Corporate Governance, Disclosure and the Role of Nomads: Evidence from the Alternative Investments Market

Abstract

This thesis examines the different areas of agency theory including managerial discretion, corporate governance compliance, voluntary disclosure policies and regulation. The institutional setting for these studies will be the Alternative Investments Market (AIM) as this market provides a unique regulatory environment and distinctive corporate governance features that makes it suitable for analysis. Specifically, AIM, unlike its FCA-regulated main market counterpart, operates under a self-regulated environment, where application of the FCA rules and combined codes are voluntary. This allows great discretion in a firms operation leading to potential agency problems as mandatory disclosure is limited to price-sensitive information, allowing for the presence of information asymmetry. As well as agency theory, one of the main arcs of this thesis explores the role of Nomads. As principle regulator, these firms are charged with ensuring the compliance of their clients with the AIM rules, as well as ensuring the continued success of AIM itself.

The first investigation creates a Nomad reputation index to test how the market responds when companies change to more reputable Nomads. To do this, event study methodology is utilised to examine the abnormal returns earned around Nomads switches. The key findings indicate that when managers switch-up to a more reputable Nomad, a proxy for managerial bonding, the market responds favourably, in spite of the costs associated with hiring a more reputable Nomad. Similarly, when managers make the unnecessary decision to switch to a Nomad of equal rank, the market responds negatively. As there is no intuitive advantage to switching to a Nomad of equal rank, it might therefore be seen as a costly and unnecessary move that will not improve the value of the firm. Therefore, the market reacts negatively, indicating the presence of market discipline as investors are punishing managers for making a decision perceived as unnecessary. The final analysis introduces the concept of ‘strict’ Nomads who are perceived to follow the AIM rules more closely than other Nomads. The reporting lag is used as a proxy and finds a positive relation with switches to a strict Nomad over a lenient one.

The second study examines the determinant of corporate governance compliance with a focus on the effect of regulation. The findings document that regulation has not influenced the level of compliance, but rather there has been a convergence in governance standards over time given the increased awareness and demand for governance attributes. The findings also extend the Nomad reputation analysis with regards to governance and find a significant positive relation indicating Nomads influence governance standards as part of their monitoring role.

The final study examines how the extent of voluntary disclosure is influenced by the company’s corporate governance attributes and the reputation of the Nomad. This study finds a positive relation between the level of voluntary disclosure, board independence and the presence of a nomination committee. Furthermore, this study reveals that voluntary earnings disclosure is a signal for bad news as the LS regression documents a negative relation between abnormal returns and the level of voluntary disclosure. This is corroborated in the event study where the announcement of a notification of results and the subsequent earnings announcement are associated with negative abnormal returns being earned.