8
H3: Insider ownership levels of publicly traded firms in Chile affect firm disclosure levels.
Boonlert-U-Thai, Meek and Nabar (2006) argue that Chile has the second highest level of
accrual quality (second only to Japan) and pose that earnings quality models, widely used in
empirical studies within the United States, may not be well suited to capture accrual quality when
applied internationally. Ronen and Yaari (2001) develop a mathematical model to demonstrate
that if truthfulness of ex-post disclosures can be verified, insiders can design management
contracts that provide incentives for greater disclosures. They argue that when firm disclosure
levels are low it is easier for insiders and more difficult for outsiders to distinguish between high
performing and low performing firms. In Chile, institutional investors such as AFPs could be
capable of verifying ex-post the truthfulness of disclosures made by insiders to outside
shareholders. Several corporate governance studies predict a positive effect on disclosure when
there are outside block stockholders and when there are minority stockholders on corporate boards
(e.g., Lins, 2003; Klein, 2002). In China, Chan, Lin, and Zhang (2007) find that when government
ownership holdings decrease and institutional investor holdings increase, the demand for high-
quality audits grows resulting in more credible accounting disclosure. Since institutional investor
ownership of publicly traded firms in Chile has increased substantially, we propose the following
hypothesis:
H4: Institutional investor ownership levels of publicly traded firms in Chile affect firm disclosure
levels.
SAMPLE SELECTION
There are 325 companies publicly traded on capital markets in Chile. We use the
Worldscope database to gather information about these companies. Since data availability prior to
1995 was limited, our analysis is constrained to the 1996 to 2005 period. In Chile, all companies
follow the calendar year as the fiscal year. Therefore, we first selected the companies that were
Convention