firm’s transparency. As a result of this, managers are given incentives to support the firm’s transparency and to promote their abilities regarding various responsibilities at the workplace. Thus, voluntary disclosure is considered as one of the signalling means. Firms disclosing more information are obliged by the laws and regulations to signal that these firms are relatively better firms than other competitors  (Campbell et al., 2001). Thus, stakeholders taking advantage of these signals give rewards to managers for favourable consequences. Some examples are increased firm’s market value and a decrease in the cost of equity (Connelly et al., 2011; Cotter et al., 2011; Omran and El-Galfy, 2014).

In addition, in order to reduce information asymmetries and market uncertainty, firms are expected to adopt good corporate governance practices (Jensen and Meckling, 1976). A reduction in information asymmetry could: (i) offer equal opportunities to both large and small shareholders in accessing information, which may help in reducing agency problems and the cost of capital (Morris, 1987; Hearn, 2011; Sharma, 2013); (ii) help the firm to attract both local and foreign investment and provide higher liquidity (Healy and Palepu, 

2001; Chung and Zhang, 2011);

Additionally, firms respond to market uncertainty and reduce information asymmetries by ensuring the adoption of corporate governance practices (Jensen and Meckling, 1976). Controlled and decreased information asymmetry issues generate positive outcomes such as provide equal opportunities for accessing the firm’s information to both small and large stockholders. As a result, they contribute to the reduction of agency problems and related negative impact on the cost of capital (Morris, 1987; Hearn, 2011; Sharma, 2013). Moreover, reduced information asymmetry issues support an organization to attract foreign and local investors to invest their savings in the firm. Thus, the overall liquidity of the firm increases. (Healy and Palepu, 

2001; Chung and Zhang, 2011).

and (iii) enhance the market as a corporate control mechanism and, in turn, help to create a highly efficient market (Klein et al., 2005). Therefore, the association between sustainability disclosure and liquidity is suggested by signalling theory indicating that firms’ increased disclosure serve to reduce the information asymmetry between the firms and investors, and thus increase the stock market liquidity to firms.

Furthermore, such practices result in the increase of corporate control mechanism that encourages a firm to develop a new highly efficient equity market for the firm (Klein et al., 2005). Thus, the signalling theory associates the firm’s liquidity with sustainability disclosure. Consequently, increased information disclosure cause to bring down information asymmetry issues in the firms. Moreover, the overall market reputation of the firms gets improvement from these practices.

Legitimacy Theory of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

Therefore, in order for companies to maintain their legitimacy status, they disclose the corporations view on various environmental and social issues in order to make impressions about the company’s activities; they do this through the legitimacy device, usually the annual report.  Hence, the legitimacy theory suggests that when firms disclose information on sustainable development, this improves their reputation which in turn will attract members of the society. The attraction could lead to the influx of highly qualified employees, investors and more customers, hence leading to better performance of the firm. This theory attempts to explain sustainability reporting as a determinant of firm performance and expects a positive link from sustainability reporting as a determinant of stock performance and liquidity.

Companies main their image in the market by communicating about environmental and social issues. In annual reports, companies translate their involvement in social issues as well as legitimacy status of the company. Considering the legitimacy theory, firms ensure sustainable development and improvement in their market reputation by representing the corporate social responsibility of the firm. Although, it increases attraction society members towards the firm. Some common results of this legitimacy theory are new potential investors, more customers, and highly qualified employees which contribute to the betterment of the firm’s performance. In this theory, sustainability reporting is considered as a determinant of a firm’s performance. Sustainability reporting is expected to generate a positive impact on liquidity and stock performance. 

Generally, corporate performance is measured on the basis of the extent of profit maximisation. According to Ramanathan (1976), legitimacy theory perceives profit maximisation broadly as a measure of organisational legitimacy. Adams and Roberts (1995) argue that firm requires managers to provide adequate information to shield their self-interests to maintain, promote and legitimise relationships. Managers provide adequate information to avoid probable regulatory intervention (Gray and Roberts, 1989). Lindblom (1994) and Rizk (2006) argue that firms’ actions can be legitimised using three approaches. Firstly, stakeholders have to be made aware of alterations in firms’ performance. Secondly, stakeholders’ perceptions have to be changed rather than their actual behaviour. Thirdly, stakeholders’ concerns have to be diverted to other relevant issues with a view to influencing their perception. 

A general method to measure corporate performance is to determine the level of profit maximization. In accordance with Ramanathan (1976), legitimacy theory considers the concept of profit maximization as a measure to determine firm legitimacy. Following the studies of Adams and Roberts (1995), organizations require managers to ensure delivery of adequate information to stakeholders for shielding their self-interests in maintaining and promoting the legitimise relationships. Moreover, adequate information is required by the managers to avoid regulatory interventions in firms (Gray and Roberts, 1989). In accordance with the research work of Lindblom (1994) and Rizk (2006), three approaches make the firm’s decisions legitimised. Firstly, stakeholders are given information regarding alterations in the performance of firms. Secondly, changes are made in stakeholders’ perceptions instead of their actual behaviour. Thirdly, stakeholders’ concerns and interests are directed towards other relevant issues to make changes in their perceptions. 

 Disclosure plays a significant role in each of the above-mentioned approaches. Managers can easily contact stakeholders and society by revealing information deliberately. That is why managers will endeavour to legitimise corporate actions as well as their managerial positions. To elucidate disclosure practice, legitimacy theory has been applied. Most disclosure studies, such as on social and environmental disclosure, have been based on this theory. The concept of disclosure is supported by the evidence of these studies, which are perceived as a means of legitimacy (Deegan, 2002).

In all above-stated approaches, disclosure has a significant role. The deliberate revealing of the firm’s information by managers develops a contract with stakeholders and society. Therefore managers are endeavoured to legitimise corporate practices and managerial position. Moreover, legitimacy theory is implemented to elucidate disclosure practices. Thus, legitimacy theory is a base for disclosure studies (e.g. social and environmental disclosure). In several research studies, this theory is supported by evidence about its positive impact (Deegan, 2002).

5.4.4 Agency Theory of Corporate Sustainability Reporting and its Impact on Stock Returns and Liquidity: An Empirical Investigation of the Listed Firms in the Kingdom of Saudi Arabia

Agency theory is generally employed in accounting research to explain the manager incentives for voluntary disclosure (e.g. Cerbioni and Parbonetti, 2007; Lim et al., 2007; Li et al., 2008; Von Alberti-Alhtaybat et al., 2012).

According to agency theory, the ownership of a firm (the principals) authorises the mission of managing the firm to the agent (the managers). The agency relationship that results from the separation between the stockholders and the management may create a conflict of interest between the principals and the agent. This conflict leads to an agency problem when managers tend to make decisions that achieve their own interests, even though these decisions could be harmful to the interests of principals. Consequently, this relationship could lead to an information asymmetry problem due to the fact that managers have more access to than shareholders (Jensen and Meckling, 1976). Contractual agreements are a means of alleviating the agency problem as they help in bringing shareholders’ interests in line with managers’ interests (Healy and Palepu, 2001).

The management of an organization has incentives for voluntary disclosure in the accounting research which is generally known as agency theory (e.g. Cerbioni and Parbonetti, 2007; Lim et al., 2007; Li et al., 2008; Von Alberti-Alhtaybat et al., 2012). In accordance with this theory, the principals or owners of an organization give authority to the agents (recognized as managers) regarding the management of the firm's operations. However, the different perception of shareholders and management results in the creation of “conflict of interest” between agents and principals. While it encourages agency problem when managerial staff primarily pay attention to their interest rather than considering the interest of principals. Although, it can also cause information asymmetry problem. Such issues arise when managers are given access to more than stockholders. (Jensen and Meckling, 1976). Somehow, agency problems can be alleviated by contractual agreements which enable the shareholders to maximize alignment of their interest in the firm's decision-making process with the managers.  (Healy and Palepu, 2001).

These conflicts concern a core  variable namely, informational asymmetry. To this end, the governance practices have to provide and maintain shareholders’ rights and ensure that information asymmetry is mitigated along with the agency conflict between minority and controlling shareholders as this can significantly impact managers (La Porta et al., 2000). With regards to and because of the agency conflict, managers may be urged to hide some pertinent information or manipulate it. Such opportunistic and inefficient management activities are expected to lead to selective information disclosure. This is availed on to hide inefficiencies or expropriation of wealth and this could mean more increased information asymmetry (Prommin et al., 2014). Nevertheless, with firms characterized by robust governance, managers are monitored more strictly through mechanisms and are therefore, not as able to hide information. Hence, stronger governance is considered to lessen information asymmetry for the firm, and as such, it increases firm transparency (Leuz et al., 2003). In theory, investors holding greater firm information are expected to be more inclined to invest, indicating greater confidence in and demand for firms securities that are listed in their sectors and this ultimately leads to increased shares liquidity and stock return (Silva et al., 2014).

These conflicts concerns with core variable named “informational asymmetry”. In such a situation, governance is required to maintain and provide rights to the shareholders while ensuring that agency conflict between managers and shareholders is mitigated properly. Moreover, it also required to control the impact of shareholder’s interest on management (La Porta et al., 2000). Managers sometimes manipulate and hide pertinent information regarding firm because of this agency conflict. Inefficient managerial practices and opportunistic activities cause selective information disclosure issues in firms. The information asymmetry issue increases when managers hide expropriation of wealth or the firm’s inefficient performance from shareholders (Prommin et al., 2014).

Although, in robust governance-based firms, strict mechanisms are developed to monitor the activities managers to control them from hiding information. Thus, a strong governance system can reduce information asymmetry issues for the firm as well as increases transparency (Leuz et al., 2003). In agency theory, shareholders having more firm information are expected to have more inclining behaviour towards investment, which produce confidence for the demand of the firm’s securities listed in various sectors. Such a situation results in the increase of shares liquidity as well as greater stock return. (Silva et al., 2014).

 In summary, an agency problem occurs due to differences in the aims of both the managers and the shareholders. The shareholders need to encourage the managers to perform in the shareholders' interests, yet they do not have appropriate information about the behaviour of those managers. However, the managers behave in a way that satisfies their own interests, even if it conflicts with the shareholders' interests. One way to alleviate this problem, according to agency theory, disclosing voluntary information by firms’ managers which tends to reduce the agency costs resulting from conflicts between firms’ managers and shareholders.

In terms of corporate governance, a multi-theoretical framework, including agency theory and legitimacy theory, is used.  Agency theory has been applied in many studies related to voluntary disclosure to explain the role of diverse corporate governance practices (see Jensen and Meckling, 1976, Michelon and Parbonetti, 2012), as the theory provides a strong framework to link disclosure practice to corporate governance and considered to be appropriate for an organisation’s behaviour topics related to information asymmetry (Barako, Hancock and Izan 2006). However, as the study targets SR, which is based on the broader view of stakeholders, the use of agency theory on its own to examine the effect of CG on SR and stock return and liquidity is inadequate as the theory overlooks other types of stakeholders (Freeman, 2010). Therefore, to overcome this issue, following the suggestion of Eisenhardt (1989), agency theory is used in combination with legitimacy theory, that have been dominant in many SR studies (see Anas et al., 2015; Chan, Watson and Woodliff, 2014; Tan, Benni and Liani, 2016), are also applied. The multi-theoretical framework of agency theory and legitimacy theory not only allows the argument for the effect of corporate governance on voluntary disclosure like SR to be developed but also explains corporations’ involvement in SR and effect on stock market.

Summarizing, the key reason behind the agency problem is differences in the interests of both parties (managers and the shareholders). The shareholders put pressure on the managers to take decisions and do activities in the best interest of shareholders. However, they do not have access to the actual information about the behaviour of agents  (managerial staff). Somehow, the managers are mainly focused on the strategies and practices that cover their own interests, even if it causes conflicts with the interest of shareholders. An appropriate method to mitigate this problem is to promote voluntary information disclosure by the managers of firms. Thus,  agency costs caused by conflicts between firms’ managers and shareholders can be reduced.

A multi-theoretical framework which includes the agency theory and legitimacy theory is used as corporate governance.  Several research studies have discussed Agency theory in relation to voluntary disclosure of information to elaborate on the role of diverse corporate governance actions in a firm (Jensen and Meckling, 1976, Michelon and Parbonetti, 2012). Thus, this theory is supportive for the strong corporate governance and disclosure practices at firms for positive managerial behaviour regarding information asymmetry problem (Barako, Hancock and Izan 2006). Additionally, the broader view of stakeholders also concerns with the impact of CG on SR and overall return by the firm’s stock and liquidity considerations for shareholders (Freeman, 2010). Thus, to resolve such issues, Eisenhardt (1989) suggested the combined application of agency theory and legitimacy theory. This is solution is also backed by several other research studies on (see Anas et al., 2015; Chan, Watson and Woodliff, 2014; Tan, Benni and Liani, 2016). The multi-theoretical framework (combined application of legitimacy theory and agency theory) not only provide strong arguments regarding the impact of corporate governance on voluntary information disclosure (e.g. SR to be developed) but also put light on the impact of corporations’ involvement in SR on firm’s equity market.