Article2014

Financial disclosure and performance of microfinance institutions

55 citations0/0 files storedJournal of Accounting & Organizational Change

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Auditing, Earnings Management, Governance Corporate Social Responsibility Reporting Microfinance and Financial Inclusion

Abstract

Purpose – The purpose of this paper is to analyze the relationship between financial disclosure and the financial performance of microfinance institutions (MFIs). Design/methodology/approach – The paper utilizes ordinary least squares method to analyze the impact of disclosure on financial performance, an ordered probit model to investigate the possible effect of financial performance on disclosure and utilizes a three-stage least squares method to delineate the endogenous relationship between disclosure and financial performance of MFIs. Findings – The paper finds that better disclosure has a statistically significant positive impact on operational performance of MFIs; second, it also shows that improved financial performance results in better financial disclosure. Keeping the endogenous nature of the relationship between disclosure and performance, the paper uses a three-stage least squares method to show that disclosure and financial performance positively affect each other simultaneously. Research limitations/implications – The paper attempts to delineate a positive association between better disclosure on financial performance of MFIs, which can be used for developing a better disclosure policy by management, formulating more effective guidelines for disclosure by the stakeholders and mandating more appropriate laws and uniform disclosure practice by regulators. Originality/value – This is the first study that uses a large number of MFIs from 75 countries; second, it uses a uniform scale of designating a disclosure rating (assigned by MIX Market) to show the relationship between disclosure and performance. Finally, it uses three-stage least squares method to address the possible endogeneity between disclosure and performance.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2010Strategic management a stakeholder approach 1983Separation of Ownership and Control 1997A Survey of Corporate Governance 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2003Corporate Governance and Equity Prices 1999Corporate governance, chief executive officer compensation, and firm performance 1997Disclosure level and the cost of equity capital.

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2018Corporate governance, ethics, internal controls and compliance with IFRS 2016Cooperative social and environmental disclosure and financial performance of savings and credit cooperatives in Kenya 2016Corporate governance, firm characteristics, external environment and performance of financial institutions in Uganda: A review of literature 2022The Effect of Digitalization of Cooperative on Better Transparency and Competitive Advantage 2020Board role performance and compliance with IFRS disclosure requirements among microfinance institutions in Uganda

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