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Corporate Governance and Voluntary Disclosures

2.1 Introduction

This section reviews the extensive literature – academic, legislative and policy, in the field of corporate governance and voluntary disclosures with a view to identify the gaps, if any, in existing research in terms of voluntary disclosure studies in India. Based on the literature, a hypothesis is postulated on the on relationship between firm-level attributes and the extent of voluntary disclosures in the top 100 Indian companies listed on the BSE.

This section is divided into 3 parts. The first section discusses the definition, significance and theoretical foundations of corporate governance and the role of voluntary disclosures within the corporate governance agenda. The second part highlights the evolution and state of corporate governance principles in India. After having analysed the literature and evidence the third part develops the hypotheses in relation to firm level attributes.

2.2 Definition and theoretical foundation of corporate governance and voluntary disclosure

2.2.1 Definition and components of CG

According to the UK Corporate Governance Code, “corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship”. This definition of corporate governance was produced by the Cadbury Committee in 1992 and still forms the context for the code. Sir Adrian Cadbury. Explaining its role further, Sir Cadbury states that Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000).

The International Chamber of Commerce explains Corporate Governance as a relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. Furthermore, as mentioned above, CG also encompasses the relationship between the corporation and the stakeholders and society at large (Millstein, 1998).

Though the CG codes, regulations and practices may vary from country to country, according to the Millstein Report (1998), there are four core principles of corporate governance: fairness, transparency, accountability and responsibility.

Fairness – by ensuring the protection of shareholder rights and the equitable treatment of all shareholders

Transparency – by the timely and quality disclosure of adequate, clear and comparable information concerning corporate performance, governance and ownership (OECD, 2004). Disclosures are normally published in annual company reports (Akhtaruddin, 2005). Disclosure may either be mandated by existing laws or may be voluntary. Disclosures most commonly include, but are not restricted to information on the company’s financial situation and performance. In fact, the level and extent of disclosures is an important benchmark in measuring the quality of CG (Aksu and Kosedag, 2006).

Accountability – to the owners (shareholders) by clarifying the roles and responsibilities of the management and by ensuring the union of managerial and shareholder interests as monitored by the board of directors (OECD, 1999 in Mohamad 2004)

Responsibility by not only ensuring compliance with laws and regulations, but also by fulfilling its duties to stakeholders, including employees and by developing an active socially responsible and environmentally sustainable corporate conduct (OECD, 1999)

2.3 The importance of corporate governance and disclosures

The importance of CG and disclosures cannot be overstated in today’s globalized free-market world economy. In one of his writings, James D. Wolfensohn, the incumbent President of the World Bank, likens the importance of governance of the corporation to the government of countries (Mohamad, 2004). The failures of individual companies like Enron, Satyam and the financial crisis in East Asia to the recent sub prime collapse and economic downturn all show elements of failed or inefficient CG and lack of transparency.

According to Gregory and Simms (1999, in Mohamad, 2004), the quality of corporate governance and disclosures is important since it has a direct impact on:

The ability to attract low-cost capital and the efficiency with which a corporation employs assets -A company that follows an efficient and credible CG framework finds it easier and relatively cheaper to attract capital, both domestic and foreign, as it is able to instill and boost the confidence of its investors that their money would be used for the agreed purpose. A survey of institutional investors by R.F.Felton et al (1996) found that they would willingly pay on average well over ten percentage points more for a “well-governed” company, all other things being equal (Mohamad, 2004). Agreeing with this view, Bopkin and Isshaq (2009) and La Porta et al (1998) suggest in their separate articles that investors would be more willing to provide finance in countries/companies that can provide greater protection through good CG practices. Good disclosures are particularly relevant in this capacity as they help to reduce information asymmetry, thereby lowering the investor’s risk (Bushman and Smith, 2001; Ball, Kothari and Robin, 2000) and reducing the volatility of a firm’s stock (Lang and Lundholm, 1996). The role of disclosures in securing cheap, long term capital becomes particularly important in developing countries that rely much on foreign direct investments and financial investment (Salter, 1998).

Development of capital markets – Efficient governance mechanisms such as mechanism for investor protection is a quintessential for the development of capital markets (Rabelo and Vasconcelos, 2002). Akhtaruddin (2005) opines that effective functioning of capital markets significantly depends on the effective flow of information between the company and its stakeholders.

Its ability to meet the expectations of society – CG and transparency enables a corporation to function in a fair and judicious manner by providing appropriate checks against the possible immoderation of management (Patel et al, 2002) and against the excessive exploitation of societal and environmental resources. In encouraging accountability and transparency and adherence to existing regulations, it can also help combat corrupt and unlawful practices amongst businesses. Haat, Rahman and Mahenthiran (2008) opine that greater corporate governance and disclosure practices may not totally eliminate corporate failure, but could at least provide the ‘’red flag” to stakeholders and to regulators.

Its overall performance – Many studies have found association between good corporate governance practices and overall profitability of the company. A study carried out by Millstein and MacAvoy in the United States analyzing data from 1991-1995 found that U.S. corporations with active and independent boards of directors generated higher economic profit.

2.4 Theories of corporate governance and disclosures

According to Charreaux’s taxonomy, theories explaining the concept and role of corporate governance can be classified into micro-level theories and macro-level theories.

Micro theories of corporate governance propose a model of how a company and its managers are governed whereas macro theories account for the specificities and variation in the governance systems found in different nations.

For the purpose of this research, one of the micro theories, the Agency Theory, as postulated by Jensen and Meckling (1976) is adopted as the theoretical framework and the CG practices are offered as solutions to the problems posted by it.

According to Jenkins and Meckling, in the modern corporation, the ownership of capital is divorced from its management and that there exists a contractual agreement between the two i.e. the shareholders are the principal and the managers are the agents who act on their behalf. In an agency relationship, information asymmetry exists – commonly managers have an information advantage which they may misuse for their own vested interest or which may give rise to conflict of interests. Conversely the managers may use the advantage positively to disclose more information to enhance the value of the firm and boost investment (Barako, Hancock and Izan, 2006).

The nature of agency problem is quite different in developed countries and in developing countries (La Porta et al., 1999). In developed countries, the agency problem is between managers and shareholders whereas in developing countries this exists between majority and minority shareholders (La Porta et al., 1999). And hence, instead of the tradition principal-agent model, a modified version known as the principal-principal (PP) model of corporate governance (Young et al., 2008), which can be seen as a synthesis of micro and macro theories of governance, has been put forth. According to Young et al, principal–principal conflicts between controlling shareholders and minority shareholders result from concentrated ownership, extensive family ownership and control, business group structures, and weak legal protection of minority shareholders.

Patel et al. (2002) opine that the agency problem in corporate governance can be resolved in many ways – by a vigilant board of directors, by timely, accurate and sufficient disclosure of financial information and by transparency in the ownership structure. Through the benchmarking exercise this research attempts to evaluate the extent to which such solutions are embedded in Indian companies and then focuses on one particularly pertinent issue of disclosure and transparency.

2.5 Review of disclosure index studies

The most important aspect of corporate governance is transparency and disclosure. According to the principles of corporate governance by the OECD it is essential that the organizations disseminate timely and accurate information about all the matters that are concerned to the financial situation, performance, ownership and the overall governance of the organization. This information is disclosed through the annual reports published by the companies. This dissemination of financial and non-financial information through corporate annual reports is a function of acts and regulations in the corporate sector (Ahmed, 2006). The extent to which the companies disclose the related information in the annual reports indicates the degree of transparency of the company and sometimes also known as corporate transparency or corporate disclosure (Naser and Nuseibeh 2003).

Various empirical studies have been conducted by different researchers on the degree of disclosure of information in the annual reports. The approach widely used is to determine the degree to which the specific attributes or items of information are disclosed in the annual reports. According to Knutson (1992, p. 7) “At the top of every analyst’s list is the annual report to shareholders. It is the major reporting document and every other financial report is in some respect, subsidiary or supplementary to it.”

The commonly used method is the construction of a disclosure index. A disclosure index is defined as a weighted list of investor list of investor related information items which could appear in the firm’s annual report (Firer C, 1986). These indices are constructed on the basis of either the researchers study or the existing literature of corporate reporting. The disclosure index is a statistic or a matrix that captures the extent of disclosure by a firm on an item in the list. These indices which were constructed to determine the quality and degree of disclosure in annual reports differ significantly from one study to another, although all share the central idea of usefulness of information for the purpose of making investment related decisions (Inchausti, 1997).


Country of Study & Year

Number of Firms

Criteria for selection of Items

Vander Bauwhede, Willekens

European Union 2008


130 Companies from that form the part of the FTSE Eurotop 300 were selected and items included major corporate governance indicators, capital and shareholder’s structure, company’s board, committees etc

Singhvi & Desai

United States 1966


34 items were included in the study which included a number of attributes from the balance sheet, income sheet, profit & loss account, future trends, information about directors and stock levels

Santema & Van De Rijt

The Netherlands 2001


This index was constructed to study the disclosure of strategy and the items were analysed on basis of 10 criteria

Meek, Roberts, Gray

U.S., U.K. & Continental Europe 1995


checklist consists of 85 items of information. They are categorized into three major groups of information types and, further, into twelve subgroups – (a) Strategic information: ( 1) general corporate characteristics, (2) corporate strategy, (3) acquisitions and disposals, (4) research and development, (5) future prospects information; (b) Nonfinancial information: (6) information about directors, (7) employee information, (8) social responsibility and value added disclosures; (c) Financial information: (9) segment information, (10) financial review information, (11) foreign currency information, and (12) stock price information.

Leventis & Weetman

Greece 2004


72 items of disclosure formed the part of index belonging to the categories of 1)Corporate Environment like General Corporate Information, Information about Directors, Specific Corporate Information 2)Social Responsibility like Employee Information, Social Policy 3)Financial Information viz. financial review, ratios,market related info

Hossain, Hammani

Qatar 2008


44 items of voluntary information grouped into 8 categories like corporate governance, financial performance, risk management, CSR and general information about the firm

Eng & Mak

Singapore 2003


The total number of items included in the studys was 84 which belonged to the category of strategic, non-financial and financial performance provided in management discussion and analysis

Donnelly & Mulcahy

Ireland 2002


79 items of disclosure formed the part of the index. They were divided in to the three groups of 1)strategic information viz. corporate strategy, management discussion & analysis & future prospects 2)Financial info and 3) Non financial info viz. is employee information


Sweden 1989


Total of 224 items distributed in the subgroups of the financial statements, financial history, disclosure of projection and budget, ratios & segmental info etc.

Barako, Hancock & Izan

Kenya 1992 to 2001


47 disclosure items classified

into four categories: general and strategic

information, financial data, forward looking

disclosure and corporate social disclosure

(employee, environmental and social information)

and board and senior management


Aljifri Khaled

UAE 2003


Index was constructed with 73 items taking into consideration the financial reporting requirements in UAE such as income statements, balance sheets, statements of cash flow, statements of changes in equity, and notes to accounts

Aksu, Kosedag

Turkey 2003


106 items of disclosure classified into three categories of Ownership structure and investor relations, Financial transparency and information disclosure and Financial transparency and information disclosure


Bangladesh 2005


160 total items of disclosure was constructed. The items were from the following categories Balance sheet items ,Income statement items, Accounting policies items, Directors’ report items, Historical summary items


India 2006


170 items formed the part of index which belonged to the balance sheet,profit &loss account accounting policies and corporate governance

The table below gives the list of some of the studies done both in developed and developed nations. The regulations governing disclosure of information in the developed countries is very comprehensive. Although the level of disclosure is low in the developed countries than in developed countries, it is increasing, for two main reasons: the developing countries want to attract investors and potential investors require greater levels of disclosure by corporate for reasons of confidence and transparency. Hence a lot of studies are being carried out in recent times on developing countries for the very same reason as seen in the table.

Since one of the very first work done by Cerf (1961) a number of different approaches have been adopted to study the disclosure but there is no set theory that suggests the method for the selection of the items to measure disclosure. The study by Singhvi and Desai on 155 companies in United States in 1966 had 34 attributes mainly in the category of financial performance. A number of studies have been done in various counties thereafter. The disclosure of the different financial attributes of the companies has been a part of almost every study. A number of studies recently have substantial amount of information disclosed about the board of directors and board committees an important aspect of corporate governance. Not many studies have incorporated the disclosure of information regarding the CSR policies of the companies as the part of the index.

2.6 Relationship between firm level attributes and level of disclosures

There have been many studies on the firm level attributes that have an influence or determine the level of disclosure by companies. The most commonly studies characteristics include the size of the firm, profitability, ownership structure, dispersion of ownership, leverage, industry type, size of audit firm, assets in place. This study attempts to analyze and determine the relationship, if any, of five corporate factors on the extent of voluntary disclosures – size of firm, age of firm, profitability, assets in place and complexity of business.

2.6.1 Age

The extent and quality of a company’s disclosure may be influenced by its age i.e. number of years since it has been established. According to Owusu-Ansah (1998), age functions as a proxy for the company’s development and growth. They suggest three reasons for age being an important determinant of disclosures:

  1. Disclosures about some key information like product development and expenditure on research could pose as a source of threat to newer companies in the form of competitive disadvantage.
  2. Younger companies are more likely to face higher costs of gathering and managing the information to be disclosed, as compared to already well established information management systems in older companies.
  3. Younger companies may either not have enough information or may lack a ‘track record’ to publish.

Research on relationship between age and level of voluntary disclosure has been limited and inconclusive. Hossain’s (2007) regression analysis of factors influencing disclosure levels in Indian banks found that level of disclosure was not affected by the age of the bank or the number of years it had been in business. Akhtaruddin (2005) also inferred a similar conclusion that age is insignificant from his research on differences in firm level characteristics that affect the disclosure in 97 listed companies in Bangladesh.

However, Liu Chi’s study in Taiwan finds that there is a negative association between the quality of corporate disclosure practices and firm size. Also, Alsaeed’s research on Saudi Arabian firms show yield uncertain conclusions- though It firm age did not explain the variation of disclosure level among the Saudi, it was significantly positively related to the disclosure level if one of the highly ranked firms on his disclosure index which was deleted from the analysis.

H1. Longer-established firm will tend to disclose more information than more newly-established firms.

2.6.2 Profitability

The relationship between profitability and level of disclosures has been studied at length by researchers. The following table summarizes the major studies and their findings with respect to profitability.


Year of Study

Sample size


Dulacha G. Barako, Phil Hancock and H. Y. Izan


43 listed companies in Kenya

Profitability does not have a significant influence on the level of voluntary disclosure

Khaled Aljifri


31 listed firms in the UAE

Profitability has insignificant association with the level of disclosure

Mohammed Hossain , Helmi Hammami


25 listed firms of Doha Securities Market (DSM) in Qatar

profitability is insignificant in explaining the level of voluntary disclosure

Stephen Brammer and Stephen Pavelin


450 large UK companies

participation in high quality disclosure is not affected by profitability

M. Akhtaruddin


94 listed companies in Bangladesh

Profitability has no effect on disclosure

Khalid Alsaeed


40 firms in Saudi Arabia

Profitability does not have a significant influence on the level of voluntary disclosure

Mohammed Hossain


38 banking companies listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India

Profitability is significant in level of disclosure



258 NYSE, 113 other exchanges and 156 OTC firms

A positive relation between disclosure and profitability exists.

Singhvi & Desai


100 NYSE and 55 OTC firms

Firms disclosing inadequate information tend to be less profitable.



316 firms in 13 countries

Profitability is significantly and positively related to disclosure.

Authors have posited a couple of reasons for this positive relationship – according to Inchausti (1997), managers of profitable companies disclose greater information for personal advantages, i.e. to continue their management position or their compensation. This proposition was also supported by Singhvi and Desai (1971) who suggested that management of highly profitable companies publish more information to demonstrate their ability to maximize profits and thereby justify their compensation package. On the other hand, management in companies with low profitability may disclose less information in order to hide poor performance (Richard, 1992). Watts and Zimmerman (1986) argue that companies making high profits are subject to more scrutiny by regulatory authorities and hence may publish more information to reduce any political costs.

H2. The level of disclosure is positively associated with profitability.

2.6.3 Assets in place

Assets in place refer to the assets (securities, real estate, and other property) that a company already owns or has ‘in place’. The relationship between the level of assets in place and disclosure level is ambiguous. In their study of voluntary disclosures among multinational companies in US, Hossain and Mitra (2004) found a clear and systematic association between the value of assets in place and level of disclosure in these companies.

Myers (1977) argued that a higher value of assets in place lessens the company’s need to take recourse to debt financing. Debt financing normally entails a higher agency cost and therefore requires greater levels of monitoring and disclosure. By reducing the need to use debt financing, a firm with more fixed assets can reduce its agency costs and consequently its disclosure levels. Substantiating this hypothesis, Zimmerman at al (1981) found that those US companies that published semi annual reports had a significantly higher debt ratios and lower value of assets in place.

Similarly, Butler et al (2002) also propounded that firms with greater tangible assets have lower agency cost, as it is relatively difficult for the agents (managers) to embezzle physical assets. Lower agency costs translate into a reduced need for detailed disclosures.

The above arguments suggest that assets in place should have a negative relationship with level of disclosures i.e. higher the value of assets; lower the disclosures. However, other researchers have found either no significant relationship between assets in place and level of disclosures or have found the sign of regression to be positive. For example, Hossain et al (1994) found no significant relationship between assets in place and level of disclosures in their study of Malaysian listed companies. However, Haniffa and Cooke’s(2002) regression analysis of company level characteristics affecting levels of disclosures amongst Malaysian companies did find a significant association, though the sign was positive. A study of voluntary disclosures in Swiss companies by Raffournier in 1995 did not find any significant relationship between the two variables.

H3. There is an association between the proportion of asset-in-place and the extent of disclosure.

2.6.4 Complexity of business

Complexity of business, measured as number of subsidiaries the company has for the purpose of most regression studies, seems to be relatively less studied and hence a variable with uncertain relationship in determining the level of voluntary disclosures. A priori, as explained by Courtis (1978) and Cooke (1989) complexity may have a significant role in the level of disclosures as the presence of many subsidiaries requires an effective information management system and that such a system reduces the cost of producing information for disclosure purpose, thus facilitating greater level of disclosures. However, in their study of Malaysian companies, Haniffa and Cooke (2002) did not find any such relationship.

H4. The level of disclosure id positively associated with the complexity of the firm.

2.6.5 Size of the firm

Size of the firm has been extensively researched and has been identified as a significant explanatory variable determining the extent of voluntary disclosures in companies. The table below summarizes the research studies and their main finding with respect to the relationship between the two variables.

Many theoretical reasons have been put forth by authors to explain the relationship between size and voluntary disclosures. According to Jensen and Mackling (1976) bigger firms experience more problems associated with the agency theory, i.e. more levels of separation of the ownership from the management and hence need more disclosures to deal with such problems. Ahmed and Nicholls (1994) argue that larger firms are more likely to possess the wherewithal, knowledge and management skills necessary for the production and publication of information and hence exhibit higher levels of disclosure. Many researchers like Cooke (1991), Lang and Lundholm (1993) and McKinnon and Dalimunthe(1993) believe that larger firms are subject to more scrutiny from government and legal authorities (legal costs as referred to by Zimmerman et al, 1981) and also from customers, suppliers and analysts and hence have higher level of disclosures. Also, the large size of a firm implies that the firm is experiencing higher and faster growth and has relatively higher need for capital and as explained in the previous section, greater extent of disclosure helps to secure capital (Wallace and Naser, 1995).


Year of Study

Sample size


Khaled Aljifri


31 listed firms in the UAE

the size, had an insignificant association with the level of disclosure

Mohammed Hossain , Helmi Hammami


25 listed firms of Doha Securities Market (DSM) in Qatar

Size is significant in explaining the level of voluntary disclosure

Stephen Brammer and Stephen Pavelin


450 large UK companies

the quality of disclosure is determined by a firm’s size

Dulacha G. Barako, Phil Hancock and H. Y. Izan


43 listed companies in Kenya

company size has a positive relationship with the extent of voluntary disclosure

Mine Aksu and Arman Kosedag


52 largest and most liquid firms in the Istanbul Stock Exchange

Size is significant in explaining the variation in disclosure

M. Akhtaruddin


94 listed companies in Bangladesh

size is a predictor of mandatory disclosure

Hasnan Ahmed


100 non-financial listed companies in India

the extent of disclosure in terms of size , it is found that the higher is the firm’s size, the higher the level of disclosure revealed by the firms

Khalid Alsaeed


40 firms in Saudi Arabia

size was significantly positively associated with the level of disclosure

Philip M. Linsley, Philip J. Shrives 2006


79 UK company

a significant association is found between the number of risk disclosures and company size

Mohammed Hossain


38 banking companies listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India

Size is significant in explaining the level of disclosure

Stergios Leventis and Pauline Weetman


87 Greek language annual reports of non-financial publicly traded companies listed on the ASE.

Disclosure variation is explained by the overall size of the firm, measured by market capitalization.



44 NYSE and AMEX firms plus 44 OTC firms

A positive relation between disclosure in annual reports and the size of company assets exists



80 of the Fortune 1,000 firms

Firm size, among large industrial firms, is not an important factor in explaining disclosure



258 NYSE, 113 other exchanges and 156 OTC firms

A positive relation between disclosure and size exists.



90 firms: 38 unlisted, 33 listed on the Swedish Stock Exchange, 19 listed on both the Swedish and at least 1 foreign stock exchange

size explain the extent of disclosure



63 firms operating in the Securities Exchange of Thailand

Voluntary disclosure is related to size



98 Jakarta Stock Exchange listed firms

size is related to disclosure

Giner Inchausti


138 Valencia Stock Exchange listed firms

size is related to disclosure


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