Anti-corruption disclosure as a necessary evil: impact on profitability and stability of extractive firms in Africa
| DOI | https://doi.org/10.1108/JFC-09-2020-0173 |
| Published date | 25 January 2021 |
| Date | 25 January 2021 |
| Pages | 531-547 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Emmanuel Tetteh Asare,King Carl Tornam Duho,Cletus Agyenim-Boateng,Joseph Mensah Onumah,Samuel Nana Yaw Simpson |
Anti-corruption disclosure as a
necessary evil: impact on
profitability and stability of
extractive firms in Africa
Emmanuel Tetteh Asare
Department of Accounting, Business School, University of Ghana, Accra, Ghana
King Carl Tornam Duho
IMANI Centre for Policy and Education, Accra, Ghana and
Dataking Consulting, Accra, Ghana, and
Cletus Agyenim-Boateng,Joseph Mensah Onumah and
Samuel Nana Yaw Simpson
Department of Accounting, Business School, University of Ghana, Accra, Ghana
Abstract
Purpose –This study aims to examine the effect of anti-corruption disclosure on the profitability and
financial stability of extractive firms in Africa. It also tests the convergence of profitability and financial
stability.
Design/methodology/approach –The study uses an unbalanced panel data of 27 firms operating in five
African countries covering the period 2006–2018.Ant i-corruption assessment is done in line with GRI 205: Anti-
Corruption. Profitability is measured using the return on asset and return on equity, whereas the z-score
measures financial stability. The study uses the panel-corrected error regression technique for estimation.
Findings –There is evidence that corruptiondisclosure reduces the financial stability of firms. Disclosures
on corruptionanalysis and corruption training are the main factors driving the reductionin financialstability.
The effect on profitabilityis not significant except in the case of disclosure on corruptionresponse, which also
reduces profitability.There is strong statistical evidenceto suggest that profitability and financial stability of
extractivefirms converge. This suggests that less-performing firms catchup with high performers.
Research limitations/implications –The study has relevant implications for practitioners,policymakers
and the academic community. The study uses data that is skewed towards large extractive firms.
Originality/value –This study is premier in exploring the effect of anti-corruption disclosure on
performance metrics among extractivefirms in Africa. It is also unique in providing a test of both beta and
sigma convergenceof performance among the firms.
Keywords Institutional theory, Global Reporting Initiative, Convergence, Anti-corruption disclosure,
United Nations Global Compact, Extractive Industries Transparency Initiative
Paper type Research paper
The authors appreciate without implications, the support of the Editorial Team, including Professor
Barry Rider OBE, Mrs May Li - Hong Xing and Ms Angela Futter. The authors wish to acknowledge
the support of the Global Reporting Initiative (GRI), specifically Bianca Covlescu and Beatriz Fatio
Vasconcelos for sharing some relevant datasets at the initial stages. We also thank Divine Mensah
Duho and Wise Delight Duho for their support during data collection. This study is part of the
academic thesis of the second author.
Funding: This research received no external funding.
Anti-
corruption
disclosure
531
Journalof Financial Crime
Vol.28 No. 2, 2021
pp. 531-547
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2020-0173
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
1. Introduction
Corruption is not an emerging issue but is as old as human existenceand has persisted over
the evolution of human society (Alemann, 2004). In spite of the arguments in literature on
the possible benefits of corruption (grease the wheel hypothesis), corruption in Africa
inhibits development as it follows the “sand the wheel”hypothesis (Méon and Weill, 2010;
Hope, 2020). Corruption leads to diversion of state resources, increases political risk and
leads to legal and compliance costs to firms. Corruption is the use of power for private
gain. The discussions on corruption have overfocused on public sector corruption while
ignoring private sector corruption, which contributes to the former. The risk of
corruption is excessive in high investment sectors and so the extractives industry has
been a hotspot for corruption (IMF, 2019). In Africa, corruption issues are even more
worrying as different forms of corruption continue to persist, at the face of weak
institutional frameworks and proliferation of bad governance (Hope, 2020). A typical
insight on how corruption is perceived in Africa is evident in the yearly corruption
perception index heatmap that is published by TransparencyInternational.
There are various measures put in place by the private sector to reduce corruption, and
anti-corruption disclosure is one of these (Duho et al., 2020a). Blanc et al. (2017) found a
positive impact of anti-corruption disclosure on the reduction of corrupt practices in firms.
The typical factors considered under these disclosures include an extensive corruption risk
analysis; training and effective communication on corruption to both internal and external
stakeholders; and, finally, the responsesthat firms put in place after there is an incidence of
corruption (Duho et al., 2020a;Barkemeyer et al., 2015;Sari et al.,2020). The Global
Reporting Initiative (GRI) is one of the standard-setters driving broader sustainability
disclosure and has since been including corruption issues as part of its disclosures. Previously,
corruption was included as part of the social indicators but in the recent standard, the GRI 205:
Anti-Corruption, the GRI has included anti-corruption under financial indicators. This dramatic
change shows the importance that such indicators play in driving financial performance. It is
not just a social issue; the finances of firms could be affected as well.The question is as to what
direction of effect the disclosure of anti-corruption efforts has on performance. Research in this
area has been sparse in the literature and the nexus is explored in this study.
The study explored the effect of anti-corruptiondisclosure on return on asset and return
on equity financial stability. The following are the research questions that the study
addresses:
RQ1. What is the effect of anti-corruptiondisclosure and its components on profitability
and financial stabilityof extractive firms in Africa?
RQ2. Do profitability and financial stability of firms converge among extractive firms
in Africa?
The study applies the panel-correctedstandard error regression on a sample of 27 extractive
firms in Africa over the period 2006–2018. The results suggest that anticorruption
disclosure of firms reduces both profitabilityand financial stability of extractive firms. This
shows that disclosure increases costs to firms and is a necessary evil. Firm size, United
Nations Global Compact (UNGC) membership, favourable corruption perception index and
economic development are drivers of positive performance. High debt in the capital
structure reduces financial stability and stock market cross-listing impacts stability
negatively. Mining firms appear to be less profitable as compared with energy firms while
multinational enterprises are less profitable as compared with non-multinationals. The
study found that Extractive Industries Transparency Initiative (EITI) membership and
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