7055EFA Project Assignment Sample
Impact of financial transparency on corporate governance of UK based organisations listed in London Stock Exchange
Chapter 2: Literature review
Introduction
A literature review is a chapter of research studies that incorporates the theoretical aspects related to a topic. In particular, the literature review chapter of a research study focuses on reviewing the previous studies on a topic to develop the base of the research. The literature review chapter of a research study is normally structured on the basis of research questions and objectives. Here, the chapter has also been developed by considering the research questions.
Concept of financial transparency
Financial transparency refers to the extent to which an organisation provides accurate as well as accessible financial information to the stakeholders. Especially, the stakeholders like shareholders, employees, investors, and the general public are considered important for sharing financial information. According to Zhou, et al. (2018), financial transparency ensures that an organisation is accountable for all its financial activities and helpsthe stakeholders to make informed decisions with the consideration of financial information. The type of information that comes under financial transparency is income statements, balance sheets, and cash flow statements. Along with this, disclosure of information related to financial risks, internal control systems, and accounting policiesis also considered under the aspect of financial transparency. Organisations use financial disclosures, annual statements, and public documents for publishing information. The study byGoodell, et al. (2020), also claimed that financial transparency is not only about the promotion of accountability rather it helpsorganisations to build trust and develop a credible relationship with the stakeholders. It helps in improving access to funding as well as reduction of chances of financial fraud. All the aspects related to the exploration and publishing of financial information come under financial reporting. Other than financial reporting, auditing and disclosure of information are also important for financial transparency. Auditing is the procedure by which a certified public accountant (CPA) or other authorized professionals independently examines the financial records and operations of an organisation. The audit detects any inconsistencies or opportunities for development and offers an unbiased assessment of the organisation’s financial health. While the disclosure is the process of sharing information with stakeholders.
Concept of corporate governance
Corporate governance is referred to the system of rules, processes, and practices which are used to govern an organisationand its management and controlling procedure. According to Yermack (2017), the primary objective of corporate governance is to ensure that an organisation is running ina responsible, ethical, and transparent mannerthatis capable of creating long term values for the stakeholders. The author also states that the roles and responsibilities of the board of directors, senior management, and other important stakeholders are determined by corporate governance. Additionally, it outlines the procedures for accountability, risk management, financial reporting, and decision-making. Transparency, accountability, fairness, and responsibility are among the main principles of corporate governance. The provision of accurate and detailed information to stakeholders about the organisation’s activities, financial performance, and risks is a requirement of transparency. Accountability involves the stakeholders holding the organisation accountable for its performance as well as its decisions and actions. The organisation must treat all stakeholders equally and without bias in order to be considered fair. The organisation must act in a way that is both socially and environmentally responsible. In consideration of the different aspects of corporate governance, the study of Kovermann & Velte (2019), claimed that effective corporate governance can help organisations in improving financial performance, reduction of risks, and enhancement of reputation. Along with this, the promotion of trust, as well as confidence among the stakeholders, improvement of access to funding and capital, are also the benefits associated with corporate governance.
Impact of financial transparency on corporate governance of UK based organisations
Based on the study of Al-Ahdal, et al. (2020), it can be said that financial transparency plays an important role in the promotion of effective corporate governance. With the presence of transparent financial activities, corporate governance can ensure the implementation of effective risk management and decision making process. The author further explores the dimension to explain the aspects through which financial transparency impacted corporate governance. Enhancement of accountability, increase in trust and confidence, reduction of risks related to corruption and fraud, improvement of decision making, and enhancement of reputation are the key aspects related tothe impact of financial transparency on corporate governance. In accordance with Kyere & Ausloos (2021), organisations are held responsible for their financial activities, including revenue, expenses, and financial performance, when there is financial transparency. Stakeholders can hold the organisation responsible for its actions as well as decisions by receiving accurate and easily available financial information.Building confidence as well as trust among stakeholders, including shareholders, consumers, and investors, is another benefit of financial transparency. Organisations can show their dedication to sustainable management by providing clear and accurate information about their financial activities. By having a clear view of an organisation’s financial condition and actions, financial transparency can help in preventing fraud and corruption. Any irregularities or disparities that can point to fraudulent or unethical behaviorcan also be found using this.By giving precise and current financial information, financial transparency can be helpful for better decision-making. Organisations can benefit from this while making decisions about funding, investments, and other commercial endeavors.By highlighting a company’s dedication to accountability, transparency, and responsible management, financial transparency can also help in improving an organisation’s reputation.
Gross profit is an important financial measure for promoting financial transparency because it represents the revenue that exceeds the cost of goods sold (Ledleyet al. 2020). By analysing the gross profit, stakeholders can evaluate a company’s financial performance and efficiency, including their ability to generate profits from their core operations. Furthermore, examining the gross profit margin breakdown can help investors assess how changes in costs or prices affect a company’s profitability. Thus, gross profit is crucial in providing relevant information to stakeholders for informed decision-making.
Independent directors are crucial for financial transparency because they provide an impartial and unbiased viewpoint in a company’s decision-making procedures (Bencomo, 2021). These directors are not involved in the company’s daily operations and have no connections to major shareholders or management. As a result, they can offer oversight and accountability that helps ensure the company operates with the best interests of its stakeholders in mind.
Corporate governance in the UK hasa significantimpacton the business which is driven by financial transparency. The best practices of corporate governance and rules have a long history in the UK and ithas been developed and improved over time. In accordance with Kovermann & Velte (2019), a strong legal and regulatory framework for corporate governance exists in the UK. Businesses need to abide by laws like the Companies Act and the UK Corporate Governance Code, which demand that they provide stakeholders access to clear and accurate financial information.
CEO duality occurs when the same person holds the position of CEO and Chairman of the Board in a company. Some argue that CEO duality can offer a cohesive leadership style and a unified vision. However, others believe that CEO duality can have negative impacts on financial transparency. This is because the CEO, who oversees the day-to-day operations of the company, may also be responsible for supervising the board’s decisions, including those related to financial reporting and governance (Afriyieet al. 2020). This creates a potential conflict of interest and reduces the level of oversight and accountability for the company’s financial reporting practices. Therefore, separating the roles of CEO and Chairman of the Board can enhance financial transparency by providing independent oversight and accountability in the decision-making processes.By providing permission to the stakeholders and holdingorganisations accountable for their financial activities, financial transparency encourages accountability. Organisations in the UK are expected to publish details about their governance frameworks, risks, and financial performance in annual reports and other public papers.
Relationship between corporate governance and profitability of companies listed under the London Stock Exchange
Corporate governance and a company’s ability to make a profit are interrelated with each other. An increase in profitability and better financial performance can result from effective corporate governance.The study of Ahmed, et al. (2020), has identified certain ways through which corporate governance can have an impact on a company’s profitability. Transparency and accountability, effective risk management approach, strategic decision making, talent retention, and reputation are the key aspects as stated by the author. If a company has transparent financial reporting, and corporate governance then it makessure that it is responsible for its activities. This can boost stakeholders’as well as investors’ trust in the business, encourage more money to be invested, raise stock prices, and eventually boost profitability. While, effective risk management is encouraged by strong corporate governance, which can aid a corporation in avoiding costly errors and potential losses. Companies can prevent unforeseen costs that may have an impact on profitability by identifying and managing risks. A firm can also use the framework for strategic decision-making provided by corporate governance to decide on investments, business operations, and other matters. Allowing the business to take advantage of possibilities that can boost financial performance, can result in an improvement in profitability.Not only direct financial benefits, but internal organisations also observe the impact of having effective corporate governance (Al-Ahdal, et al., 2020). For example, the retention of talent or employees gets improved with the presence of effective corporate governance. The attraction and retention of talent become easier if an organisation has effective corporate governance in place. This is because the presence of an effective corporate governance framework works as a factor to attract employees.
According to Ararat, et al. (2017), the London Stock Exchange (LSE) has earned a reputation as a premier international financial center with excellent standards for corporate governance, and the relationship between corporate governance and profitability of companies listed under the LSE is particularly significant.The author has identified certain specific aspects or areas related to corporate governance which can have impact on the profitability of organisations in LSE. For companies listed on the LSE, the UK’s robust legal and regulatory framework for corporate governance is very important. Businesses are required to abide by laws like the UK Corporate Governance Code, which outlines the ideal methods for corporate governance. Companies can improve their credibility and reputation by adhering to certain regulations, which may ultimately result in higher profitability.The study by Kyere & Ausloos (2021), also claimed that investors from all around the world come to the LSE to invest, and they have high standards for the companies that are listed there. By encouraging openness, accountability, and responsible management, good corporate governance can increase investor confidence. More investment and higher stock prices may result from this, which may boost profitability.
Literature gap
A literature gap exists in research studies if relevant information is not available or difficult to access. In this literature review, the literature gap has also been identifiedin regard to the explored information. The literature gap has been identified due to the lack of information onthe secret policies of the companies. Many companies do not reveal their crucial and confidential information which is why this research has faced problems to explore information. However, it is expected that future research by a collection of data can help in exploring the information in this study.
Summary
This chapter of the research study has conducted a literature review of the topic. The previous studies associated with the topic have been explored here.Financial transparency is the level of accuracy and accessibility of financial information provided to stakeholders by an organisation. Particularly, it is thought that communicating financial information with stakeholders including shareholders, employees, investors, and the general public is crucial. An organisation’s management and control procedures are governed by a set of rules, procedures, and practices known as corporate governance. Effective corporate governance is promoted in large part by financial transparency.
Corporate governance can assure the implementation of an efficient risk management and decision-making process with the presence of transparent financial activities. A company’s capacity for profitability and corporate governance are intertwined. Effective corporate governance can lead to higher profits and better financial performance. The London Stock Exchange (LSE) has established itself as a leading global financial hub with high requirements for corporate governance; the connection between corporate governance and the financial success of companies listed on the LSE is particularly important.
Chapter 3: Research Methodology
3.0 Introduction
The present section of the research focuses on depicting the different methodological aspects highlighted through the aspects of a secondary quantitative data analysis on the impact of financial transparency over corporate governance in UK-based organisations that are currently listed on the London Stock Exchange. However, the current section has focused on including the relevant purpose and objectives of the research formulated after the identification of the literature gap, while depicting necessary inferences on research philosophy, approach and design. The current section has also highlighted the data collection and analysis approach for the quantitative data analysis along with the necessary ethical considerations maintained.
3.1 Research Purpose
The current research is aimed at highlighting the impact of financial transparency on the corporate governance levels of UK-based organisations. At the same time, the study has also emerged to gather relevant inferences from organisations that are situated and listed on the London Stock Exchange. The relevancy of financial transparency in the UK organisations’ corporate governance has been assessed within the current study it has also highlighted the necessary aspects and understanding of corporate governance and financial transparency levels. In addition to that, the research has also depicted an essential relationship between the profitability levels of organisations along with corporate governance maintenance levels that have been listed under the London Stock Exchange.
However, from the above analysis, formulated research objectives can be highlighted as follows,
- To understand the concept of financial transparency and corporate governance
- To find out the impact of financial transparency within the UK-based organisations have on its corporate governance.
- To investigate the relationship between Corporate governance and firm profitability of companies listed under the London stock exchange.
3.2 Research Philosophy
Research philosophy is the set of underlying beliefs and attitudes that guide the research design and implementation. It shapes the theoretical framework and assumptions made about knowledge and the relationship between the researcher and the subject matter. Four main philosophical perspectives include positivism, interpretivism, realism, and pragmatism. The choice of research philosophy is important as it determines what data should be collected to support the research. Interpretivism is a research philosophy that emphasises the researcher’s interpretation of the collected data based on personal understanding, which includes human perspectives. However, it was not used in the present study as it does not incorporate human perspectives and inferences.
The research study opted for the positivism philosophy, which entails the collection of factual and objectively true data by researchers. The main rationale behind choosing this philosophy was to facilitate quantitative research by acquiring precise and pertinent information.
3.3 Research Approach
The research approach is a plan that guides the collection, analysis, and interpretation of data to gain a better understanding of the research topic. Abutabenjeh and Jaradat (2018) suggest that the research approach is important in helping researchers identify data and make general assumptions. Three main types of research approaches are deductive, abductive, and inductive. The inductive approach involves the researcher developing a theory based on the observations and patterns they observe during the research process. In contrast, the abductive research approach focuses on constructing theories by examining unexpected or anomalous empirical findings in the context of multiple existing sociological theories and conducting systematic analysis using a methodological approach (Timmermans and Tavory, 2012).
The present study has chosen to utilize the deductive research approach since it involves the collection and analysis of quantitative data, and testing it against existing theories. The choice was made based on the focus on hypothesis testing, rather than the inductive research approach which draws specific conclusions from detailed discussions.
3.4 Research Design
The research design is a crucial element in planning and organising a research study. It provides a systematic and structured approach to collecting and analyzing data to address research questions or explore a topic. Research design includes various types, including observational, exploratory, case study, descriptive, experimental, causal, and correlational, which outline the steps and procedures for data collection, analysis, and presentation.
The research study employs a quantitative research design to investigate how financial transparency affects the corporate governance of UK-based organisations. Specifically, the study explores the relationship between the components of corporate governance in the selected sample. Quantitative research design is a systematic method used to collect and analyse numerical data to answer research questions or test hypotheses (Apuke, 2017). This approach is used to measure and quantify variables, establish causal relationships between them, and is typically characterised by large sample sizes, randomisation, and control over extraneous variables to increase the reliability and validity of the results.
3.5 Research Variables
The formulated hypothesis for the current research is depicted as follows,
H0: There is no significant impact of financial transparency on corporate governance in companies listed under London Stock Exchange
H1: There is a significant impact of financial transparency on corporate governance in companies listed on London Stock Exchange
3.5.1 Gross profit margin
Gross profit is the revenue that remains after deducting the costs associated with producing a product or delivering a service. The GP margin is calculated by subtracting the cost of goods sold (COGS) from the total revenue.
3.5.2 Net profit margin
Net profit is the revenue that company earns after the deduction of all the costs such as operating costs, taxes and interests that companies are liable to spend during a year. The NP margin is calculated by substracting all the costs from the total revenue generated by the company.
3.5.3 Board size
Board size refers to the number of directors on a company’s board of directors. The specific number of directors can be influenced by factors such as the company’s size, structure, and governing policies. Typically, larger companies have a greater number of directors compared to smaller companies. The size of the board can have an impact on decision-making efficiency, as well as the diversity and expertise represented among the board members.
3.5.4 Board independence
Board independence as a research variable can refer to the degree to which a company’s board of directors is comprised of independent directors, meaning directors who do not have any significant relationship with the company, its management, or its controlling shareholders.
3.6 Data Sampling
This study uses a sample of 10 organisations based in the United Kingdom. The data analysed spans the period from 2015 to 2020 and was collected from Thomson Reuters Refinitiv Eikon. This data will be used to analyse the dependent and independent variables in the research.
3.7 Data collection and analysis
The current research has emerged to highlight the collection of secondary quantitative data of the organisations listed in the LSE. Furthermore, the quantitative data has been collected from refinitivelkon website which has been further analysed through statistical platforms of Excel.
Statistical analysis is a crucial process in research that helps to explore the connections between variables and assess hypotheses. This process involves the use of mathematical and statistical techniques to evaluate the data gathered in the study. Its main objective is to recognize patterns, trends, and links in the data to determine the significance of the research findings and the validity of the conclusions. By utilising statistical analysis, researchers can measure and identify the impacts of various factors or interventions on the outcomes. This process is an integral part of research methodology that enables researchers to draw informed conclusions and derive valuable insights from their data. In this study, statistical analysis was employed to examine the relationship between variables, verify the data, and test the hypotheses. The collected data was assessed using analytical tools on the Excel add-ins to perform the regression test.
3.8 Research Limitations
In addition to that, the current research has emerged to face significant limitations in the scope of the financial and time constraints leading to secondary data collection and analysis procedures that have helped the researcher to save additional time taken to conduct the research. The research has encountered difficulties in exploring information due to the lack of disclosure of important and confidential information by many companies. However, it is anticipated that future research that collects data may aid in uncovering the information required for this study.
3.9 Ethical Considerations
There are some serious ethical considerations required to be undertaken for the concerned research topic. The researcher has a responsibility to maintain the confidentiality of the data obtained from the annual financial reports of the chosen companies and must not share it with anyone who is not authorised. Since the study relies on secondary data, there is no requirement to obtain informed consent from the companies. Nevertheless, the researcher should make certain that the information is solely used for research purposes and not for any other commercial intent.
The companies were chosen in an impartial and equitable way using explicitly stated selection criteria that were based on objective measures. The researcher has taken steps to guarantee that the information collected is dependable and precise. The financial reports of the companies have also been checked to ensure that the data is free of inaccuracies and mistakes.
The researcher has taken measures to safeguard the data collected from any unauthorised access or misuse by storing it in a secure location and only granting access to authorised individuals. The study was conducted without any external influence or bias. Depending on institutional regulations, the researcher may need to acquire ethical approval from relevant authorities before conducting the study. All of these ethical considerations are crucial to maintaining the accuracy and reliability of the research findings.
Confidentiality
It is essential for the researcher to maintain the confidentiality of the data obtained from the annual financial reports of the selected companies and not to disclose it to unauthorised individuals. This is crucial in safeguarding the financial information of the companies and ensuring their privacy.
Fairness
It is important for the selection of companies to be conducted in an equitable and impartial manner, with clearly defined selection criteria based on objective measures. This is necessary to guarantee that the study is conducted without any bias or unfairness.
Informed consent
Since the study relies on secondary data, it is not necessary to obtain informed consent from the companies. However, the researcher should take care to utilise the data solely for research purposes and avoid any other commercial intent.
Data protection
The researcher must safeguard the data collected from any unauthorised access or misuse by storing it in a secure location and limiting access to authorised individuals. This is crucial to protect the privacy and confidentiality of the data.
Ethical approval
Obtaining ethical approval from relevant authorities may be necessary for the researcher, depending on institutional guidelines. This is essential to ensure that the study is conducted in an ethical manner and adheres to applicable regulations and guidelines.
Chapter 4: Results and discussion
4.1 Introduction
In research study, in order to authenticate the research and obtain an understanding of the topic, it is essential to gather data and test the same thereby generating more information and knowledge. In addition to this, collection of data and analysis of the same further assists researchers in evaluating the relevance of the secondary findings reflecting the information analysed in the literature review section. In this context, following the research methods such as positivism philosophy, deductive approach and exploratory design, data from the secondary sources have been obtained. Concerning the strategy of the research, quantitative data has been gathered from the published sources such as online websites that include numeric data. In a detailed manner, it can be stated that in order to understand the effect or impact of the financial transparency on the corporate governance of the listed UK organisations, it is essential to evaluate numeric data such as financial data.
In this regard, quantitative data reflecting financial data of 10 organisations in the UK have been collected that represents data from 2015 to 2020. The data has been collected from Thomson Reuters Refinitiv Eikon and it has been used to analyse the dependent and independent variables in the research. In this case, statistical analysis has been integrated such as one sample T-test, correlation and regression which have also helped in testing the developed hypothesis of this research. However, a discussion of the overall findings of the research has been incorporated in this section where a link between the findings of the literature review and collected data has been shown.
4.2 Quantitative analysis
As mentioned above, quantitative data for five years from 2015 to 2020 has been obtained reflecting information related to board size, board independence, gross profit margin and net profit margin of 10 companies in the UK that are listed. However, with the statistical tests the relevance of the data and its significance for the research has been analysed.
4.2.1 Correlation
Correlation is one of the basic statistical tests that researchers conduct in order to analyse the relationship between variables of a study. As per the words of Gogtay and Thatte (2017), correlation test analyses the association between independent and dependent variables of a study thereby evaluating the degree to which the variables are related. In addition to this, it reflects on the kind of relationship the variables share such as whether the relationship is linear or nonlinear. This view sheds light on an understanding that correlation test assists in understanding the rate of change of one variable due to the other one thereby reflecting on the relationship type whether it is direct or inverse. In this case, in order to conduct the correlation, dependent and independent variables have been chosen such as board size, board independence and gross profit margin and net profit margin respectively.
| “Correlations | ||||
| Boardsize | Grossprofitmargn | Netprofitmargin | ||
| Boardsize | Pearson Correlation | 1 | .456** | -.183 |
| Sig. (2-tailed) | .000 | .161 | ||
| N | 60 | 60 | 60 | |
| Grossprofitmargn | Pearson Correlation | .456** | 1 | .145 |
| Sig. (2-tailed) | .000 | .268 | ||
| N | 60 | 60 | 60 | |
| Netprofitmargin | Pearson Correlation | -.183 | .145 | 1 |
| Sig. (2-tailed) | .161 | .268 | ||
| N | 60 | 60 | 60 | |
| **. Correlation is significant at the 0.01 level (2-tailed).” | ||||
Table 1: Correlation test
(Source: Self-developed)
As shown in the first table, a Pearson’s correlation has been integrated that has helped in analysing the relationship between the selected variable with the exposure of the significance values. As emerged, the values of independent variables such as have been .000 and .161 for gross profit margin and net profit margin respectively. In this case, it can be mentioned that the value of the variables have been lower than the significance value of 0.05 or 5% which is considered to be the normal or standard p value or significance value. This implies that the independent variables are directly related to the independent variables. In other words, it can be mentioned that with changes in the independent variable, the dependent variables also change.
Moreover, there is a positive impact of the net profit and gross profit margin on the board size of the companies as analysed. Thus, it can be further added that the variables of the study are statistically significant. In this respect, it can be stated that the financial transparency of the organisations in the UK that are listed have potential and significant impact on the corporate governance structure and practices of the firms. However, this can be further evaluated with the help of the regression test where the validity of the correlation result can be further evaluated with help of the ANOVA test.
4.2.2 Regression
Regression analysis is another significant statistical test that evaluates the relationship between two or more variables in a study. As stated by Montgomery et al., (2021), regression analysis helps in analysing the impact of explanatory variables on the dependent variable thereby evaluating the relationship between the variables. In addition, it also tests the hypothesis thereby assisting the acceptance or rejection of the same depending on the results. Based on this opinion, it can be stated that a regression test helps in understanding the relationship between the variables that are all present in a study reflecting testing of more than one variable. Also, it tests the hypothesis developed and according to the results, accepts or denies the developed hypotheses.
| “Model Summary | ||||
| Model | R | R Square | Adjusted R Square | Std. Error of the Estimate |
| 1 | .521a | .271 | .246 | 12.17281 |
| a. Predictors: (Constant), Netprofitmargin, Grossprofitmargn” | ||||
Table 2: Summary model
(Source: Self-developed)
The summary of the regression test has been provided in the above table where the influence of the independent variables on the dependent ones has been reflected. Concerning the R column value, it has been found that the value has been .521 depicting 52.1%. This reflects that the influence level of the independent variables has been high on the dependent ones thereby stating that financial transparency predicts the corporate governance of the companies in the UK.
| “ANOVAa | ||||||
| Model | Sum of Squares | df | Mean Square | F | Sig. | |
| 1 | Regression | 3145.759 | 2 | 1572.880 | 10.615 | .000b |
| Residual | 8446.111 | 57 | 148.177 | |||
| Total | 11591.870 | 59 | ||||
| a. Dependent Variable: Boardsize | ||||||
| b. Predictors: (Constant), Netprofitmargin, Grossprofitmargin” | ||||||
Table 3: Test of ANOVA
(Source: Self-developed)
The ANOVA test has been included within the regression test that has helped in testing the hypothesis developed where the impact of financial transparency on the corporate governance of the companies in the UK have been tested to know whether it is relevant or not. In addition to this, the ANOVA test has also been incorporated within this research to test the efficiency of the regression test. In other words, it has revealed the potential of the regression test in matching the results of the correlation thereby further assisting the researcher in confirming that the financial transparency has impacted the corporate governance of the UK organisations. In this case, concerning the F ratio column, the result of the test has been evaluated.
The F value represents F (2, 57) = 10.615, p<0.05, which reflects that the result of the regression has been similar to that of the correlation. Based on the result of the regression, it can be stated that the influence level of financial transparency has been high on the corporate governance of the companies. In addition to this, the test has reflected a significance level of .000 which is lower than 5% or 0.05. This further implies that the variables chosen for the regression test have been significant statistically. Moreover, it can be stated that the independent variables such as gross profit and net profit margin have positively impacted the board size of the UK companies reflecting positive relationship between the independent and dependent variables respectively. Also, it can be mentioned that there is a linear relationship between the variables.
Concerning the hypothesis, as the significance level of the regression test has been lower than the standard p value of 0.05 or 5% reflecting a value of .000, it can be stated that there is a direct relationship between corporate governance of companies in the UK and the financial transparency. This indicates that there is an impact on the corporate governance for the financial transparency of the listed UK companies. Hence, in this regard, null hypothesis stating that there is no impact has been rejected whereas alternative hypothesis stating that there is an impact has been accepted.
| “Coefficientsa | ||||||
| Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
| B | Std. Error | Beta | ||||
| 1 | (Constant) | 6.203 | 6.452 | .961 | .340 | |
| Gross Profit Margin | 2.768 | .642 | .493 | 4.314 | .000 | |
| Net Profit Margin | -15.367 | 6.894 | -.255 | -2.229 | .030 | |
| a. Dependent Variable: Boardsize” | ||||||
Table 4: Coefficient matrix
(Source: Self-developed)
Further, a coefficient matrix has been integrated within the regression to test which of the two variables impact the board size in an increased manner. In this context, testing both the variables, it has been found that the significance level of gross profit margin has been .000 and the value for net profit margin has been .030. This denotes that the values of both the variables have been lower than the significant value reflecting the validity of statistical significance of both the variables. On the other hand, comparing the two values, it is evident that the value of gross profit margin has been lower than the net profit margin. In this regard, it can be mentioned that the influence or prediction of gross profit has been higher on the board size compared to net profit reflecting lower significant value. Thus, it can be stated that concerning the variables related to financial transparency, it is the gross profit that has more influence on the board size of the UK companies compared to the other variable.
4.2.3 T-test
T-test is another test that is used for hypothesis testing where it helps in comparing the means of two samples. In addition to this, it tests both the null and alternative hypothesis thereby analysing whether the difference of the mean group is zero in the first case and different from zero for the second case respectively (Wadhwa and Marappa-Ganeshan, 2020).
| “One-Sample Test | ||||||
| Test Value = 0 | ||||||
| t | df | Sig. (2-tailed) | Mean Difference | 95% Confidence Interval of the Difference | ||
| Lower | Upper | |||||
| Boardsize | 13.227 | 59 | .000 | 23.93517 | 20.3142 | 27.5561 |
| Gross Profit Margin | 28.131 | 59 | .000 | 9.06667 | 8.4217 | 9.7116 |
| Net Profit Margin | 15.969 | 59 | .000 | .47900 | .4190 | .5390” |
Table 5: T-test sample
(Source: Self-developed)
Referring to the above table, the difference between the null hypothesis and alternative hypothesis on the basis of the means has been evaluated. In this case, it has been found that the mean difference of the variables have been different from zero reflecting the justification of the alternative hypothesis. In this case, Forkman et al., (2019) stated that a null hypothesis is rejected when the mean difference is greater than zero and an alternative hypothesis is accepted when the mean difference is more than the zero value. In this context, it can be mentioned that the values of gross profit and net profit along with the board size have been more than 0 reflecting values of 9.06, .47 and 23.93 respectively. This implies that the null hypothesis of this study is wrong whereas the alternative hypothesis is true.
In addition to this, the significance values of each of the variables in this test such as board size, net profit and gross profit margin have been found to be .000 which is lower than 5% or the standard significance value.This further states that the relationship between the variables has been positive which is mentioned in the alternative hypothesis of this research. In this case, the significance value has also helped the researcher in understanding which of the hypotheses has been true and thus with the significance of the variables, alternative hypothesis has been accepted and null hypothesis has been rejected.
4.4 Discussion
Concerning the findings of the overall research, it has been found that the financial transparency has been effective on the corporate governance system within the listed UK organisations. In other words, it can be stated that financial information of companies reflecting the performance affects the board and their business decisions. Connecting the words of Zhou, et al (2018), the accountability of the financial transparency reflecting the financial activities and informing the stakeholders with justified financial information can be stated to be broadly related to the board of directors of the company. In this case, it can be stated that it is the responsibility of the board members to decide which information needs to be disclosed to the stakeholders of the companies such as the investors, employees and general public, so that effective decisions can be made by them in support of the company. In addition to this, it can be further said that it is the financial performance, activities or transactions and the policies that board members need to analyse in a detailed manner before publishing any financial information in the annual reports.
Upon further explanation, it can be stated that based on the financial activities and performance of companies, board members can make the business decisions in an efficient manner and also improve the board structure reflecting the arrangement of the number of independent and dependent board members. This is because directors have the power to influence the overall structure, policies and size of the companies thereby having an impact on the decision-making processes. Also, it also helps the board members in understanding the areas of strategic improvement for improving the financial performance such as employee diversity, engagement level and many more (Al-Ahdal, et al., 2020). In this context, following the statistical test, it has been found that the financial transparency of companies have a direct impact on the corporate governance system of the same, thereby stating that financial variables influence the corporate governance variables of an organisation.
Relating to the correlation test, it has been found that the value of the significance level that has helped in understanding the financial transparency of the companies such as net profit and gross profit margin have been low compared to the standard significance value of 5%. This, in turn, provided insight on an understanding that the evaluation of financial performance of companies such as net profit and gross profit has influenced the board size where the directors have planned for the number of directors to be present for making the business decisions based on the performance of the company. It also influences the board in deciding the independence of the members as well as deciding on the level of diversity to be included for improving the overall performance in the operating market. Hence, it can be stated that the test of correlation has potentially reflected a similar result to that of the opinion generated by the authors till date.
Furthermore, concerning the relationship between the two variables and considering the opinion provided by Kyere & Ausloos (2021), it can be stated that the transparency within the financial information such as the income and expenses, and other financial transactions potentially benefit the stakeholders of an organisation as ti enables them in making effective decisions regarding the investment. In addition to this, it reflects the sustainable management of the organisation which further benefits the board members in taking action against any kind of fraudulent activities thereby maintaining the governance within the organisation. In other words, it can be stated that with the financial transparency, the board members receive the opportunity of improving the overall management system of the organisation thereby including regulations and strategies that benefit the companies in mitigating any kind of risks associated. This sheds light on the fact that the financial transparency has significant potential in influencing the corporate governance system in an organisation reflecting both in negative and positive manner.
In this regard, the results of the statistical tests can be stated to be justified as it also helped the researcher in proving that there is a significant relationship between the selected variables of this study. Moreover, it can be stated that the financial information provided by organisations with respect to revenue earnings such as gross profit and net profit potentially help the board of directors in understanding the condition of the organisation. In addition to this, it can be stated that it further assists the board members in helping the stakeholders receive transparent financial information thereby improving their trust level on the board of directors as well as the organisation. Also, it influences the board members in evaluating whether there is any financial fraud within the organisation that has impacted or can impact the business operations thereby assisting in preventing the same. This further improves the governance system of the company and also improves the decision-making capacity of the board members that benefit the company for the long-term.
Furthermore, with reference to the words of Ahmed, et al. (2020), it has been found that the relationship between the financial variables and variables of corporate governance has been interrelated. In other words, an effective system of corporate governance influences the profitability performance and position of companies reflecting a direct relationship between the two variables. Furthermore, it has also been found that due to the improvement in the financial performance especially the variables such as profit levels, it has been beneficial for the board members to undertake decisions in an effective manner that further benefits the growth of the organisations for the long-term. In addition to this, it can be further mentioned that financial transparency further improves the business operations in the organisations with the maintenance of governance within the same that helps in conducting ethical business practices and operations.
In this case, concerning the regression test, it has been found that the influence of the financial transparency has been found to be significant on corporate governance reflecting a percentage of 52.1%. Furthermore, the ANOVA test with the significance level of .000 proved that the influence has been significant which helped the researcher in accepting the alternative hypotheses. In addition to this, with respect to the regression test, it was further analysed as which of the financial transparency variables has been more effective or influential for the corporate governance system in the organisations. In this context, generating a value of .000 compared to .030, the coefficient matrix reflected that gross profit margin has more influence. In other words, it can be stated that with specific financial information such as gross profit, the board members get the opportunity of understanding the capability of the same in generating income from the direct sales.
Moreover, this understanding level further helps the organisational board members in analysing the effectiveness of the operations or activities that are related to the sales. In addition, this further helps the members in analysing whether there is a requirement of improvement or not thereby influencing an effective decision-making system within the organisation. Also, it helps the members in evaluating if there is any kind of error associated with the activities or the financial transactions and with the help of corporate governance, the board members take action against the same and improve the performance of the overall organisation. Therefore, it can be stated that it is essential for organisations to provide the board members with transparent financial information so that it can help the members in taking effective decisions for the growth of the business.
On the other hand, the one-sample t-test that has been conducted also effectively helped the researcher in understanding the validity of the views of the author and the hypotheses developed. In this case, it has been found that the mean differences between the alternative and null hypotheses have been significant as the values have been more than the value of zero reflecting the rejection of the null hypothesis. Moreover, the significance values also have been lower than 5% which further reflected on the positive relationship between the chosen independent and dependent variables of the study. Thus, concerning both the regression and the t-test, it can be stated that the null hypothesis has been rejected and an alternative hypothesis has been accepted.
4.5 Summary
The current section of the research has incorporated an analysis of the secondary data obtained for 10 organisations that are listed within the UK. In this section, with the help of the variables such as gross profit margin, net profit margin and board size, quantitative analysis has been included. The statistical analysis reflected tests like correlation, regression and one-sample t-test which has been further used for the test of hypothesis. The results of the tests reflected an understanding that the independent variables such as financial transparency have a significant impact on the system of corporate governance within the UK listed firms. The significance values for each of the test have been found to be lower than the “standard significance value which is 0.05 or 5%”. In this case, referring to the statistical significance of the variables, it has been concluded that the null hypothesis of the study has been incorrect and the alternative hypothesis has been true. Thus, concerning the research, the latter has been accepted and the former one has been rejected.
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