Termización

According to Choi (1973) disclosure appears to be an important consideration in helping a company to gain access to the limited reservoirs of consumer savings. The implications that emerge from this line of reasoning are that increased disclosure helps to make capital markets efficient in both an operational and allocative sense. The more efficient capital markets are, the better the participation by borrowers and lenders (Choi, 1973). Choi highlighted that there seems to be a competitive advantage to be gained in terms of voluntary disclosure and the marketplace therefore has a compelling interest in, and effect on, a company’s disclosure strategy (Choi, 1973). In a similar vein, Dixon and Holmes (1991) acknowledged that the important of disclosure stems from the assumption that there is an association between increased disclosure and the efficiency of national financial markets. Previous studies (e.g. Daske et al., 2008; Hodgdon et al., 2008; and Akman, 2011) have argued that compliance with IFRS disclosure requirements reduces information asymmetry and improves the quality of accounting information disclosure. Improving the quality of disclosures makes the capital allocation process more efficient and decreases the average cost of capital (Dixon and Holmes, (1991). This efficiency is achieved when information about the securities traded in that market is available to investors at relatively

low cost and the prices of securities being traded incorporates all the relevant information which can be acquired.

The importance of mandatory disclosure is rooted in the objectives of financial reporting.

In this context, Darrough (1993) highlighted that:

“Mandating disclosures through regulatory agencies such as the SEC (Securities Exchange Committee) or the FASB will force firms to disclose the type of information that firms wish hidden. In such a case, mandating has a real effect on the workings of the market, with potentially different effects on the stakeholders” (p, 535).

Over the past fifty years or so, accounting standard setters have promoted the idea that the main aim of accounting disclosure is to provide financial statement users with enough information on which to base financial and investment decisions (Staubus, 2000). This notion of usefulness of information for investors is considered a mainstay of recent regulatory pronouncements (Finningham, 2010). Fishman and Hagerty (1989) agreed that by voluntarily disclosing information about themselves, firms can increase the efficiency of security prices which leads in turn to better investment decisions. Narayanan et al. (2000) suggested there is a significant information asymmetry between outside investors and inside managers, but the latter can solve this problem by voluntarily disclosing qualitative information to investors in an attempt to influence their decisions about the value of the firm. However, voluntary disclosure of information can only be a suitable and useful tool to reduce the information asymmetry between managers and investors as long as the information is credible and economically significant. In this regard, Peterson and Plenborg (2006) argued that the potential benefits of increased disclosure include reduced estimation risk and reduced information asymmetry.¹³

13 However, “corporate disclosure can also be directed to stakeholders other than investors” (Healy and Palepu 2001, p. 406).

Kothari (2000) argued that there is partial consensus between regulators and investors on the need for high quality financial reporting, as the quality of financial reporting has a direct effect on capital markets Kothari stated here that:

“I firmly believe that the success of capital is directly dependent on the quality of accounting and disclosure systems. Disclosure systems that are founded on high-quality standards give investors confidence in the credibility of financial reporting and without investor confidence, markets cannot thrive” (p. 91).

Greater investor confidence could be achieved by making detailed information available to investors (Naser, 1998). Both mandated and voluntary disclosures play a role in reducing information asymmetries between informed and uninformed market participants. These reductions can decrease the cost of capital by shrinking bid-ask spreads, enhancing trading volume, and diminishing stock-return volatility (Kothari, 2000).

Healy and Palepu (2001) examined the role of disclosure in modern capital markets in matching savings to business investment opportunities but argue that it is a complicated task for a number of reasons. First, savers do not have better information about the value of business investment opportunities than the information available to entrepreneurs. Second, investors do not completely believe what entrepreneurs say about their business because investors believe that entrepreneurs have an incentive to inflate the value of their ideas;

these information differences and conflicting incentives give rise to a problem that can potentially lead to a breakdown in the functioning of the capital market. The authors suggest that disclosure, and the institutions created to facilitate credible disclosure between managers and investors, play a significant role in mitigating against these problems. They also note that optimal contracts between entrepreneurs and investors will provide incentives for full disclosure of private information, therefore eliminating the mis-valuation problem.

Verrecchia (2001) argued that mandatory disclosure could play an important role in creating an environment in which managers credibly communicate their more value-relevant voluntary disclosures.¹⁴ Graham et al. (2005, p. 54) suggested that “the primary role of voluntary disclosure is to correct investors’ perceptions about current or future performance” while Einhorn (2007) claimed that the desire of management to inflate investors’ expectations about firm value - and thereby maximise the price at which the firm’s stocks are traded in the capital market-are the main motivations behind firms decisions to make voluntary disclosures. Ferreira (2007) suggested that companies’

decisions to disclose information are generally considered important as long as something is revealed about the firm’s strategy. Armitage and Marston, (2008) argued that the main benefits of disclosure is promotion of confidence amongst investors and of a reputation for openness. Yuen (2009) contended one of the dominant aims of disclosure is the achievement of users’ needs; she argued that this user needs view, is usually manifested in practice as an investors’ needs view, where the purpose of disclosure is to provide information to securities markets so that investors can make better investment decisions.

However, the levels of information supplied by companies can also differ (in terms of quantity and quality) dependent on the extent to which how much these companies comply with disclosure requirements.

Most of the previous literature on voluntary disclosure treats it as the only type of disclosure, and does not pay attention to the existence of mandatory disclosure (Einhorn, 2005). However, mandatory disclosure may affect the incremental content of voluntary disclosure for investors and therefore act as a key determinant of the firms’ discretionary disclosure strategies (Einhorn, 2005). Similarly, Dye (1985) investigated the influence of mandatory requirements on voluntary disclosure and in this context argued that this effect depends on whether mandatory and voluntary disclosures are substitutes for or

14 The author noted that this effect could be described as ‘the confirmatory role’ of mandatory disclosure.

complements to each other. If they are substitutes, then more disclosure requirements will reduce voluntary disclosure, whilst, if they are complements, more mandatory disclosure should increase voluntary levels. Yu (2011) argued that voluntary and mandatory disclosures are likely to be interdependent as did Adina and Ion (2008) who reported that voluntary disclosure supplements a mandatory reporting process that often seems to be inadequate for satisfying user’s needs.

In this context Omar and Simon (2011) argued that mandatory and voluntary disclosures should not be considered as different items of financial reporting, as both are potentially important; they documented that:

“If mandatory disclosure requirements are limited or regulations vague and difficult to interpret, voluntary disclosure can be used to compensate for such deficiencies. Therefore, mandatory and voluntary disclosures should not be seen as separated elements of financial reporting and both should be taken into consideration when exploring firm disclosure and related behaviour” (p.167).

The empirical association between mandatory and voluntary disclosure has been investigated by previous studies such as: Dye (1985); Naser and Nuseibeh (2003); Al-Razeen and Karbhari (2004b); and Einhorn (2005). Both Dye (1985) and Naser and Nuseibeh (2003) reported that mandatory and voluntary were complements, however, Al-Razeen and Karbhari (2004b) found no clear relationship between the two types of disclosures. Einhorn (2005) found the probability of providing voluntary disclosure by companies to be linked to the content of their mandatory disclosure while, most recently, Omar and Simon (2011) reported that:

“…there is a no single association between the likelihood of voluntary disclosure and the information quality of mandatory disclosure and the overall disclosure could be enhanced by limiting their discretion in mandatory reporting or by extending the scope of mandatory disclosure requirements” (p. 168).

A number of previous studies have addressed the level of corporate compliance with the mandatory requirements in accounting standards, the majority of these use firm specific characteristics to explain differences in the degree of compliance. The first category of prior studies reflects investigations that adopt either a cross-country approach (e.g. Meek et al., 1995; Tower et al., 1999; Street et al., 1999; Street and Bryant, 2000; Street and Gray, 2002; Chau and Gray, 2002; Ali et al., 2004; Al-Shammari et al., 2008) or focus on compliance in a single country (e.g. Wallace et al., 1994; Abd-Elsalam and Weetman, 2003; and Glaum and Street, 2003). The second category of disclosure distinguishes between compliance with mandatory disclosure requirements (e.g. Akhtaruddin, 2005;

Abd-Elsalam and Weetman, 2007; Aljifri, 2008; Al Mutawaa and Hewaidy, 2010; Al-Akra et al., 2010; and Omar, 2012) and adherence to voluntary disclosure initiatives (e.g. Firth, 1979; Chow and Wong-Boren, 1987; Cooke, 1989b; El-Gazzar et al., 1999; Hossain et al., 1995; Leventis and Weetman, 2004; and Hossain and Hammami, 2009), while a third sub-category of studies concentrates on aggregated disclosure, looking at a combination of mandatory and voluntary (e.g. Cerf, 1961; Buzby, 1975; Inchausti, 1997; Abayo et al., 1993; Naser and Nuseibeh, 2003; Hassan et al. 2006 and Omar and Simon, 2011). A further distinction in the literature relates to the extent of disclosure is examined from the viewpoint of preparers and for users of corporate annual reports (e.g. Baker and Haslem, 1973; Chandra, 1974; Abu-Nassar and Rutherford, 1996; Al-Razeen and Karbhri, 2004a;

Yaftian and Mirshekary, 2005). This structure is adopted in the following sections, which review the disclosure literature in more detail.