Succinct Survey of Financial and Nonfinancial Disclosure Quality: Definition, Classification and Analysis

Abstract

This paper mainly introduces different measures of disclosure quality, pivotal to know what the quality is, what the characteristics of good information quality are and how prior studies measure disclosure quality as to choose the suitable and appropriate approach sheathing for your research. Besides, because different measures have different strengths and weaknesses, and merits and flaws, thus, this paper can let us latch strengths and weaknesses of each approach in order to mitigate these weaknesses. Disclosures can be classified as any deliberate corporate release of financial or nonfinancial, quantitative or qualitative, mandatory or voluntary, formal or informal information. There are different forms of corporate to disclose information to the gullible public, including conference calls, annual or quarterly reports, investor relations, prospectus, press release, management interview and websites (Gibbins, Richardson and Waterhouse, 1990). The annual report is considered as a dominant document in the capital market (Botosan and Plumlee, 2002). A large voluminous prior studies investigate the corporate disclosure issues via annual reports (e.g. Wallace, Naser and Mora, 1994; Meek, Roberts and Gray, 1995; Inchausti, 1997; Botosan, 1997; Ahmed and Courtis, 1999; Depoers, 2000; Hail, 2002; Botosan and Plumlee, 2002; Hope, 2003a; Hope, 2003b; Coy and Dixon, 2004; Abd-Elsalam and Weetman, 2007). For instance, Coy and Dixon (2004) investigate the change in disclosure quality of the annual reports of the New Zealand universities during the period of 1985–2000. Abdelsalam and Weetman (2007) delve deeper in the matter of the annual reports of Egyptian listed companies in the period of 1991–1992 and 1995–1996. However, conference calls and quarterly reports are oft than not considered as more timely disclosures by corporate. Disclosure literature can investigate wide range “hither and thither” issues: determinants of voluntary disclosures, determinants of compliance with and cleavage unto laws, rules and regulations, the use of accounting information by analysts, and the economic repercussions of different types of disclosures (e.g. Botosan, 1997; Sengupta, 1998; Botosan and Plumlee, 2002; Easley, Hvidkjaer, and O’Hara, 2002, 2004; Francis, LaFond, Olsson, and Schipper, 2005). In certain extent, most of these studies must measure the disclosure quality to perform the research. Prior studies offer different measures or proxies such as index, ratings, readability, intricate textual analysis and uses of proxies for disclosure quality. Disclosure quality can be defined in terms of the precision of a Bayesian investor’s beliefs about the firm value after receiving the disclosure (e.g., Diamond and Verrecchia, 1991). As preparers’ perspectives, some studies define the disclosure quality based on the degree of preparer interested bias in disclosures as King (1996) concludes that preparers likely report veridicus information to vamp up their reputation in sophisticated and gauche general users’ perception. Other studies define the disclosure quality based on readers or users’ degree of understanding the contents (Hopkins, 1996). For example, Hopkins (1996) vindicates that different thoroughfares to prepare information would affect the unwary users’ knowledge of accessing and using such information. Therefore, it is relatively difficult for researchers to directly measure the quality for narratives as they are context-sensitive and personal-subjective in most of the cases. This section is to provide a salutary review and carefully but not pedantically discuss different measures of disclosure quality so that it can also provide new insights for future research to measure the CSR disclosure quality.