Corporate Voluntary Disclosure Research Articles

Corporate Governance and Institutional Transparency in Emerging Markets

This paper posits that differences in corporate governance structure partly result from differences in institutional arrangements linked to business systems. We developed a new international triad of business systems: the Anglo-American, the Communitarian and the Emerging system, building on the frameworks of Choi et al. (British Academy of Management (Kynoch Birmingham) 1996,Management International Review 39, 257-279, 1999). A common factor determining the success of a corporate governance structure is the extent to which it is transparent to market forces. Such transparency is more than pure financial transparency; as it can also be based on factors such as governmental, banking and other types of institutional transparency mechanism. There may also be a choice for firms to adopt voluntary corporate disclosure in situations where mandatory disclosure is not established. The Asian financial crisis of 1997-1999 and the more recent corporate governance scandals such as Enron, Andersen and Worldcom in the United States and Ahold and Parmalat in Europe show that corporate governance and business ethics issues exist throughout the world. As an illustration we focus on Asia’s emerging1 markets, as, both in view of the pressure of globalization and taking into account the institutional arrangements peculiar to the emerging business system, these issues are important there. Particularly for those who have to find an accommodation between the corporate governance structures and disclosure standards of the Emerging system and those of the Anglo-American and Communitarian systems.

Corporate governance and strategic transparency: East Asia in the international business systems

Purpose – This paper aims at discussing the determinants of strategic transparency and the governance structure of the East Asian firms. The relatively weak institutional infrastructure in East Asia raises the question about the adaptable governance structure and transparency in the East Asian firms.Design/methodology/approach – The paper presents theoretical underpinnings of the literature on corporate governance, corporate strategy and international business. This paper argues that one of the common factors that determine the success of corporate governance structure is the extent to which it is transparent to the market forces within particular institutional arrangements.Findings – When the institutional arrangements favor mandatory versus voluntary corporate disclosure, this study suggests a reform measure for the East Asian corporate governance system that relies, inter alia, on the percentages of long‐term and short‐term financing to total financing. The higher the percentage of long‐term financing,...

TINGKAT KELUASAN PENGUNGKAPAN SUKARELA DALAM LAPORAN TAHUNAN DAN HUBUNGANNYA DENGAN CURRENT EARNINGS RESPONSE COEFFICIENT (ERC)

This study examines whether voluntary corporate disclosure level that is published in annual report affects the return-earnings relationship. The study hypothesizes that the informativeness of earnings and voluntary disclosure is complementary to each other. This hypothesis implicitly presumes that investor will use the information provided in annual report disclosures together with information in earnings as one of the guidance in investment decisions. To test the hypothesis, current stock returns are regressed against current earnings changes. The sample consists of 90 annual reports of companies listed on the JSX as of December 31, 1998. The amount of voluntary disclosure provided in annual reports is measured by disclosure items and weighted scores developed by Botosan (1997), Sitanggang (2002), and Suripto (1999). Before deciding to use the weighted score, this study examines the differences between weighted scores and the equally weighted ones. The findings of the test of differences support the hypothesis that the two kinds of score measurement are statistically different, meaning that investors place different interests to each disclosure items. The findings of regression test support the hypothesis of complementary relationship, which remain consistent after controlling for other factors that have been identified in previous studies influence the earnings response coefficients. The findings are also robust with respect to different holding period returns and different earnings measurement.

Board leadership, outside directors’ expertise and voluntary corporate disclosures

This study examines the linkages between board leadership structure in terms of CEO duality (CEOs who jointly serve as board chairs), the proportion of expert outside directors on the board (PENEDs) and voluntary corporate disclosures. Regression analyses of observations from 385 Hong Kong companies show that CEO duality is associated with lower levels of voluntary corporate disclosures. However, the negative CEO duality/voluntary disclosure association is weaker for firms with higher PENEDs suggesting that the expertise of non-executive directors (NEDs) moderates the CEO duality/corporate disclosures relationship.

Undertaking large-scale disclosure studies when AIMR-FAF ratings are not available: the case of prices leading earnings

The paper presents a new methodology for evaluating corporate voluntary disclosures in the annual report discussion section. Based on a new dataset of electronic annual reports and a standard text analysis software package, we text-search a large number of annual reports at minimal (marginal) cost. The resulting sample sizes are comparable to those employed in studies based on the AIMR-FAF database. A major advantage of our new scoring system is that it is adaptable to the particular requirements of the research project. We demonstrate the importance of this feature when applying our new disclosure scores to the case of ‘prices leading earnings’. While we are unable to find the predicted association with a broadly defined measure of disclosure quality, our results reverse once we focus on a more narrowly defined metric based on forward-looking profit statements.

The Effect of Product Market Competition on Corporate Voluntary Disclosure Decisions

This paper investigates empirically the effect of different types of product market competition on levels of voluntary disclosure of proprietary information in financial markets. Firms, considering a disclosure, trade off attaining financial market valuation-related benefits vs. protecting long-term product market advantage. Based on economic theory, I propose that there are two types of strategic interaction settings relevant to disclosure: Capacity competition drives firms to disclose more; price competition drives them to disclose less. When firms are competing on capacities, firms disclose more information to lower the cost of capital needed for capital investments. In contrast, when firms are competing on prices, they disclose less information because proprietary costs are high and the benefit from any decreased cost of capital is low due to less acute need for additional capital. By estimating the signs of the slope of reaction curves to identify the type of competition facing firms in oligopoly markets, I find that the type of product market competition affects the level of voluntary disclosure over and above what pervious literature has documented as the firm's external financing needs. That is, firms engaged in capacity competition disclose relatively more information than firms engaged in price competition. Further analysis after including as benchmarks firms with no strategic interaction, shows that capacity competition firms disclose more information than no-strategic-interaction firms but that price competition firms do not disclose less information than no-strategic-interaction firms.

The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms

The relationship between disclosure quality and cost of equity capital is an important topic in today's economy. In general, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks – neither disclosure level nor cost of capital can be observed directly – and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of seventy-three non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8 to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias – a major concern in disclosure studies – the marginal effect remains of the same direction and even increases in magnitude, although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and Swiss capital markets.

Pengaruh Luas Ungkapan Sukarela dan Asimetri Informasi Terhadap Cost of Equity Capital pada Perusahaan Publik di Indonesia

This study examines whether voluntary corporate disclosure level published in annual report and asymmetry information has an effect on cost of equity capital. The purpose of the study is to investigate whether the variances in corporate disclosure level and asymmetry information effect cost of equity capital. The sample consists of 61 companies listed on the Jakarta Stock Exchange in 1999 and 2000. The hypotheses tested was conducted by implementing pooled data method, for period of 1999- 2000. The results support the hypotheses that voluntary corporate disclosure, information asymmetry and beta have effect on cost of equity capital. More specifically, the results show that size significantly moderates the relationship between information asymmetry and cost of equity capital, but size does not significantly moderate the relationship between voluntary corporate disclosure level and cost of equity capital.

Ownership structure and corporate voluntary disclosure in Hong Kong and Singapore

Drawing on prior empirical research based on disclosure behavior in developed western markets, this study examines the association of ownership structure with the voluntary disclosures of listed companies in the Asian settings of Hong Kong and Singapore. An analysis of annual reporting practices shows that the extent of outside ownership is positively associated with voluntary disclosures. In particular, the results also indicate that the level of information disclosure is likely to be less in “insider” or family-controlled companies, a significant feature of the Hong Kong and Singapore stock markets.

The Impact of Securities Litigation Reform on the Disclosure of Forward‐Looking Information By High Technology Firms

This study evaluates corporate voluntary disclosure of forward‐looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using a sample of 523 computer hardware, computer software, and pharmaceutical firms, we find a significant increase in both the frequency of firms issuing earnings and sales forecasts and the mean number of forecasts issued following the Act’s passage. To provide more direct evidence that our findings are attributable to the Act reducing firms’ legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms’ ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward‐looking information. Forecast errors, whether directional or non‐directional, were not significantly affected by the Act’s passage.

The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

The relationship between disclosure quality and cost of equity capital is an important topic in today's economy and generally, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks - neither disclosure level nor cost of capital can be observed directly - and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of 73 non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8% to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias - a major concern in disclosure studies - the results are generally consistent with the main hypothesis although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and the Swiss capital markets.

Environmental Influences on Voluntary Disclosures in the Annual Reports of Hong Kong and Singapore Companies: A Cultural Perspective

This study investigates the impact of environmental influences, particularly a secretive aspect of Chinese culture, on voluntary corporate disclosure practices. Evidence is provided of the similarly low level of voluntary disclosure by Hong Kong (HK) and Singaporian listed industrial companies. Further, a comparative analysis with prior research on UK/US companies indicates that the extent of voluntary disclosure by HK and Singaporian companies is lower overall. However, while this finding applies to both financial and nonfinancial information, it is not so in the case of strategic information for HK companies.

Corporate Disclosure Policy and the Informativeness of Stock Prices

We examine the association between voluntary corporate disclosure and the informativeness of stock prices. We measure corporate disclosure using the AIMR-FAF annual corporate disclosure ratings. We define price informativeness by the association between current stock returns and future earnings changes: more informative stock price changes contain more information about future earnings changes. To measure this association, we use the multiple regression model of Collins, Kothari, Shanken, and Sloan (1994), wherein current returns are regressed against both current and future earnings changes and future stock returns. The aggregated coefficients on the future earnings changes, which we refer to as the future ERC, is our measure of informativeness (association).We hypothesize and find that greater disclosure is associated with greater price informativeness (i.e., higher future ERC). This is the first empirical evidence that enhanced disclosure results in stockprices that are more informative about future earnings, indicating that greater disclosure provides information benefits to the stock market.In addition, the method we use to document the benefits of enhanced voluntary disclosure can be applied in other cases of interest to both academics and policymakers, such as assessing the benefits of additional required disclosures.

CEO stock option awards and the timing of corporate voluntary disclosures

We investigate whether CEOs manage the timing of their voluntary disclosures around stock option awards. We conjecture that CEOs manage investors’ expectations around award dates by delaying good news and rushing forward bad news. For a sample of 2,039 CEO option awards by 572 firms with fixed award schedules, we document changes in share prices and analyst earnings forecasts around option awards that are consistent with our conjecture. We also provide more direct evidence based on management earnings forecasts issued prior to award dates. Our findings suggest that CEOs make opportunistic voluntary disclosure decisions that maximize their stock option compensation.

The Impact of Statutory Sanctions on the Level and Information Content of Voluntary Corporate Disclosure

This article examines the effect of statutory civil and criminal sanctions on voluntary corporate disclosures by firms listed on the Australian Stock Exchange (ASX). Apart from direct investigation of the quantity of voluntary disclosure, we also investigate several possible consequences of altered corporate disclosure policies, namely properties of analysts’ forecasts, the degree to which share prices anticipate the information content of periodic earnings reports, and the relationship between volatility and corporate disclosures. Results suggest that, post‐sanctions, any increase in voluntary disclosure is confined to smaller firms and those which performed relatively poorly. Moreover, analysts’ earnings forecasts did not become more accurate or less diverse following the introduction of statutory sanctions, and there was no statistically significant increase in the weight placed on each disclosure’s ability to explain return volatility. There is some evidence that share prices have anticipated earlier the value relevant components of annual periodic accounting data, although this result is again confined to smaller firms. Although the tests used are not independent and have a limited time period post‐sanctions, the results cast doubt on the extent to which the imposition of substantive civil or criminal sanctions affects corporate disclosure policy.

CEO Stock Option Awards and Corporate Voluntary Disclosures

We investigate whether CEOs manage the timing of their voluntary disclosures around stock option awards. We conjecture that CEOs manage investors' expectations around award dates by delaying good news and rushing forward bad news. For a sample of 2,039 CEO option awards by 572 firms with fixed award schedules, we document changes in share prices and analyst earnings forecasts around option awards that are consistent with our conjecture. We also provide more direct evidence based on management earnings forecasts issued prior to award dates. Our findings suggest that CEOs make opportunistic voluntary disclosure decisions that maximize their stock option compensation.

The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High Technology Firms

This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using data on earnings and sales forecasts issued by 547 computer, software, and drug firms, we find that there was a significant increase in both the frequency of firms issuing forecasts and the number of forecasts issued following enactment of the Reform Act. The increased level of disclosure is primarily attributable to managers issuing more long horizon forecasts of good news and short horizon forecasts of bad news. Moreover, there is some evidence that the forecasts issued after the safe harbor took effect specified a more precise estimate of expected future earnings performance. We also find that the increase in disclosure was not at the expense of forecast quality in that forecasts issued after passage of the Reform Act are no less accurate than those issued previously. In particular, there is no evidence to support critics' concern that the protection of the safe harbor would prompt managers to issue more overly optimistic statements to investors.

Financial Reporting Discretion and Corporate Voluntary Disclosure: Evidence from the Software Industry

This paper studies the effects of new accounting standards that limit the amount of financial reporting discretion on corporate voluntary disclosure policies. Specifically, it tests the prediction that the decrease in management's discretion with respect to revenue recognition, following the issuance of Statement of Position (SOP) 91-1 in 1992, affected the extent to which managers of software companies voluntarily disclose information outside the financial statements. Consistent with the predictions, the empirical evidence indicates that, relative to a matched control group of non-aggressive reporting firms, managers of aggressive reporting firms reduced the extent to which they issue earnings forecasts, and increased the frequency in which they modify their cash payout policy and disclose non- financial information. Further analysis reveals that earnings management incentives, similar to the ones suggested in the extant accounting literature, do not seem to explain the aggressive revenue recognition practices during pre SOP 91-1 period, and suggests that managers of software companies were using their accounting discretion in an attempt to convey information to investors. Overall, I interpret the empirical findings as evidence of the potential costs associated with new accounting standards that decrease the amount of financial reporting discretion.

On the Association Between Voluntary Disclosure and Earnings Management

This paper investigates the association between corporate voluntary disclosure and management's discretion over accounting choices. In particular, it examines the role of earnings management in mitigating costs associated with management earnings forecast errors. The empirical results are consistent with the prediction that managers, fearing costly legal actions by shareholders and loss of reputation for credibility, use discretionary accruals to reduce their forecasting errors. Specifically, the paper documents that managers who overestimate the earnings number manage reported earnings upward, and that the extent of discretionary accruals is associated with various securities litigation cost factors and the amount of management's accounting flexibility. Having identified the role of accounting discretion in mitigating costs associated with management earnings forecast errors, the study raises the possibility that the degree of accounting discretion affects corporate voluntary disclosure policies.

Dissemination of Price-sensitive Information and Management of Voluntary Corporate Disclosure

This paper aims to describe how 27 large UK case companies sought to adapt their City and stock market disclosure policies to cope with the changes brought about by the publication in March 1994 of the Stock Exchange's Guidance on the Dissemination of Price-sensitive Information. Legislators and regulators have long sought to define and regulate the corporate decision problem in the price-sensitive information area. This paper employs corporate case interview data to describe models of corporate behaviour and to investigate how the case companies have dealt with this problem area. The paper concludes by (a), considering the effectiveness of regulation in providing a clear boundary for corporate behaviour, and (b), by discussing the relationship between this research and another major field study of corporate disclosure management (Gibbins, Richardson and Waterhouse, 1990), developing the disclosure model that they present.