Information In Annual Reports Research Articles

The dynamics of financial working capital management strategies

The strategy matrix for financial working capital management (FOCAL matrix) is created in this paper to present the dynamics of financial working capital management strategies. The FOCAL matrix can be used as a general tool in the academia, and companies can use the matrix as a management tool to improve their financial working capital management strategies and benchmark competitors' strategies. The matrix is tested on three case companies which have a declining trend in profitability. Annual report information and press releases from the years 1999-2013 are used in the testing. The results indicate that the studied case companies have different emphases on financial working capital management. The strategies evolve according to the financial situation of the company, and companies do not always follow the strategies presented in previous literature.

Can Voluntary Management Earnings Forecasts Improve Value Relevance of Earnings in China?

Managers’ voluntary disclosure of private information in advance may confirm subsequent financial reports and make them more trustworthy. However, Lennox and Park (2006) document past management earnings forecasts (MEFs) are NOT positively associated with a firm’s earnings response coefficient in USA. This paper examines whether MEFs can improve value relevance of earnings numbers in China, as a different information market environment. Based on a sample of Chinese listed firms in 2005-2012, we find that firms disclosing voluntary MEFs show significantly higher value relevance of earnings information in annual reports. The confirmation effects of voluntary MEFs also apply to normal/abnormal accruals and cash flows from operations. We do NOT find similar improvements by voluntary MEFs in value relevance of balance sheet items for most regressions. Among forecast characteristics, we find that more specific forecasts can significantly improve value relevance of earnings, indicating that the markets particularly care for the forecast specificity in China. Our results are robust to different research designs and additional tests concerning earnings news types, corporate governance effects, endogeneity considerations and sample adjustments. The findings contribute to literatures by showing how a different information market environment highlights the effects of voluntary MEFs.

Practical Challenge of Content Analysis: An Illustrative Example from Recoding IC Information in the UK's Companies Annual Reports

Intellectual capital (IC) is believed to be more important resources to add the value of a company rather than physical assets. This gives rise to the increasing practice of reporting IC information in corporate annual report. Over the past fifteen years, considerable numbers of studies have employed content analysis to examine the extent and nature of IC information in several countries, but they presented different results. These results might partly contribute to different methods in counting information. In fact, the previous studies have been critised for not explicitly clarifying how information was recoded and counted which led to incomparable findings. Therefore, this paper firstly seeks to discuss an illustrative example of ‘sense-making‘ process in identifying, categorizing, and counting of IC information in annual reports of pilot sample company. Secondly, the method refined in the pilot study was applied over the final samples of six large companies in the UK from 1974 to 2008 The contribution of this paper is to primarily refine the previous method in recoding information, to send a message that transparency is crucial in content analysis and to facilitate method replication for future studies. Overall, this study demonstrates a marked increase in IC information disclosure was identified over the 35 years. The relational capital information disclosure was relatively more prominent over time, followed by human capital and structural capital.

Transparency, corporate governance and firm performance in The Netherlands

We explore the relations between transparency, corporate governance, and performance for Dutch exchange-listed firms over 1997-2007. Our measure for transparency is based on annual report information. In 2005 a new accounting standard (IFRS) became mandatory and applicable to the annual reports of Dutch listed firms. We investigate the effects of IFRS by comparing pre and post IFRS periods. We find that under IFRS transparency has increased substantially, and that the determinants of transparency have also changed. Pre-IFRS, disclosure is mainly driven by firm size, leverage and protective preference shares. Post-IFRS, we observe very little variation in disclosure practices.

Differential reporting of social and environmental disclosures between local and foreign oil companies in Nigeria

PurposeThis study aims to identify the differences between local and foreign companies’ social and environmental disclosures (SEDs) practices operating in the Nigerian oil sector. It aims at distinguishing SED levels by comparing local and foreign companies operating in the oil sector.Design/methodology/approachThe paper analyses annual reports through content analysis. SED extent and type are measured by the number of sentences. SEDs are further classified into three subcategories according to whether they are negative, neutral or positive disclosures and then their proportions are compared through descriptive analysis. To better understand SED differences, the Kruskal–Wallis and Mann–Whitney–Wilcoxon tests are used.FindingsLocal companies are found to provide more content and a wider variety of SED than foreign companies. The majority of the total SEDs in both local and foreign companies are positive with very little evidence of negative news.Research limitations/implicationsThe measurement of SEDs focuses on only annual reports, without consideration of other disclosure media such as standalone reports and corporate websites. SEDs are assumed to be voluntary for the companies and they may choose not to disclose any information in annual reports, as there are no regulations or disclosure guidelines in Nigeria to be followed.Originality/valueThe main contribution of this study lies in identifying the factors that have led to diversity and uniqueness in SED between local and foreign oil companies. As such, this study seeks to contribute to the development of understanding multiple factors that could give rise to changing patterns of SED.

Drivers of Corporate Voluntary Disclosures: Empirical Evidence from Sri Lankan Listed Companies

Stakeholders’ dissatisfaction with traditional mandatory financial reporting has led to increase the demand for more comprehensive voluntary information disclosures. As such, the corporate disclosure practices in Sri Lanka have changed dramatically in recent years. The purpose of this study is to identify the drivers of corporate voluntary disclosures in Sri Lankan listed companies. This study provides new insights about voluntary disclosures in Sri Lankan context since few studies have been conducted. Sixty non-financial companies were selected based on market capitalization for the study purpose. Company annual reports from 2009 to 2014 were scrutinized to find the voluntary disclosures. Panel regression was utilized due to the nature of time series and cross sectional. This study demonstrated that the level of voluntary disclosure in Sri Lankan listed companies is lower compared to other emerging countries. It is confirmed that the size of firm was the more significant factor in determining voluntary disclosure practices in Sri Lanka. Moreover, block holders negatively influenced to the voluntary disclosures in Sri Lankan listed companies. However, corporate governance variables do not have any impact to the voluntary disclosure practices. Furthermore, profitability, leverage, industry category are not influencing voluntary disclosure practices. This study has found that auditors’ duty has been limited to financial statements in Sri Lankan listed companies. The outcome of this study would encourage in developing standards for the disclose of information in annual reports and also persuade corporate managers to reform disclosure practices.

Mandatory Disclosures and Earnings Management: Evidence from IFRS Adoption

We examine how changes in mandatory disclosure requirements affect firms’ earnings management practices. Drawing on Ewert and Wagenhofer 2005, we predict that if the increase in mandatory disclosures reduces accrual-based earnings management firms will rely more on real earnings management. We test this prediction using the event of mandatory adoption of International Financial Reporting Standards (IFRS) among UK public firms. We find that after IFRS adoption firms disclose significantly more information in annual reports. Using mediation analysis we document that the increase in the amount of disclosures is a mechanism through which IFRS reduces accrual-based earnings management. Finally, we demonstrate that after IFRS adoption firms rely significantly more on real earnings management. Analysis of earnings management practices around IFRS adoption among firms with a specific incentive to manage earnings (among firms issuing equity) shows similar results. However, comparing earnings management among public and private firms, we find that the substitution between accrual-based and real earnings management around IFRS adoption occurs only among public firms. Overall, our results show that the initiatives towards restricting accrual-based earnings management can lead to a more costly way of managing earnings and thus can have adverse consequences to firm value. Obtained evidence also sheds light on the mechanism through which the adoption of accounting standards can impact earnings management activities of a firm.

Accounting Statement Footnotes Contextual Association with Firm Financial Characteristics in the Oil and Gas Industry

Information quality of financial accounting statements is an issue for readers’ decision-making. This study investigates the association of the annual report readability with the firm’s weighted average cost of capital (a key ratio used in firm valuations and investments). The study focuses upon the oil and gas industry in order to include an analysis of “successful efforts” versus “full cost” accounting methods. Prior studies find that as the level of useful information increases in the financial statements, the corresponding firm’s information asymmetries decrease, resulting in a company’s lower cost of capital (Francis, J. et al. 2008, and Barth M. et al. 2013). The current study findings indicate that the accounting readability of annual reports does associate with weighted average cost of capital. This study extends readability research into this financial ratio footnote and MD&A area. The study also finds the accounting choice of “successful efforts” versus “full cost” affects readability of annual report information, but no association is apparent of the method with the weighted average cost of capital.

Responsibility in The Corporate Governance Framework and Financial Decision Making Process

Abstract Many organizations today have realized that if they want to be successful, they must have a sense of responsibility not only for their business activities but also for the development of the whole society. Honesty, fairness, integrity and the people – consumers, customers, clients, community, the public, the company and their needs and interests are gradually taking top ranks in the charts of corporate values. This approach is entirely consistent with the concept of socially responsible business, of which corporate governance (in the economic field) can be considered an integral part.Our main objective is to highlight the importance of applying the principles of governance corporate for companies whose securities are listed on the Bratislava Stock Exchange.The paper uses a correlation analysis to examine the association between corporate governance as a part of socially responsible business and financial decision making process in the area of dividend policy and indebtedness. We measured the level of corporate governance by corporate governance index, which contains information about the disclosure of annual reports, corporate governance information in annual reports, the content of corporate governance statements, boards of companies, remuneration of board members, risk management, audit,remuneration and nomination committee characteristics. We have compiled the first corporate governance index in Slovakia and we found inspiration in foreign studies with respect to the specifics of the Slovak financial market.The most important contribution of this paper is the finding that the application of the principles of corporate governance affects financial decisions of companies. There is a correlation between the responsible application of corporate governance principles and the total debt of companies. And also, there is a correlation between responsible application of corporate governance principles and the amount of dividends paid to shareholders.

How does corporate voluntary disclosure affect asymmetric information and adverse selection?

This paper investigates whether the extent of corporate voluntary disclosure mitigates asymmetric information and adverse selection in the Euronext Paris stock exchange. We apply a disclosure index as a proxy for the extent of voluntary disclosure and use different spread measures to estimate both asymmetric information and adverse selection. Our findings show a negative relationship between the disclosure index and asymmetric information and adverse selection proxies. An analysis of sub-indexes provides additional mixed results. Several asymmetric information measures are negatively related to the volume of financial, non-financial and voluntary governance information in corporate annual reports. Nevertheless, the effect of strategic information volume is statistically significant only for effective bid-ask spreads. On the whole, these results are consistent with the view that high corporate voluntary disclosure is associated with narrow spreads and low adverse selection costs

The Use of Graphs in Malaysian Companies’ Corporate Reports: A Longitudinal Study

The purpose of this paper is to examine the nature and extent of voluntary disclosure of graphical information in the annual reports of 54 non-financial public listed companies in Malaysia using a longitudinal approach. The results show that the disclosure of graphical information in Malaysian companies’ annual reports has increased at an ‘average level’ over the thirty-year period. The majority of Malaysian companies prefer to use the bar graphs and the most frequently graphed variables are profit, turnover, earnings per share, and shareholders’ fund. The implications of this study are that: a) companies should be aware of the usefulness and advantages of providing graphical information for the benefit of various user groups; b) it may timely for the accounting regulatory bodies to propose a minimum/adequate level of graphical information using selected items of high importance to users of annual reports; and to formulate suitable guidelines in order to standardise the presentation of graphical information in annual reports of companies.

Risk sentiment and firms’ liquidity in the French market

This paper investigates the impact of risk sentiment on market liquidity by using panel data. We use six risk word lists; uncertain, weak model, negative, legal, opportunity, and environmental & social responsibility word lists to measure the risk sentiment. Concerning the liquidity proxies, we use three measures, quoted spread, effective spread, and adverse selection component. The results indicate that an intensive risk tone and uncertain information in annual reports lead to decreased liquidity. In addition we find that risk sentiment variable impacts the liquidity but not vice versa.

Human Resource Accounting Disclosure Practices in Indian Companies

Human resources with their innate pool of knowledge, skill, leadership, creativity and talent assist companies in achieving their goals. However, the current accounting system is not able to provide the value of human resources. We find human resource accounting (HRA) disclosures to be very low in Indian companies with only five companies reporting HRA in their annual report that is just 1 per cent of the sample set of companies. Furthermore, HRA disclosures that are made by companies are unstructured and inconsistent, and incomparable across companies and industries. Therefore, we examine the extent of HRA measurement and reporting practices of selected Indian companies among the National Stock Exchange S&P CNX 500 companies. We critically analyze these and rank the companies on the basis of the extent of disclosure of HRA information in annual reports of companies.

The Impact of the Disclosure of Non‐GAAP Earnings in Australian Annual Reports on Non‐Sophisticated Users

The disclosure of non‐GAAP earnings in Australian annual reports has risen steadily in recent years. These non‐statutory earnings measures are generally disclosed in the unaudited section of the annual report and are not consistent with statutory profit as defined under generally accepted Australian accounting standards (GAAP). Recent research conducted in the United States (US) has provided evidence that non‐sophisticated investor decisions are influenced by the presence and prominence of non‐GAAP earnings information. Further evidence suggests that investor perception changed after non‐GAAP earnings disclosures became subject to regulation in that jurisdiction. Australia has high investor participation rates by international standards, including investors operating self‐managed superannuation funds, resulting in a significant number of active individual investors. This study employs an experimental design to investigate the impact on non‐sophisticated investors of the reporting of non‐GAAP earnings information in addition to GAAP earnings information in Australian annual reports. The results of this study show a positive association between the prominent disclosure of non‐GAAP earnings information and non‐sophisticated investor reliance on this information. These results provide important evidence to Australian regulators as these narrative disclosures are not subject to regulation, in contrast to the US where mandatory regulation has been in place since 2003.

The Effects of Different Parts of the Annual Report on Potential Investors' Attitudes Towards the Company and on the Corporate Reputation

Research problem: Both the function and the appearance of annual reports have changed over the last few decades. These multimodal reports now include many types of information that serve different functions. In this study, the effects of several information types on stakeholders' attitudes toward annual reports and the companies that published them are measured. Literature review: Not much is known about how stakeholders read annual reports. The literature is not conclusive on the relative importance of several information types in these reports. Most studies investigate the impact of part of the information in annual reports and ignore the combined impact of the information types. Whether the potential investors are more affected by the financial review, the future strategy narrative or by pictures, such as a picture of the CEO, is unknown. Methodology: An experiment (2 $\,\times\,$ 2 $\,\times\,$ 2 between subjects design) was conducted to test the effects of a good financial review versus a poor one, a good future strategy versus a poor one and a picture of the CEO smiling versus that with a serious facial expression. The effects on potential stakeholders' attitudes toward the information, on their attitudes toward investing in the company, and on their perceptions of the corporate reputation are measured. Results and conclusion: The results show significant effects of all three information types. A good financial review, a good future strategy, and a serious facial expression have beneficial effects on the potential stakeholders' attitudes and on the corporate reputation. More important, however, the results show that the information types should be aligned with each other. A smiling facial expression, for example, is only beneficial if the content of the other information types is good.

Organizational Commitment to Climate Change and GHG Reductions

This study examines whether a stronger commitment to climate change within a company results in reductions in GHG emissions. Utilizing data from the Carbon Disclosure Project (CDP) data base for a sample of 224 companies in the S&P 500 operating in 2009, we construct an overall measure for the level of an organizational commitment based on firm responses to the CDP project survey including a firm having: (1) a board committee or other executive body responsible for climate issues, (2) an emission target in place or recently achieved, (3) 80 percent or more of emissions verified, (4) monetary incentives for reduced emissions by the board/executive board and/or management group, (5) climate change information in annual reports, and (6) climate change information in a Sustainability or CSR report. These constructed variables are correlated with CDP designations of companies as having excellent carbon disclosure and carbon performance. To test the overall hypothesis of a significant relationship between GHG reductions and commitment, we perform regressions on this variable and changes in carbon emissions for future years 2009 to 2011, and 2009 to 2012, as well as individual commitment measures. Our empirical results show that the organizational commitment variables are not significantly related to carbon emission or carbon intensity reductions. However, having board responsibility for sustainability and a previous target or success are significant factors, along with being more profitable. Our results suggest that embedding sustainability, as related to climate change, in companies does not follow a simple prescription.

Signaling strategies in annual reports: Evidence from the disclosure of performance indicators

In voluntary annual report communication, empirical results of signaling theory are contrasting, mainly owing to problems in disclosure measurements. We focus on a specific piece of incremental information and study the signaling strategies in annual reports by analyzing the disclosure of performance indicators that provide incremental information. In this paper, we scrutinize the business review of a sample of 120 listed Italian companies for fiscal year 2010. After controlling for size, risk, and industry, our analysis confirms that the number of indicators published is positively related to firm profitability. Our results help clarify the signaling strategies in annual report communication. Operatively, our evidence can help regulators and standard setters to better discipline the communication of relevant and private information in annual reports, particularly performance indicators.

Attaining legitimacy by employee information in annual reports

Purpose: The purpose of this study is to provide evidence on the category, quantity and quality of voluntary employee-related information Australian listed companies disclose in their annual report. An explanation is also sought to determine whether companies adopt employee-related disclosures to legitimise their relationship with society. Voluntary adoption of corporate governance best practice recommendations is used as a measure of companies' attempts to attain ex ante legitimacy. Media agenda setting theory is used as a measure of an attempt to gain legitimacy ex post following adverse publicity from the media. Design/methodology/approach: The annual reports of all companies with at least one employee listed on the Australian Stock Exchange with a 30th June balance date of 2004 are examined to identify employee-related disclosures. This employee-related information is categorised and identified as positive, negative or a combination of positive and negative information by three independent coders. Ordinary least squares regression is used to explain the quantity of disclosure with a corporate governance score and number of adverse newspaper articles included as experimental variables. Findings: Adopting voluntary corporate governance mechanisms is associated with the quantity of voluntary annual report employee-related disclosures. Higher levels of adverse publicity are also significantly associated with higher quantities of employee-related disclosures. The quality of these disclosures is questioned because 124 companies had adverse publicity relating to employees and only two of these companies reported any negative employee-related disclosures. Few companies from the whole sample reported any negative information relating to their employees in their annual report, with 98 per cent of companies reporting positive news or no news. Originality/value: Most previous social responsibility research has focused on environmental disclosures. This study is original because it focuses on employee-related disclosures. Honest, transparent employee disclosures are an international corporate governance recommendation by the Organisation for Economic Co-operation and Development and studies have not previously tested the relation between reporting recommended corporate governance mechanisms and employee-related disclosures in annual reports.

Human capital disclosures in developing countries: figureheads and value creators

Purpose – The purpose of this paper is to explore if any disparity exists between human capital information desired by financial analysts and fund managers and actual disclosure of such information in company annual reports, in the context of developing countries. Design/methodology/approach – Financial analysts and fund managers were interviewed to obtain opinions on the importance attributed to human capital information and whether their desired information is disclosed in the annual reports. Content analysis was then used to assess the extent and nature of human capital information actually provided in the annual reports of 100 listed companies in Malaysia. Findings – Interviewees seek information on company management and key corporate decision makers who could provide a firm with competitive advantage. However, the human capital information provided is limited, and tends to focus on directors, many of whom may be figureheads with little impact on the way companies are run and in creating value for the firm. Accordingly, analysts rely on alternative sources to get their desired information – a costly process for private shareholders. Originality/value – The paper contributes to the literature on the demand for, and disclosure of, human capital information in the context of developing countries. It identifies the inadequacy of current human capital disclosure practices in company annual reports. The authors theorise that in developing countries, resource dependence, legitimacy-seeking and “culture” cause companies to pay relatively more attention to figureheads than value creators.

Corporate governance and different types of voluntary disclosure

PurposeThe purpose of this paper is to investigate the impact of corporate governance on voluntary disclosure of different types of information in annual reports of Malaysian listed firms.Design/methodology/approachA linear regression model is used to test the association between the level of voluntary disclosure of five key information categories and corporate governance. The sample consists of 100 firms over three different socio‐economic periods: 1996, 2001 and 2006.FindingsThere are significant increases in all the key information categories with better communication most pronounced between 1996 and 2001, and a noticeably lower level of communication growth between 2001 and 2006. The strength of a firm's corporate governance structure clearly influences the voluntary disclosure of information relating to corporate and strategic directions, directors and senior management, financial and capital markets, forward‐looking projections and corporate social responsibility in 2001 and 2006.Research limitations/implicationsThe use of a governance index to arrive at an overall corporate governance score has the potential to mask major underlying relationships of individual governance attributes. The use of the self‐constructed disclosure indices may also omit certain information items that are employed in other prior studies. Moreover, the different categories of disclosures are solely constructed on the information disclosed in the annual reports without considering the alternative avenues.Practical implicationsThe results will assist regulators and policy‐makers to better understand the impact of corporate governance on the voluntary disclosure of different types of corporate information in Malaysia.Originality/valueThis study generates evidence of the changing scene of management voluntary disclosure practices embedded in the corporate governance framework in a developing country with an emerging capital market.