Discretionary Disclosure, Corporate Governance and Share Price Reaction: Aftermath of the October 2008 Financial Market Crisis

Abstract

Research aims:The purpose of this research is to investigate the impact of the nature and extent of discretionary disclosure of Australian listed entities on share prices subsequent to a major financial market crisis. Further the proposed study also aims to investigate the moderating role of corporate governance on the above mentioned relationship. As a secondary aim, the study will also examine changes in the nature of the discretionary disclosure by Australian listed entities (namely, good vs. bad news and quantitative vs. qualitative data) as well as the medium of such communication (i.e. annual reports vs. website). Background and Justification for Study:The Financial market crisis that occurred in October 2008 wiped out billions of dollars from the stock markets world-wide, and the impact on business organisations is yet to be known. Nevertheless, organisations will need to gain shareholder confidence back and discretionary disclosure will be an important vehicle through which this can be achieved. Discretionary disclosure relates to voluntary release of financial and non financial information through annual report and other means over and above the mandatory requirements, either with regard to the company laws, professional accounting standards or any other relevant regulatory requirements (Dulacha et al. 2006). Prior studies on discretionary disclosure (otherwise referred as voluntary disclosure) by companies indicate a significant growth trend over the two decades. Previous studies on discretionary disclosures have been largely based on two schools of thoughts: Impression management and Incremental information. Impression management is a field of study that originates from social psychology which focuses on how individuals present themselves to others to be perceived favourably by others (Hooghiemstra, R, 2000). Incremental information by contrasty refers managers assumed to have economic incentives to engage in unbiased reporting as it enhances their reputation and compensation (Baginski et al.,2000).In relation to discretionary disclosures, the impression management school of thought, would predict that discretionary information would occur as a means to manage impressions of the organisation or the management (Abrahamson and Park,1994; Hooghiemstra, 2000, Aerts, 2005). In fact empirical results of the studies by Aboody and Kasznik suggest that a higher level of discretionary disclosure is made when firms deal with bad news prior to stock option award periods. However, no study to date has examined, the motivations for disclosure from both the preparers perspectives and as well as the users perspectives. In other words, further research is needed to determine the intentions and usefulness of discretionary disclosure from both these stakeholders - particularly as a result of the financial market crisis.The study will look also examine the impact of managerial dominance (i.e. CEO duality) and audit committee characteristics on discretionary disclosure from an impression management perspective. For example, during the period immediate to the financial market crisis, it is expected that firm experiencing changes in CEO might indulge in greater discretionary reporting as a result of impression management tactics. In addition, most studies on discretionary have focused on annual report (Jameson, D. 2000; Courtis, J.K. 2004b.), interim reports and prospectus (Courtis, J.K. 2004a.). This study will assess discretionary disclosure based on additional disclosure media, such as websites and conference calls to expand such analysis to electronic means of communication with investors. This will be an important contribution to the existing literature. From the users’ perspectives, this study proposes to look at how impression management may influence different type of users. This could be tested by asking categories of users of corporate report to rate examples of different impression management strategies.Finally this study will also investigate share market reaction to the discretionary disclosure made in different disclosure vehicles. A share market reaction in an efficient market can be expected only in the presence of new information (Ball & Brown,1969). It is predicted that there will be a significant relationship between share price reaction and discretionary disclosures levels in the period subsequent to the financial market crisis as much of the news will be bad and discretionary disclosures will better facilitate impression management.