Financial Information Transparency Influence On Investor Behaviour In The Saudi Stock Market

Financial Information Transparency Influence On Investor Behaviour In The Saudi Stock Market.

CHAPTER 1
INTRODUCTION TO THE STUDY
This chapter introduces the topic of the study. It presents the financial information transparency influence of the investor behavior in the Saudi Stock Market. The major subtopics that this chapter covers include the background to the study, statement of the problem, the purpose of the study as well as research questions and hypothesis. More so, the chapter covers the relevance or importance of this study.

Background of the Study
Any issues involving finance, for instance in companies and organizations require transparency. Such matters include completeness, accuracy, timeliness as well as thoroughness. Therefore, many investors rely on the reliability of company information and the strategies that such a firm sets to meet the targets. The recent financial crisis in the emerging markets has been caused mainly by a lack of financial transparency. Gelos and Wei, (2002, N.p) argue that lack of financial transparency contributed much to the Mexican crisis of the year 1994 to 1995. Also, the 1997-1998 market crisis came about because of financial system weaknesses (hidden). Also, lack of clarity and inadequate economic data also played a notable part in the claim.
According to Hsiu, (2006, p.14), the transparency of business financial information is very crucial when it comes to influencing the investment strategies from the investors. In fact, most of the investors are attracted by the degree of reliability or quality of the organization data.

That means financial information transparency for the company play a pivotal role to investors when they want to make their investment decisions. The investors would always want to avoid experiencing cases that might lead to their financial losses. Some of these cases which investors have been putting on spotlight include accounting fraud, poor corporate governance as well as misstatements. In the recent past, issues like Worldcom, Adelphia, Enron, Global Crossing, and Merck Nicor among others are some of the cases that have drawn a lot of tension on the side of investors. Every investor would, therefore, want to see reliable, accurate and verifiable company data before they risk their funds into the company. According to research in behavioural finance, the investment decisions are greatly influenced by the information systems together with other market features have a lot of impact on investment decisions. That means, many investors rely on historical information of a specific company before risking their saving in it. But at times, data may be unreliable or wrong. At such circumstances, the probability of these investors to lose funds becomes higher.
Therefore, they always ensure that where possible, the company information is audited and is verified. However, the degree of risks that investors would want to take is not the same. There are those who can invest even when the risk is so high. Such investors can easily risk their capital even when the company information is not only precise but also unreliable. Personal perception when it comes to risks takes a leading role in the stock market. Most of the rational investors rely on the reputation of the company when they want to come up with any decisions about investment. Those firms with high and best reputations become favourable to investors. Every rational investor would buy stock from a company with best ratings regarding standings. They tend to believe that the best-rated companies have no cases of fraud and higher returns are expected when one invests in such a company. In a recent analysis, there has been a definite direct proportional to company reputation and returned anticipations. In fact, those firms in high esteem have reliable financial information, and they rarely mislead investors.
The quality of information also has a significant influence on the cost of capital for firms. The differences in composition, quality and type of information at the end affect the cost of capital. Most of the investors tend to demand would want to hold stocks whose private information is more significant. Those informed investors are used to shifting most of their portfolio to utilise the correct information. At the need, the asset prices get influenced by the quality of information for the particular firm (Easley and O’Hara, 2004, 59).
The corporate governance of any particular firm determines the transparency and reliability of any information. In the recent years, various firms in many countries have decided to issue recommendations and corporate governance code with the aim of increasing the level of transparency. The Enron collapse has been a big lesson to the investors. They have decided to emphasise on aspects of corporate governance which include disclosure and transparency aspects. The cross-border portfolios or internationalisation as well as crises that have already taken place the institutions are now more carefully at the corporate governance of any particular firm. In fact, there is direct the relationship between increased transparency in the company information and the firm’s accountability.
Most international investors are attracted to risk their capital in firms with high levels of transparency and accountability in any info that hey issue. According to OECD (1998a), as cited by Mallin (2002, 10), various principles dictate the good governance. Such governance has a repercussion of attracting investors and the net worth of substantial benefits at the end. Such policies include rights and shareholder obligations, treating all the shareholders equally without any form of discrimination, information disclosure, and transparency, as well as independent auditing, executive performance among others. But out of the above principles, the quality of company information is not only highlighted but also detailed for clarity purpose. The corporate governance framework ensures that the information is full, timely and the disclosure is described regarding material facts performance, financial situation, management and structure of the company. To be specific, the company information that requires transparency include: operating and financial results, the structure of ownership, the board members, and management information, both qualitative and qualitative issues about company stakeholders, including employees, prospects and corporate targets. Information requiring such transparency includes execution of complex and unusual transactions concerning the derivative products as well as their specific risk levels.
The Saudi stock market grew to become recognized stock market within the last five years. However, about 70 years ago, the first stock company had started operating in the kingdom of Saudi Arabia (Al-Twaijry, 2007, 5). But formally, the Saudi Arabia stock market was regulated in 1984 and the Saudi shares stock market in 1997. The monetary Agency of Saudi Arabia was introduced in 1990 by Saudi Shares Registration Company. The TADAWUL or Saudi stock market was officially initiated in the year 2001(Al-Twaijry, 2007, 5). Various laws governing the operation of the Saudi stock market were then put in place to ensure confidentiality, reliability, and accuracy of the market information. The capital; the market law was necessary, especially when it comes to serving international investor who can easily be lied due to lack of correct information about the Saudi Stock Market.
Statement of the Problem
There has been the financial crisis in all markets in the world for many years. The insufficient, unreliable and misleading information has played a critical role towards the reported crisis in the financial and capital markets. The losses that have emanated lack of or insufficient financial information to the investors have been tainting the confidence of investors, especially in the capital markets. An example of such issues which even caught the attention of U.S Congress was the year 2002 Enron scandals. In this scandal, most of the accounting information was misleading. The corporate leaders willingly contributed to this failure either due to conflict of interests and intention to loot from the company. Even the auditor, Arthur Anderson also played a crucial role in the scandal because he could not account for the misleading information. Therefore, even the auditor was not independent because he was linked directly to the scandal.
Due to such scandals, investors have lost a lot of funds. In return; public confidence has been tainted in various markets, starting with US stock market where the outrage was centered. Therefore, transparency and reliable company information have become very important for investors because they are usually afraid of losses. There is the need, thus, to avoid the occurrence of such fraud in the stock market to instill investor confidence.
Purpose of the Study
Financial information transparency has a lot of influence when it comes to the behaviour of investors in the stock market. In the past, many cases of fraud emanating from lack of transparency in financial information as well as misstatement have been rampant. Examples of notable high profile cases include issues at WorldCom, Enron, Ade; Sophia, Sunbeam, Tyco have frequently been reported. In fact, by the year 2002 December, the report showed that one out of every ten companies was affected by the fraud cases, which eventually transformed the earnings. Therefore, there is a greater need for financial transparency, which can serve as the primary tool for curbing such cases.
One of the measures which were taken at least to avoid future Enron was the Sarbanes –Oxley Act. The regulation aimed at creating a working and reliable oversight framework which would govern accounting profession. Such guidelines were considered as the significant milestones for fighting fraud in financial and stock markets and eventually bring back the investor confidence in the markets. This research is intended to focus on exploring the influence of economic information transparency when it comes to the behaviour of investors. The geographical coverage would be Saudi Stock Market. The primary areas that the paper would specify on would include corporate performance, decision making for the investors, theories relating to corporate governance and performance, the behaviour of investor regarding trading trends among others. All these series of activities that I will focus on have been utilized.
Research Questions and Hypothesis
This research intends to measure and explore the primary factors for explaining how information transparency influences the behaviour of the investors in Saudi Stock Market. Examples of these companies that are listed in the Saudi stock market include Arab National Bank, Saudi British Bank, Al Raji Bank among others. The findings and recommendations from this research paper are likely to be very useful when designing investor behaviour, trend and possible repercussions for any investor undertakings regarding the investment decisions. Certain traits have been observed over the years regarding the conduct of investors, with some being risk high-risk taker and others lie in the middle between the risk takers and risk-averse. Such class of investors would want a lot of assurance that in case they invest in a particular stock market, then, their funds remain safe with the high probability of reaping high returns in the end.
Therefore, the research analyzed the expectations of the investors on the reliability of the company data. By doing so, the researcher had to utilize various independent variables which eventually have effects on the dependent variable. These set of variables will be the critical determinants of the recommendations once the data is analyzed using the specific tools of data analysis. Therefore, for this paper, information transparency is taken as the significant variable. On the other end, the behaviour of investors was considered as the dependent variable. Therefore, the paper aimed at addressing the effectiveness of the information transparency when it comes to encouraging the investors to risk their funds through investment, especially on the stock market. Below is the specific research question as well as the hypothesis for the paper;
Research Questions
Is there a relationship between investor perceptions of financial information transparency and investor behaviour in the Saudi Stock Market?
Hypothesis
H: Investor perceptions of financial information transparency are significant explanatory variables of investor behaviour in the Saudi Stock Market.
Importance of the Study
There is necessity to understand the relevance of actions so that measures can be taken to control misleading financial information because it can ‘chase away’ potential and current investors. Already, the Sarbanes-Oxley Act of 2002 was one of the measures which the US government emphasized. According to Kulzick(2004), as cited by Hsiu,( 2006,5), the US government is aiming at boosting the confidence of international investors. The principal tool for achieving such objective would be to instill confidence in both local and international investors through ensuring the information that any firm or company releases are accurate, reliable and meet the required standard. This research paper is, therefore, aiming at researching and coming up with the real impact of transparency of that information on Saudi Arabian investors. The research will also open field for related studies because it will not cover all factors that motivate the investors in various stock markets in the world.

CHAPTER II
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
Introduction
This is the second chapter in the paper which comprises the literature of the major ideas that the study is backed. The literature review has been done comprehensively to develop the theory supported by this research. The report for this dissertation focuses on literature which relevant to the problem under investigation which will be addressed in the conclusion and recommendation subtopics.
Literature Review
Business Financial Information Transparency and Disclosure
The theoretical literature applied in this paper is based on theories of transparency in information related to finance. Also, the role played by corporate governance when it comes to winning investor confidence is discussed in this theoretical literature. The paper describes the theories as well as the concepts of transparency in financial information. Then, the second part of the chapter is the corporate governance theories. When one wants to gain the full knowledge of strategies used by investors and what motivate them, then, these theories create a vital knowledge foundation.
Financial Information Transparency
Transparency is essential when winning the trust and confidence of investors. The Di Maggio, and Pagano( 2017,3) explains that the disclosure of any financial information has an effect of inducing externality regarding trade. Where there is info transparency, there is no depression of market price because no hedgers or speculators would have to refrain from trading. In fact, with clear and transparent information, the trading process is accelerated because traders become more visible to the hedgers. The misstatement in financial information is unethical behaviour in the accounting. In fact, it is one way of breaking the rules and regulations through manipulating the financial statements. Similar cases were experienced in Toshiba Company between the year 2006-2014 whereby operating profits ended up being overstated by about $1.2 billion ( Klinsukhon, and Ussahawanitchakit, 2016,1).The lack of financial transparency brought about all these scandals.
The signaling theory by Spence (1973) can be the ideal base for this chapter. According to this theory, the information existing between investors and the company is usually asymmetric. The result of such situation results in complete misunderstanding or even misguidance on the side of investors when it comes to company operations. Modigliani and Miller, as cited by Chen (1999, N.p), argues that managers are entrusted with almost all the information for the company. They take this advantage and either sells overvalued company stock or undervalued bonds. In fact, the outsides end up losing because their knowledge concerning the firm might be so minimal compared to the managers, and can even be misleading in nature.
Financial Information Disclosure Requirements
The company representatives have the mandate of reporting the company information to the public and address any SEC requirements (Hsiu, 2006, 8). There is also independent third party who should oversee and monitor the effectiveness of this information. The internal control system is another party which should track the public company information. For example, in the US, the body tasked with such responsibility include the board of directors from a given firm as well as the SEC. Before the company information is released to the public, it must be approved by the public accountants as well as the committee responsible for auditing. The primary aim of this procedure is to eliminate any case of inaccuracy, misrepresentation, and irrelevancy. After this auditing process is over, the information is now believed to be transparent, efficient and reliable.
To understand the financial transparency in a real sense, the model created by Vishawanath &Kaufinan(2001)cited by (Hsiu,2006,9) becomes relevance in the study. The authors established three criteria for measuring slide, which included reliability and quality, accessibility and relevance. The concept of openness dictated that the information has to be read to the public. The significance of a concept argued that the financial information should be relevant to the investors; meaning, the information concerning companies should be relevant parties like banks and financial institutions when giving loans. Quality and reliability, on the other hand, defines such info as one that is clear, simple and effective. Therefore, outsiders who are independent, like SEC has to play a role in ensuring these criteria are met.
Corporate Governance
According to BusinessDictionary.com (2018, N.p), corporate governance refers to practices and rules that board of directors usually put in place to facilitate fairness, accountability, and transparency in a firm. It involves implicit and explicit relations between the stakeholders. Therefore, corporate governance aims at managing stakeholder relationships in the limited liability companies. North (1994) as cited by (Hsiu, 2006, 10), as cited by argues that there are always informal and formal agreements involving stakeholders when it comes to corporate governance. Various theories about corporate management have come up with varying views about the corporate governance. But one thing in common is that all these scholars are that they adhered to guidelines from Organization of Economic Cooperation and Development. According to Hawley and Williams (1996) as cited by (Hsiu, 2006, 11), the leading theories of corporate governance include stakeholder theory, agency theory and stewardship theory. The three approaches are outlined in details below;
Agency Theory
This theory emanated from various researchers who focused on incomplete information from contracts relating to the insurance industry. Eventually, agency theory was generalized to incorporate public and private limited companies. The focus of the method is to view either employer-employee or employer-contractor relations. The argument tries to get the best representation regarding interests from agent to the principal. In fact, every agent is expected to serve the principal’s interests to the best. When the business owner is dispersed with without active supervisory board, the agency problem is inevitable. According to this theory, agency problem arises because of a delegation of duty by shareholders. When the shareholder has minor interests in the company, such that the ownership is diverse, then it becomes hard for any single investor to spend time and resources in the management. Therefore, Hawley and Williams had a view that the best way to avoid the agency problem is to initiate rules or explicit and implicit contracts so that the agent or managers actions can be aligned with the principals’ interest. The parties, including governments across the world, have come up with the systems of implementing the agency theory either by creating regulations that would govern the actions taken by the managers regarding their respective companies. Examples of these rules include Generally Accepted Accounting Principles (GAAP), Securities and Exchange regulations (SEC) among others.
Stewardship Theory
According to Davis and Donaldson (1997), as cited by Abdullah and Valentine, (2009, 4), steward usually maximizes and protects the wealth of shareholders by ensuring that the firm performs excellently. Such responsibility would ensure the maximization of steward’s utility function. The stewards, in this case, refer to company managers who work with the shareholders to not only making the profit for the company but also protecting the shareholders’ wealth. This theory differs from agency theory because it emphasizes on top management, who are referred to as stewards and no just individual role. These stewards are responsible for integrating their goals to align with those of the Jovanovic, Andreadakis, and Schinckus,( 2016,84). Therefore, the success of the organization acts as the motivating factor for the stewards. The top managers (stewards) always ensure the financial performance is maximized. In fact, the profit-making goal, according to Daly et al., (2003) as cited by (Hsiu, 2006, 15), the stewards rely on profit-making goal for the organization as a way of building their reputation. The idea is backed by Shleifer and Vishny (1997, N.p) who stresses that return on shareholders’ capital is the critical reputation building for the managers because it ensures that investors return and invest more on the company.
Stakeholder Theory
This theory has a specific definition, that ‘any person or group who can be affected either positively or negatively by results of company objectives’. The method also suggests managers have network or combination of relationships which they ought to consider. This theory was incorporated in business management in the year 1970. By 1984; Friedman had developed this theory to include the concept of accountability about various stakeholders. According to Cai &Wheeler (2004, N.p), the combination of organizational and sociological disciplines was utilized when deriving the stakeholder theory.
The study conducted by Luoma and Goodstein in the year 1999 concerning the stakeholder theory and corporate governance in the US indicated that the structure of the board of directors has significant relationship organizational size as well as industries that have strict regulations. The conclusion of this research agreed that more large organizations and highly regulated organizations have more significant numbers of directors who are still stakeholders. These individuals are tasked with monitoring of the corporate performance. According to Dimovski and Skerlavaj(2004,7), financial performance is strongly correlated with technology and information communication.
Corporate Social Responsibility
The model was conducted by Jackson in the year 2003. The research has shown that corporate governance is directly related to the organizational social performance (McGuire, 2003 as cited by (Hsiu, 2006, 39).Therefore, the research concluded that when the firm or organization improve the corporate governance, then, organizational social performance will improve.
The study by Flourish and Walker 2005 focused on the aviation industry. The Study aimed at examining the relationship that lies between financial performance and model of investor confidence. The results of this research led to the conclusion that firms with high profitability index are more attractive to investors. Therefore, by improving on firm’s performance, more interested investors are likely to risk their capital in such company.
Another research conducted by Snider, Hill & Martin on corporate social responsibility concluded that those firms that concentrate on social responsibility are more successful. Therefore, firms have to build their image by investing heavily in corporate social responsibility strategies. By doing so, they are likely to succeed more than those firms that do not engage themselves in corporate social responsibility in their management strategies. Cheng, Ioannou, and Serafeim,(2014, N.p) investigated the impact of superior corporate social responsibility performance on and financial success in a firm. The research concluded that firms whose CSR is right, the probability of experiencing capital constraints is relatively lower. The transparency involved in firms with high CSR results to financial success in such firms. This research also suggests various capital analysis methods to measure such constraints, but the results remain unaltered. These techniques include simultaneous equations and instrumental variables methods.
Efficient Market Hypothesis
Fama came up with this hypothesis back in the year 1970. Under the theory, the author produced degrees of efficiency which included muscular efficiency, semi-strong efficiency, and weak efficiency degree. Under energetic energy, the current stock price of a company is impacted by private and public information. The information under this case is the ‘insider’ information. Under the semi-strong efficiency, all public information is factored into the current stock price of a company. That means industry, economic as well as analysis for the individual company are unable to be utilized when attaining the superior gain. Finally, there is weak efficiency which ascertains that the historical price of a given firm is reflected in the current rate of stocks in a company. In such a case, the investor who wants to superior gain in a company cannot apply the technical analysis for that matter.
Sen, Singh, and Mazumder, (2017, 42) argue that nearly every rational investor in the stock market in the world inquires about the efficiency of the market. When the stock market is efficient, it covers any relevant information available regarding the stock participants. Therefore, the argument emphasizes the importance of reliable and transparent kind of information is necessary to serve any investor to the best interest
Investor Behaviour
Reasoned Action Theory Action theory
This theory was developed by Ajzini Fishbone in the year 1980 cited by (Frederick, and Swanson, 2017, 1). Routledge and was applicable when predicting behaviour intentions in the market. This theory puts together the psychological, physiological, the role theory and the behavioural systems. According to this theory, human beings tend to organize their traits through intentions. Ajez & Fishbein(1980, N.p) claims that when human nature gets the purpose related message, automatically, it alters their determination and eventually reflecting in their deeds or actions.
Various scholars, including Uddin and Gillet and Donaldson and Davis, later on, applied the reasoned out the model in the business set up. According to Uddin & Gillet(2002) cited by (Hsiu,2006,47), the theory incorporates two primary dimensions. These dimensions include investor behaviour constructs as well as their attitudes about the said behaviour. The intentions of investors are mainly affected by corporate governance, regulations, structure of compensation as well as organizational performance. The theory argues that there should be a strong correlation between the investor attitudes with the corporate view. When there are positive corporate attitudes, the investors will get attracted to the organization because it will act as a motivating factor.
Empirical Literature
Over the last few years, various scandals have hit the finances of some companies, leading to losses. Some of these scandals which have severely affected the investors’ confidence include WorldCom, Enron, and Arthur Anderson scandals. But one thing in common is that all the reported scandals came up as a result of information disclosure and issues relating directly to the corporate governance.
Business Financial Information Transparency and Disclosure
This empirical literature review focuses on transparency of financial information. Also, the decisive corporate governance and it’s immediate and long-term impact on the confidence of current and potential investors’ forms fundamental claim of this review. Therefore, it is essential under this argument, to review the investor confidence and corporate governance as well.
Financial Information Transparency
Perera and Thrikawala(2010,1), researched the importance of accounting information transparency to the investors. They focused on Sri Lanka. After analyzing the collected data, they concluded that accounting information is beneficial because it can be utilized when explaining the prices of shares for the banks. Also, the study indicated that investors usually react as per the aggregate of accounting information contained in the financial statements. In fact, investors cannot risk in taking investment decisions if they are not confident in the numbers indicated in the published accounting information, and then they cannot risk their finances. The study concludes recommending that firms should raise the quality of their accounting information as a way of increasing the value relevance of financial statements.
Another study conducted in 2005 by Chiang focussed on Taiwan’s high-tech industry (Sorensen, and Miller, 2017, n.p). The area of research was the signaling theory and transparency in financial information. The study design that the researcher applied was non-experimental, casual and comparative and quantitative. He did thorough research in comparison of constructing theories about the information transparency. His investigation concluded that the relationship between openness in business information, size of the board of directors as well as performance should be positive (Chiang, 2005) cited by (Hsiu, 2006, 50). Also, operating performance and information disclosure are positively correlated.
Financial Information Disclosure Requirements
Baldwin, Cave & Lodge, (2012, N.p) analysis the research conducted by the financial service authority about the transparency and regulatory tool. Government institutions, as well as academicians, had researched the effectiveness of disclosure requirements. This research concluded that information transparency is what both investors and customers’ require. This research acted as an update to the literature review that had been conducted earlier on about the significant factors that arise within the literature.
Corporate Governance
Agency theory
The study was done by RandOy, Down & Jessen(2003) cited by (Hsiu,2006,51) examined the corporate governance and agency theory using Norway and Sweden firms. The experiment applied casual comparative, on-experimental and quantitative design for the study. The literature review compared various contrasting views about the corporate governance. From the empirical studies concerning the agency theory, they noted that a gap exists between the performance of the board and that of the firms they supervise. The structure and ownership of the board contributed to the presence of this kind of gap.
The study utilized 59 public traded companies as the sample for the data. These firms were all located in Norway and Sweden. Their hypothesis for the study, which stated that independent of the board is strongly correlated with the performance was supported by their findings. By using various techniques in data analysis, including multiple regressions, least square method among others, they finally concluded that production of the board usually has a substantial impact on corporate governance. Therefore, there is a strong need to improve board performance for firms because it will result in the success of the company they are leading.
The study by RandOy & Down is an applicable example of the agency theory. Even though it is hard to generalize the results because their research relied on maritime industry only, one can note the impact of agency theory on this study.
Stewardship model
Madison et al.,( 2016, 29) researched the view of family firm behaviour and governance through stewardship and agency relationships. The authors incorporated a total of 107 family firms which were grounded on stewardship theory. The journals and articles reviewed were those published between years 2001 to the year 2014. The authors were keen on the quality of data because they eliminated the older items by searching those that were published between 2014 -2014. Also, the application of significant vital words made it easy to review only the relevant articles. The steward behaviour was highly evident in these firms. Their result led to the conclusion that psychological factors like intrinsic identification as well as motivation are facilitators of the steward behaviour. The survival and high profitability of the family business are guaranteed when most of the employees are family members. The results also indicated that family foster commitment and trust to the employees, creating a ‘secret sauce’ which eventually becomes a competitive advantage against other family businesses. In case outsiders are employed in these family businesses, they are likely to reveal the secrets and thereby creating a loophole for the competing firms to take advantage.
According to the research, there is a common theme in these articles about the theoretical perspectives when it to comes to family involvement. The study also indicated that family involvement usually has the substantial impact on the business. Eddleston & Kidwell (2012) as cited by Madison et al., (2016, 29) argues that there is altruism which makes the children working in family firms to act as stewards. However, the relationship between these children and parents is what matters in this kind of representation.
Stakeholder Theory
Lindsey, Mauck & Olsen (2017, N.p) carried out empirical literature on the role of stakeholder synergy theory. The authors conducted a comprehensive interview to Jim Marmon, who is the owner and the founder of Team Driveaway in the city of Kansas in Metropolitan area. He had a dream of selling his COO, meaning he wanted advice from investment banks to get the best external buyers.
In their result analysis, the authors focused on single individual utility. Therefore, manager derives utility by improving stakeholder outcomes. The excellent solution for improving stakeholder outcomes would be to maximize their wealth and as well as the financial gain (offer price).
The primary issues that Lindsey, Mauck & Olsen wanted to address included; whether the wealth maximization goal of shareholder applies to all financial institutions. Also, the research aimed at investigating the exit strategies for various business owners. Therefore, these authors concluded that stakeholder’s synergy theory is very legitimate to apply when examining the working procedure for the managers.
The researchers noted in the analysis that most of the Managers or owners of various businesses prefer stakeholder approach compared to the shareholder approach. According to Kovner & Lerner (2015), as cited by Lindsey, Mauck & Olsen, (2017, N.p), the community development venture capital (CDVC) started back in 1958 and is associated with small investment Business Company in the USA. One of the conclusions of this study was that the management literature is currently applying the stakeholder theory because of its inclusivity to other goals for the firms. This theory modifies the traditional stakeholder model since it appreciates that other actions increase the wealth of shareholders and increase the outcomes simultaneously.
Corporate Social Responsibility
Nollet, Filis, and Mitrokostas, (2016, n.p) researched to investigate the relationship between organizational social performance and financial performance. The research utilized return on asset and return on capital technique as well as excess stock returns. The researchers also applied Bloomberg’s Environmental Social Governance Disclosure score, which covered S&P 500 between years 2007 to the year 2011. The linear model utilized in that study indicated the negative relationship between corporate social performances and returned on capital. But the non-linear model suggests the positive associations. This study concluded that in the long-run, there is a definite correlation between corporate social responsibility and firm’s performance. Therefore, there should be long-run planning in case the firm has to serve the shareholders’ interests. Nollet, Filis, and Mitrokostas concluded that corporate social responsibility is significant because, in the long run, it affects the profitability of any given firm.
Efficient Market Hypothesis
Jovanovic, Andreadakis & Schinckus, (2016, 177) came up with research concerning the fraud on the market efficient market hypothesis. The paper aimed at giving critical analysis of the year 2014 US Supreme Court judgment. The major issues implicated in their paper were those critical in the financial market. The focus of the empirical literature is the doctrine of Fraud in the Markets as extracted from the Efficient Market Hypothesis (Jovanovic, Andreadakis & Schinckus, 2016, 179). The paper analyzed the implementation of Efficient Market Hypothesis, especially in the Fraud Market Theory. Their research argues that the Supreme Court was supposed to take positions for the second time concerning the Fraud on Market Doctrine. The problems in US court emanated from Efficient Market Hypothesis. The paper concludes by arguing that issues concerning fraud in the market should be given the highest weight because they can alter the investors’ decisions.
Investor Behaviour
Reasoned Action Theory
Awang and Ismail conducted comprehensive research to examine the influence of ethical judgment, subjective norm and attitude on unethical financial reporting. The study was conducted by the accounting practitioners from Malaysia’s banking industry. The survey, which included 121 participant samples was utilized in the reporting process. Partial least square structure equation modeling was used for data analysis.
The research found that subjective norm, attitude and unethical judgment are crucial when it comes to influencing the dishonest financial reporting intention. But such plan was least affected by ethical sense. Therefore, the researcher concluded by arguing that management should be guided and monitored so that they can come up with ways to control any unethical financial reporting from taking place (Awang and Ismail,2017,n.p.) The study was also relevant to the public because it provides insights concerning the fraudulent financial reporting, especially in banks management because it affects depositors and shareholders.
Theoretical Literature
Financial Information Transparency
The signaling theory was developed by Spence in 1973. According to his view, there is unbalanced information that exists in the financial markets. This information has the impact of creating some risks the information users. The argument was echoed by Holzner and Holzner(2002) as cited by Hsiu, (2006,59); who decided to segment the transparency existing in financial information into clearness, clarity and comprehensively. When there is good corporate governance, then, information transparency appears automatically. Lack of information transparency, as well as ethical behaviour, resulted in the recent scandals
Financial Information Disclosure Requirements
The model used to measure disclosure in financial information was created by Vishwanath and Kaufinann (2001) cited by Hsiu, (2006, 59). There are three significant factors by which this model uses to assess information. They include relevance, reliability as well as accessibility. According to this model, companies have the mandate to provide quality, efficient and reliable financial information.
Agency Theory
This model was created by the insurance industry to explain the employer-employee relationships. Later on, the model was expanded to cater for other sectors. The theory is described as when many shareholders possess small fractions of capital, ending up without power to acquire information and influence the firm’s decision making since they do not directly manage the firm (Sikavica &Hillman, 2015, 35).
Stewardship Theory
The stewardship concept was created by Donaldson in 1985( Glinkowsk & Kaczmarek,2015,19).In his model, the integrated both sociological, behavioural and psychological systems. The author expanded the stewardship theory to incorporate manager duality structure. According to his model, firms that are more regulated have many outsiders on the board who can guarantee the shareholders about the performance of the firm.
Stakeholder Theory
Freeman developed this theory in 1984. The 1992 American law defined stakeholders to incorporate customers, employees, community members as well as the suppliers (Hörisch, Freeman and Schaltegger, 2014, 27). In the firm’s aspect, there exists a contact between managers and theses stakeholders. These stakeholders ensure the firm is performing to the maximum to increase the shareholder’s wealth.
Efficient Market Hypothesis
The most famous theory of efficient market hypothesis was Farma’s Efficient Market Hypothesis (EMH). According to this theory; the market has three categories, which include weak efficiency, semi-strong efficiency, and energetic efficiency. The average and rational investor will risk his capital only upon acquiring the information concerning the market from expert groups ( Wallison, 2018,n.p).
Reasoned Action Theory
The Reasoned Action Theory was developed by Ajzen and Fishbein(1980) cited by Hsiu, (2006,59) to predict the behaviour of human intentions. According to this theory, human beings usually organize their practice through the plans. This determination is eventually transferred to their actions. The investor behaviour and corporate performance are strongly correlated. The positive performance of a firm will always motivate investors who would finally develop goodwill to invest in such companies.
Theoretical Framework for the Study
Various theories have been utilized to develop the framework for the study. Some of these theories include the signaling theory by Spence in 1980, reasoned action theory among others (Hsiu, 2006, 60). The concept of financial transparency corporate social responsibility and market efficiency, corporate governance and investor behaviour are some of the critical parts of the study. The theoretical literature puts most of its emphasis on investor perception and financial information transparency. Financial information transparency influence on investor behaviour in Saudi Stock Market is a crucial gap that has not yet had a lot of focus. Therefore, the study will indicate the correlation of the transparency in financial transparency and behaviour of investors in the Saudi Stock Market. The researchers and corporate investors will find this information crucial in their decision making.
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