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Blackwell Publishing IncMalden, USA CORGCorporate Governance: An International Review0964-8410Blackwell Publishing Ltd. 2006 March 2006142107125ORIGINAL ARTICLES FACTORS INFLUENCING VOLUNTARY CORPORATE DISCLOSURE BY KENYAN COMPANIESDULACHA G. BARAKO, PHIL HANCOCK AND H. Y. IZAN
Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies Dulacha G. Barako, Phil Hancock* and H. Y. Izan There has been considerable research in respect of voluntary disclosure by companies and factors that may explain such disclosure. However, most of the research has been centred in developed countries. This study extends the previous literature by examining voluntary disclosure in a developing country, namely Kenya. Over the last decade, the Kenyan Government has initiated several far-reaching reforms at the Nairobi Stock Exchange (NSE) in order to mobilise domestic savings and attract foreign capital investment. These measures include privatisation of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies. This study provides a longitudinal examination of voluntary disclosure practices in the annual reports of listed companies in Kenya from 1992 to 2001. The study investigates the extent to which corporate governance attributes, ownership structure and company characteristics influence voluntary disclosure practices. Our results suggest that the extent of voluntary disclosure is influenced by a firm’s corporate governance attributes, ownership structure and company characteristics. The presence of an audit committee is a significant factor associated with the level of voluntary disclosure, and the proportion of non-executive directors on the board is found to be significantly negatively associated with the extent of voluntary disclosure. The study also finds that the levels of institutional and foreign ownership have a significantly positive impact on voluntary disclosure. Large companies and companies with high debt voluntarily disclose more information. In contrast, board leadership structure, liquidity, profitability and type of external audit firm do not have a significant influence on the level of voluntary disclosure by companies in Kenya. Keywords: voluntary disclosure, corporate governance
Introduction iven the crucial role that an exchange plays in economic development,1 especially in a developing economy, it is not surprising that the Kenyan Government has focused on transforming the Nairobi Stock Exchange (NSE) as a vehicle for mobilising domestic savings and attracting foreign capital inflows. As the NSE becomes an increasingly important avenue to companies for accessing
G
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cheaper sources of finance (Wagacha, 2001), the level of information disclosed by listed companies is of interest to the growing audience of prospective local and foreign investors. Crucial to investors’ participation at the stock exchange is access and availability of information about listed securities. The more accurate and reliable information that companies disclose, the better is the public perception of companies’ traded securities. This is particularly relevant to Kenya, where there are con-
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*Address for correspondence: Graduate School of Management, The University of Western Australia, 35 Stirling Highway, Crawley 6009. E-mail:
[email protected]
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cerns about the quality of corporate financial reports (World Bank, 2001). Published annual reports are used as a medium for communicating both quantitative and qualitative corporate information to shareholders, potential shareholders (investors) and other users. Although publication of an annual report is a statutory requirement, companies normally voluntarily disclose information in excess of the mandatory requirements. Company management recognises that there are economic benefits to be gained from a well-managed disclosure policy (Williams, 2001). Thus, information disclosure in itself is a strategic tool, which enhances a company’s ability to raise capital at the lowest possible cost (Healy and Palepu, 1993; Lev, 1992). In an attitudinal survey to explore why companies list on the Nairobi Stock Exchange (NSE), Wagacha noted that: “The predominant reason for listing was identified as access to cheaper resources of financing . . . firms that list look to the access of non-bank finances as a principal motivation for listing” (2001, p. 3).
Motivation There is currently no empirical evidence available on the extent to which listed companies in Kenya provide information over and above that which is mandated, and whether there are variations in the levels of such disclosure. Therefore, the motivation for this study is to examine the extent of voluntary disclosure in annual reports and whether the variables that researchers have found to be significant in explaining voluntary disclosure practices by companies in developed countries apply in a developing country like Kenya. The issue of corporate governance has become an important issue in many countries and the response has varied from a legislative response like the Sarbannes-Oxley Act in the USA to an adoption of best practice principles in countries like the UK and Australia. The results of this research may be useful for regulators in Kenya as they deliberate the appropriate corporate governance requirements for that country. This study also adds to the literature on voluntary disclosure in developing countries and extends that literature by including corporate governance variables as possible explanatory variables for voluntary disclosure.2 In addition to corporate governance variables the paper also examines company attributes and ownership structure as possible explanatory variables of the voluntary disclosure decision. Additionally, after reviewing the corporate governance literature in the African context,
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Okeahalam and Akinboade concluded that: “there has been limited published research on corporate governance in Africa and even less rigorous academic or empirical research. There is an urgent need to embark on a meaningful analysis of corporate governance [research] in Africa” (2003, p. 28). Finally, the World Bank Report in 2001 on the observance of standards and codes in Kenya, although specifically examining Kenyan companies’ compliance with International Accounting Standards (now International Financial Reporting Standards), the World Bank noted: “weaknesses in corporate governance practices, lack of pressure from the users of financial statements for highquality information . . . pervades the corporate financial reporting regime in Kenya” (2001, p. 1). It is against this background that we explore voluntary corporate disclosure practices of listed companies in Kenya. This is the first known study to utilise data on Kenyan companies. To summarise, this study examines two related research questions: Firstly, to what extent do Kenyan companies disclose information in the annual reports over and above that which they are required to disclose. Secondly, to what extent do corporate governance attributes, ownership structure and company characteristics influence the disclosure decision. The study covers a ten-year period from 1992 to 2001, to enable us to examine the trend in disclosure practices over this period.
Corporate reporting and governance in Kenya Corporate financial reporting and regulation in Kenya As the focus in this research is on voluntary disclosure, it is appropriate to provide a brief overview of the regulatory framework in Kenya with respect to corporate financial reporting. This will give the reader some appreciation of the corporate reporting environment and place the extent of voluntary disclosure of information into some context. Like most Commonwealth countries, the Kenyan Companies Act3 (Chapter 486, Laws of Kenya), is based on and is substantially the same as the UK Companies Act of 1948 (Ogola, 2000). The Kenyan Companies Act sets the general framework for financial accounting and reporting by all registered companies in Kenya, and stipulates the basic minimum requirements with regard to financial reporting. The Sixth Schedule of the Act sets out the
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disclosure requirements in respect of the balance sheet and the profit and loss account. Due to the limited details of the Companies Act, financial reporting and regulation is supplemented by the pronouncements of the Institute of Certified Public Accountants Kenya (ICPAK), a body established through the Accountants Act. The Act also resulted in the formation of the Kenya Accountants and Secretaries National Examinations Board (KASNEB) and the Registration of Accountants Board (RAB). The ICPAK is responsible for the development and implementation of accounting and auditing standards and has been engaged in the setting of Kenyan Accounting Standards (KASs) since the early 1980s. In 1998 the ICPAK decided to adopt IFRSs without any modification and as a result from 1999, financial statements for all companies in Kenya have been required to comply fully with IFRSs. In order to enforce adherence to the highest standards of financial reporting, the ICPAK maintains a close working relationship with regulatory institutions such as the Central Bank of Kenya, and the Capital Markets Authority. Also, the ICPAK is represented on the Disclosure and Standards Committee of the Capital Markets Authority. The Nairobi Stock Exchange like many other stock exchanges maintains listing rules for all listed companies across the Main Investment Market Segment, the Alternative Securities Market Segment and the Fixed Income Securities Market Segment.
Corporate governance in Kenya As is the trend in other countries, corporate governance has gained prominence in the Kenyan context. Not withstanding the corporate governance concerns globally, the Kenyan environment is mainly shaped by corporate experiences, particularly corporate failures or poor performances of public and private corporations. For instance, affirming this fact, the former Governor of the Central Bank of Kenya, presenting a paper on Kenyan corporate governance experience in the banking sector commented “bad corporate governance has led to the failure of 33 banks in Kenya in 1985” (Banki Kuu News, October–December 2000, p. 4). An important player in developing the appropriate corporate governance framework in Kenya is the Centre for Corporate Governance (CCG) Kenya, an affiliate of the Commonwealth Association for Corporate Governance (CACG). In November 1999, the
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Centre for Corporate Governance developed principles for Corporate Governance in Kenya to be adopted voluntarily by companies. This document substantially constituted the draft Corporate Governance Practices for Listed Companies in Kenya (2000) issued by the Capital Market Authority, which subsequently in 2002 became a mandatory guideline for all listed companies in Kenya. The guideline and the sample code mainly deal with issues of the Board (for example, composition, role of audit committee, separation of the role of board chair and CEO) and the rights of shareholders. In 2005, in line with the emphasis on the need to improve the quality of financial reporting and governance by Kenyan companies, the Centre for Corporate Governance issued a draft Corporate Governance Guidelines on Reporting and Disclosures in Kenya. The emphasis of the draft guidelines is on non-financial disclosures, such as ownership, board (composition, qualifications, committees, meetings) auditor independence and corporate social responsibility. The preceding discussion relating to the Kenyan corporate governance environment presents an insightful summary that is generally consistent with international practices. More importantly, the study incorporates corporate governance attributes as possible explanatory variables for the level of voluntary disclosures. Thus, this study provides empirical validation of some of the corporate governance practices adopted in the past few years by listed Kenyan companies. From this brief overview of the regulation of corporate reporting and governance in Kenya it is apparent that there are many similarities to what exists in many developed countries. Consequently the list of items reported as voluntary disclosure items in other studies in developed countries are likely to include items that are also not part of the mandatory requirements in Kenya. This issue is explored in more detail later, where the selection of the voluntary disclosure items for this study is discussed.
Theoretical framework and literature review Agency theory Agency theory models the relationship between the principal and the agent. Jensen and Meckling defined an agency relationship as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision
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making authority to the agent” (1976, p. 308). In the context of the firm, the agent (manager) acts on behalf of the principal (shareholder)4 (Eisenhardt, 1989; Fox, 1984; Jensen and Meckling, 1976; Ross, 1973). This separation of ownership and management results in costs not present when the owner and manager is the same person. Jensen and Meckling (1976) categorised this cost as follows: • monitoring: expenses incurred by the principal to limit aberrant activities of the agent; • bonding costs: expenses incurred to ensure that the agent does not undertake actions that are not in the principals’ interests; and • residual loss: due to sub-optimisation by the agent of the welfare-maximisation objective. In the context of the firm, a major issue is the information asymmetry between managers and shareholders (owners). In this agency relationship, insiders (managers) have an information advantage. Owners therefore face moral dilemmas because they cannot accurately evaluate and determine the value of decisions made. The agent may take advantage of the unobservability of his actions to engage in activities to enhance his personal goals. Formal contracts are thus negotiated and written as a way of addressing agent– shareholder conflicts. It is also possible that an agent may voluntarily provide information in order to reduce bonding costs and encourage outside investors to invest in his (her) company. Therefore, in this research, voluntary disclosure presents an excellent opportunity to apply agency theory, in the sense that managers who have better access to a firm’s private information than external owners and investors can make credible and reliable communication to the market to enhance the value of the firm by reducing the costs of the agency relationship. These are the monitoring costs that managers voluntarily assume and include disclosures about investment opportunities, the financing policies and other general information about the firm. Therefore, the hypotheses tested in this research are derived from an application of agency theory.
Literature review A number of prior studies have investigated various determinants of companies’ voluntary disclosure practices. However, most of the studies are concentrated in developed countries and only a small number look at developing countries. As stated in note 2, previous studies on disclosure by companies in devel-
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oping countries include: India (Singhvi, 1968); Mexico (Chow and Wong-Boren, 1987); Nigeria (Wallace, 1988); Malaysia (Hossain et al., 1994); Bangladesh (Ahmed and Nicholls, 1994); Zimbabwe (Owusu-Ansah, 1998). We make reference to some of these papers in this section. We are not aware of any published study examining determinants of companies’ voluntary disclosure practices in Kenya and hence one of the motivations for this paper. A consistent finding in previous studies is that size is an important predictor of corporate reporting behaviour. Ahmed and Courtis (1999) conducted a meta-analysis of 29 disclosure studies, and found that size, listing status and financial leverage have a significant impact on disclosure level. Other company attributes associated with corporate disclosure include: multinationality (Raffournier, 1995; Owusu-Ansah, 1998), performance (Singhvi and Desai, 1971), industry type (Cooke, 1989, 1992) and country of origin (Meek et al., 1995). With the exception of size, findings concerning association between company characteristics and corporate disclosure practices are mixed. Craswell and Taylor (1992) and Inchausti (1997) found a significant positive relationship between type of audit firm and disclosure practices, whereas Raffournier (1995), Depoers (2000) and Haniffa and Cooke (2002) found no significant association. Similarly, Hossain et al. (1995) and Naser (1998) observed a positive association between leverage and the level of disclosure. Wallace et al. (1994) and Bradbury (1992) found no significant association between leverage and the extent of voluntary disclosure. The influence of ownership structure on corporate disclosure practices has also been extensively studied. Chau and Gray (2002) investigated the relationship between ownership structure and voluntary corporate disclosure practices of listed companies in Hong Kong and Singapore. They found the extent of voluntary disclosure is negatively associated with the level of family ownership. Ho and Wong (2001) observed a similar finding using a sample of Hong Kong listed companies. Hossain et al. (1994) found a significant negative relationship between ownership dispersion and the extent of disclosure by Malaysian listed companies, and to the contrary, Haniffa and Cooke (2002) reported a negative relationship between ownership dispersion and level of disclosure by Malaysian listed companies. McKinnon and Dalimunthe (1993) found weak support for the relationship between ownership diffusion and the extent of voluntary disclosure by Australian diversified companies. Apart from ownership concentration, foreign ownership has been a significant de-
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terminant of corporate disclosure practices. Haniffa and Cooke (2002) documented strong support for the hypothesis that foreign ownership is positively associated with the level of voluntary disclosure. Singhvi (1968) reported a similar finding that foreign ownership influences companies’ corporate reporting practices. Forker (1992) examined the relationship between corporate governance and corporate disclosure for UK companies. The focus of his study was the disclosure of share options. The results indicated that CEO dominance (defined as combined roles of CEO and the board chair) has a negative impact on the level of disclosure. Ho and Wong (2001) provide empirical evidence of a positive association between corporate disclosure practices and the existence of an audit committee. Chen and Jaggi (2000) observed a positive relationship between the proportion of independent nonexecutive directors and comprehensiveness of financial disclosures, and the relationship is weaker for family controlled firms. Similarly, Ho and Wong (2001), and Haniffa and Cooke (2002) document evidence of a negative association between voluntary corporate disclosure and the proportion of family members on the board. We draw on previous studies to investigate factors that may influence voluntary disclosure practices of listed companies. These factors include corporate governance attributes, ownership structure and firm-specific characteristics.
Hypotheses development Corporate governance characteristics This paper examines the influence of corporate governance characteristics, ownership structure and company attributes on voluntary disclosure practices of companies. Corporate governance characteristics studied in this research are: board composition, board leadership structure and audit committee formation. Board composition refers to the number of non-executive directors to the total number of directors. According to Fama and Jensen (1983), non-executive directors act as a reliable mechanism to diffuse agency conflicts between managers and owners. They are viewed as providing the necessary checks and balances needed to enhance board effectiveness (Franks et al., 2001). Evidence of the relationship between the proportion of non-executive directors on the board and corporate disclosure has been provided by Chen and Jaggi (2000) and Haniffa and Cooke (2002).
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The importance of non-executive directors has also been demonstrated in other settings: positive share price reactions to specific critical events when the firm’s board is dominated by outside (non-executive) directors have been documented. Examples of these events include tender offer bids (Byrd and Hickman, 1992; Cotter et al., 1997), the adoption of poison pills (Brickley et al., 1994), and management buyout announcements (Lee et al., 1992). These empirical research findings verify the relevance of non-executive directors as a governance mechanism that enhances the board’s capacity to ameliorate agency conflict between owners and managers, which may occur in the decision to voluntarily disclose information in the annual reports. Based on these earlier findings the following hypothesis is examined: H1: The higher the proportion of non-executive directors, the higher the level of voluntary disclosure. Within the context of corporate governance, the central issue often discussed is whether the chair of the board of directors and CEO positions should be held by different persons (dual leadership structure) or by one person (unitary leadership structure). According to agency theory, the combined functions (unitary leadership structure) can significantly impair the boards’ most important function of monitoring, disciplining and compensating senior managers. It also enables the CEO to engage in opportunistic behaviour, because of his/her dominance over the board. Forker (1992) empirically studied the relationship between corporate governance and disclosure quality, and presented evidence of a negative relationship between disclosure quality and “dominant personality” (measured as CEO and board chair combined). Hence, to the extent that the combined chair/CEO positions “signals the absence of separation of decision management and decision control” (Fama and Jensen, 1983, p. 314), the following hypothesis is examined: H2: The extent of voluntary disclosure is higher for firms with a dual leadership structure. Previous research provides evidence of a positive association between the presence of an audit committee and corporate disclosure practices (e.g. Ho and Wong, 2001). Similarly, McMullen (1996) reported that the presence of an audit committee is associated with reliable financial reporting, such as, reduced incidence of errors, irregularities, and other indicators of unreliable reporting. In addition, Bradbury argued that: “audit committees are commonly viewed as monitoring mechanisms that en-
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hance the audit attestation function of external financial reporting” (1990, p. 21). The board usually delegates responsibility for the oversight of financial reporting to the audit committee to enhance the breadth of relevance and reliability of annual report (DeZoort, 1997; Wolnizer, 1995). Thus, audit committees can be a monitoring mechanism that improves the quality of information flow between firm owners (shareholders and potential shareholders) and managers, especially in the financial reporting environment where the two have disparate information levels. Given the influence of audit committees on the context and content of corporate annual reports, the following hypothesis is tested H3: The level of voluntary disclosure is higher for firms that have an audit committee.
Ownership structure Various aspects of ownership structures have been studied in previous research (e.g. ownership concentration, family ownership, government ownership, foreign ownership, institutional ownership and managerial ownership). This study examines three aspects of a firm’s ownership structure, namely, ownership concentration, foreign ownership and institutional ownership. Agency theory suggests that in a modern corporation, due to the separation of ownership and control, there is a likelihood of agency conflicts (Jensen and Meckling, 1976), with the potential for conflict to be greater where shares are widely held than when it is in the hands of a few (Fama and Jensen, 1983). Thus, discretionary disclosure provides managers with an avenue to demonstrate that they act in the best interests of the owners (Craswell and Taylor, 1992; McKinnon and Dalimunthe, 1993). Managers may therefore voluntarily disclose information as a means to reduce agency conflicts with the owners. An alternative view is that a dispersed ownership structure implies a lack of monitoring capacity due to low ownership stake of individual shareholders (Zeckhauser and Pound, 1990). Due to ownership diffusion, shareholders may not be a formidable force to influence company’s reporting practices. Empirical results of the relationship between ownership concentration and corporate disclosure are mixed. Using a sample of Malaysian listed companies, Hossain et al. (1994) found a negative relationship, whereas Haniffa and Cooke (2002) noted a positive relationship. McKinnon and Dalimunthe (1993) observed a weak relationship between ownership structure and voluntary disclosure of
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segment information, whilst Craswell and Taylor (1992) found no relationship between ownership structure and voluntary corporate disclosure. The following hypothesis is tested in this study: H4: The higher the proportion of shares held by the top 20 shareholders, the higher the extent of voluntary disclosure. Haniffa and Cooke (2002) found a significant positive relationship between the proportion of foreign ownership and the level of voluntary disclosure by listed companies in Malaysia. They argued that there is a greater need for disclosure as a means to monitor the actions of management by foreign owners. Similarly, Singhvi (1968) found that companies, in which foreigners owned a majority of stocks, present higher quality disclosure than locally Indian owned companies. He further established that the difference between the mean disclosure scores of foreign owned (40.66) and locally owned (34.82) companies were significant at the 1 per cent level. This is an indication of the foreign owners’ influence on corporate governance practices, which impacts significantly on firms’ corporate reporting practices. Moreover, most of these companies are multinational subsidiaries, and the presence of foreigners on boards may significantly influence their approach to corporate financial reporting in order to meet foreign reporting requirements. Consistent with previous research findings, it is possible that this group of investors can influence corporate disclosure practices of listed companies in Kenya. Given the geographical separation of owners and management, company management may be inclined to voluntarily provide more information in the annual reports. Thus, ownership by foreigners can be a significant determinant of the level of corporate disclosure. Based on the discussion above, the following hypothesis is tested: H5: The higher the percentage of shares held by foreigners, the higher the level of voluntary disclosure. Due to the large ownership stake, institutional investors have strong incentives to monitor corporate disclosure practices. Thus, managers may voluntarily disclose information to meet the expectations of large shareholders. Carson and Simnett (1997) found that there is a significant positive relationship between the percentage ownership by institutional investors and voluntary disclosure of corporate governance practices by listed companies in Australia. Similarly, Bushee and Noe (2000) documented a significant positive association between institutional shareholdings and cor-
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porate disclosure practices, as measured by the Association for Investment Management and Research (AIMR). Given shareholder activism and the monitoring potential of institutional shareholders, the following hypothesis is tested: H6: The higher the percentage of shares held by institutional shareholders, the higher the extent of voluntary disclosure.
Company characteristics The company characteristics examined in this research are: size, leverage, and type of audit firm, profitability and liquidity. Industry type is a control variable. In almost all disclosure studies, company size has featured as an important determinant of disclosure levels (Belkaoui-Riahi, 2001; Chow and Wong-Boren, 1987; Lang and Lundholm, 1993; Owusu-Ansah, 1998; Singhvi and Desai, 1971; Wallace and Naser, 1995; Wallace et al., 1994; Watson et al., 2002). Several reasons are advanced for the significant influence that size has on companies’ financial reporting practices. Information generation and dissemination are costly, and, therefore, larger firms with more resources and superior expertise are better placed to produce comprehensive and detailed financial statements (Buzby, 1975). Chow and Wong-Boren (1987) argued that agency costs increase with firm size. Thus large firms voluntarily disclose more information in annual reports to ease agency conflicts. It is also suggested that large firms operate in a multi-product business environment that requires the generation of several internal management reports for the purpose of achieving the overall organisational goal. These reports can, therefore, form part of the voluntary information firms make available to shareholders, investors and the public (Owusu-Ansah, 1998). Based on the above discussion, the following hypothesis is tested: H7: The larger the firm, the higher the extent of voluntary disclosure. Jensen and Meckling (1976) argued that agency conflicts are exacerbated by the presence of bondholders in a firm’s capital structure. To cater for this, agency theory predicts that restrictive covenants may be included in written debt contracts. In their corporate disclosure study of Bangladesh listed companies, Ahmed and Nicholls (1994) argued that in countries where financial institutions are a primary source of company funds, a priori there is an expectation that companies, which have large sums of debt on their balance sheet, will
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disclose more information in their annual reports. Moreover, such firms tend to prepare detailed information to enhance their chance of getting funds from financial institutions. This is similar to the Kenyan environment in which financial institutions play an active part in the provision of funds to corporate borrowers, some of which are the listed firms. Empirical results are mixed. Various studies have found a positive association between leverage and the extent of disclosure (Bradbury, 1992; Malone et al., 1993; Naser, 1998). However, others did not establish a significant relationship between leverage and disclosure (Carson and Simnett, 1997; Hossain et al., 1994; Malone et al., 1993; McKinnon and Dalimunthe, 1993). The following hypothesis is examined: H8: The higher the leverage, the higher the extent of voluntary disclosure. Although it is entirely management’s responsibility to prepare annual accounts, an external audit firm can significantly influence the amount of information disclosed in their normal course of duty. DeAngelo (1981b) argued that large audit firms invest more to maintain their reputation as providers of quality audit than smaller audit firms. In the case of damage to reputation, large firms stand to lose more than the small firms. It is also suggested that big audit firms have many clients and are therefore likely to be less dependent on their clients, which may compromise the quality of their work to a greater degree than the small audit firms (Owusu-Ansah, 1998). The independence enjoyed by large audit firms enables them to influence corporate financial reports to satisfy the external users’ needs for reports, since their value as auditors, in part, depends on how users of annual reports perceive the auditors’ report (DeAngelo, 1981a). A number of previous studies have documented a relationship between audit firm size and corporate disclosure, e.g. Ahmed and Nicholls (1994), DeAngelo (1981b), McNally et al. (1982), and Singhvi and Desai (1971). Based on the above discussion, the following hypothesis is examined: H9: The extent of voluntary disclosure is higher for firms that are audited by the big four audit firms. Prior empirical studies have shown that profitability influences the extent of disclosure in annual reports (Wallace and Naser, 1995; Inchausti, 1997; Owusu-Ansah, 1998). Inchausti (1997) argued from the perspective of agency theory that management of a very profitable firm will use information in order to obtain personal advantages. Therefore, they
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will disclose detailed information as a means of justifying their position and compensation package (Singhvi and Desai, 1971). It may also be argued that poorly performing firms may disclose less information to conceal the poor performance, presumably from the shareholders. Wallace et al. (1994) found no relationship between profitability and disclosure, and Lang and Lundholm (1993) suggested that the direction of the relationship is not clear. However, it is more likely that the management of a profitable enterprise will voluntarily disclose more to the market to enhance the value of the firm, as this also determines their compensation as well as the value of their human capital in a competitive labour market. In light of the above discussion, the following hypothesis is examined: H10: The higher the profitability, the higher the extent of voluntary disclosure. Wallace and Naser (1995) argued that regulatory institutions, as well as investors and lenders, are concerned with the going concern status of companies. Hence a firm’s ability to honour its short-term obligations as they fall due, without recourse to selling other assetsin-place, is expected. Belkaoui-Riahi and Kahl (1978) and Cooke (1989) suggested that the soundness of the firm as portrayed by high liquidity is associated with greater levels of disclosure. On the other hand, Wallace et al. (1994) argued that firms with a low liquidity position might disclose more information to justify their liquidity status. The empirical findings are inconclusive. Whereas BelkaouiRiahi (1978) found no relationship between liquidity and disclosure, Wallace et al. (1994) documented a significant negative association between liquidity and disclosure for listed and unlisted Spanish companies. In this study, the following hypothesis is tested: H11: The higher the liquidity, the higher the extent of voluntary disclosure. Industry type is included as a control variable. Wallace et al. (1994) suggested that firms in a specific industry might face particular circumstances that may influence their disclosure practice. For example, there are significant differences in the operations and reporting practices of a firm in the manufacturing industry and another in the financial services industry. In addition, Owusu-Ansah (1998) suggested that firms that operate in a highly regulated industry might be subjected to serious rigorous controls that can significantly impact on their corporate disclosure practices. In another study, Watson et al. (2002) found that companies that are a utility or are in the media industry are less likely to disclose certain
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accounting ratios than companies in the other industries included in that study. They suggested that this may be due to companies in these regulated industries feeling less need to make additional disclosures to legitimise their activities. The empirical findings on this relationship are mixed. While Stanga (1976) reported a positive relationship between industry type and the extent of corporate disclosure, Wallace et al. (1994) and OwusuAnsah (1998) found no significant relationship between industry type and extent of corporate disclosure.
Research design and methodology Disclosure index construction and application Since the pioneering work of Cerf (1961), several different approaches have been adopted to measure disclosure quality and quantity, but there is no general theory that offers guidance on the selection of items to measure the extent of voluntary disclosure (Marston and Shrives, 1991). Disclosure, by its very nature, is an abstract construct that does not possess inherent characteristics by which one can determine its intensity or quality (Wallace and Naser, 1995). To measure the dependent variable, either a disclosure index or content analysis can be used (Williams, 1998). Hackston and Milne (1996) found that using a disclosure index or content analysis does not affect the regression results. To control for the issues associated with content analysis such as counting words or sentences, how to deal with charts and pictures and consistent with prior studies (Hossain and Adams, 1995; Hossain et al., 1995; Dixon et al., 1994), this study uses a disclosure index to measure the level of reporting by companies. A disclosure index involves the researcher identifying whether an entity does or does not disclose an item in the list. Paramount in enhancing the reliability of the index was the rigour that was applied in its construction. The steps that were followed are discussed in the ensuing sections. First, of primary importance is the definition of voluntary disclosure. For the purposes of this research, voluntary disclosure is defined as the discretionary release of financial and non-financial information through annual reports over and above the mandatory requirements, either with regard to the Kenyan company laws, professional accounting standards or any other relevant regulatory requirements. Second, an extensive review of prior studies was undertaken to develop a list of items that
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may be voluntarily disclosed by a company. The main aim was to check for commonalities across the studies and to isolate those items that have been consistently identified as relevant and which may be disclosed by companies. For an item to be included, it must have been used in more than one previously published study. Such an approach was applied in prior studies by (Buckland et al., 2000; Firer and Meth, 1986; Hossain et al., 1994) in Jordanian, South African and Malaysian studies respectively, all of which are based on disclosure by companies in developing countries. In the initial stage of this research, a broad and comprehensive list of items that may be voluntarily disclosed by companies in their annual reports was identified. The list of disclosure items included both financial and non-financial items that may be relevant to investment decision-making, and which listed companies may disclose. This step culminated in the generation of 106 items. Since the focus of this research is voluntary disclosures, the preliminary list of 106 items was subjected to a thorough screening to eliminate those that are mandated. This list was sent to various individuals chosen on the basis of their expertise and knowledge of local accounting practices, who work with or are members of institutions that influence corporate financial reporting in Kenya. As a result of their feedback, the initial list of 106 items was reduced to 47 items5 and is reported in Table 1. The disclosure items are 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 information. Two important and contentious issues are often debated in the literature on the construction of disclosure indices. The first issue is whether some items should be weighted more heavily than others. The second is whether the weights should be externally generated (for example, with the aid of a user group such as financial analysts and bank loan officers), or researcher-generated. In the accounting research, both weighted (Botosan, 1997; Buzby, 1974; Choi, 1973; Chow and Wong-Boren, 1987; Eng et al., 2001; Firer and Meth, 1986; Firth, 1984; McNally et al., 1982; Singhvi and Desai, 1971; Stanga, 1976) and unweighted (Cooke, 1989, 1991; Hossain et al., 1994; Owusu-Ansah, 1998; Raffournier, 1995) disclosure indexes have been used. Both approaches have shortcomings. The use of a weighted disclosure index has been criticised because it may introduce a bias towards a particular user-orientation, and the use of an
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unweighted disclosure index has been criticised on its fundamental assumption that all items are equally important. Notwithstanding the subjectivity in weighting, all items cannot be of equal importance. In this research, therefore, a weighted disclosure index is adopted on the premise that all items disclosed in firms’ annual reports are not of equal importance. In scoring disclosure items, the mean of the banks’ loan officers’ responses to each item is applied as a numerical weight of each item. The weights of every item marked as disclosed are added together to derive the total voluntary disclosure score for the company. Finally, to express it as a percentage, the disclosure score is divided by the maximum possible score. Although the emphasis is on weighted disclosure index scores, as a robustness check, unweighted disclosure index scores were computed and compared with the results of the weighted disclosure index. Kenyan bank loan officers were asked to rate the importance of the items on a scale of 0–4. The values attached to the points are 0 (unimportant), 1 (slightly important), 2 (moderately important), 3 (very important) and 4 (essential). The use of bank loan officers is relevant to Kenya for two reasons: there are far fewer corporate financial analysts in Kenya than in industrialised countries and, as a prudential measure, the Central Bank of Kenya require banks to seek annual reports of borrowers (at least for the past three years) prior to making a lending decision. The mean of the loan officers’ responses was applied as the weight for each item. It is difficult in practice to establish the applicability of the disclosure items to every company in advance. At the item-selection stage, to control for this effect, the guiding principle was to ensure that the selection process was devoid of industry inclination. However important disclosure items may still be inapplicable to an industry. For example, Research & Development disclosure may not be as applicable to the banking industry as it is to agriculture or manufacturing industry. Thus, companies in this industry should not be penalised for non-disclosure of Research & Development information. An independent evaluator was recruited to verify the company voluntary disclosure scores through annual accounts. The independent assessor was an auditor with a local auditing firm. His local corporate financialreporting experience was important in controlling for subjectivity in interpreting annual reports. The independent evaluator controlled errors, such as inadvertently awarding or failing to award scores to a company for items
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Table 1: Items in the voluntary disclosure categories General and strategic information Information relating to the general outlook of the economy Company’s mission statement Brief history of the company Organisational structure/chart Description of major goods/services produced Description of marketing networks for finished goods/services Company’s contribution to the national economy Company’s current business strategy Likely effect of business strategy on current performance Market share analysis Disclosure relating to competition in the industry Discussion about major regional economic developments Information about regional political stability Financial data Historical summary of financial data for the last 6 years or over Review of current financial results and discussion of major factors underlying performance Statement concerning wealth created, e.g. value added statement Supplementary inflation adjusted financial statement Return on assets Return on shareholders’ funds Liquidity ratios Gearing ratios Forward-looking information Factors that may affect future performance Likely effect of business strategy on future performance New product/service development Planned capital expenditure Planned research and development expenditure Planned advertising and publicity expenditure Earnings per share forecast Sales revenue forecast Profit forecast Social and board disclosure Number of employees for the last two or more years Reasons for change in employee number Productivity per employee Other productivity indicators Indication of employee morale e.g. turnover, strikes and absenteeism Information about employee workplace safety Data on workplace accidents Statement of corporate social responsibility Statement of environmental policy Environmental projects/activities undertaken Information on community involvement/participation Names of directors Age of directors Academic and professional qualification of directors Business experience of directors Directors’ shareholding in the company and other related interests (e.g. stock options) Disclosure concerning senior management responsibilities, experience and background
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Table 2: Sector representation Sector
Number of companies listed
Number included in sample
Percentage included
9 12 12 21 54
7 10 11 15 43
77.8 83.3 91.7 71.4
Agriculture Commercial and services Finance and investments Industrial and allied Total
disclosed. The disclosure-scoring process followed a systematic procedure.
Sample selection and data sources Due to the relatively small number of companies listed on the NSE (54), all companies were considered for inclusion in the survey. The list of companies is contained in the NSE market fact file – 2002. The main criteria used for sampling the firms were: (i) annual reports must be available at the stock exchange and (ii) the firm must have been listed for the entire period of the study 1992–2001. Firms that did not meet these criteria were excluded. The companies listed on the NSE are classified into four main sectors: agriculture; commercial and services; finance and investments; and industrial and allied. Table 2 summarises the distribution of sample firms by sectors. At least 70 per cent of companies in each of the four sectors are represented in the survey. Such a cohesive representation enables the research findings to be generalisable to companies listed on the NSE. Corporate-governance attributes and company characteristics were collected from the annual reports, while ownership information was collected from shareholders’ monthly returns submitted by listed companies to the NSE. Table 3 provides a summary of the operational definition of variables and their sources.
Results and discussion Descriptive statistics Table 4 presents a summary of the companies’ voluntary disclosure scores for selected years. The level of voluntary disclosure is generally low. However, over the ten-year study period (comparing data for 1992 and 2001) there is an increase in the extent of voluntary annual report disclosure by Kenyan companies. By 2001, one company in the finance and invest-
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ment sector disclosed at least 50 per cent of items contained in the disclosure index. In 1992, 27 companies scored less than 10 per cent on the voluntary disclosure index; by 2001, only two companies were in this category, illustrating a marked increase in the voluntary disclosure practices of companies. Table 5 presents sample characteristics. In 1992, only nine (21 per cent) companies had an audit committee, and this number substantially increased to 23 (52 per cent) over the 10year study period. Similarly, most (75 per cent) companies voluntarily adopted the dual board leadership structure by 2001, and utilised the services of the big international audit firms. Most companies had a majority of nonexecutive directors on the board. However, whether the non-executive directors are truly independent as defined in the Corporate Governance Practices for Publicly Listed Companies Guidelines draft (2000) is difficult to determine. The board size ranged from 3 to 14 in 1992 and 3 to 15 in 2001. The company with the largest board of 15 members in 2001 belongs to the manufacturing industry (industrial and allied sector), and the smallest board with three members is in the agricultural sector. In 1992, the size of sample companies ranged from 35 million to 25,866 million Kenya shillings. Over the years this had increased markedly – in 2001, company size ranged from 47 million to 102,018 million Kenya shillings. Performance of the listed companies measured as the return on equity had been on the decline, reflecting the general decline in economic performance of Kenya over the 10-year period. Although a smaller proportion (33 per cent) of companies utilised the services of the big international audit firms in the early years, there is a noticeable increase in the number of companies with auditors from the big-four audit firms. By 2001, an overwhelming 91 per cent of the companies used audit services of international audit firms (PricewaterhouseCoopers, Ernest and Young, Deloitte and Touch and KPMG Peat Marwick). Finally,
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Table 3: Operational definitions of variables Independent variables
Operational definition
Corporate governance Board composition
Board leadership structure Board size Board audit committee Ownership structure Shareholder concentration
Foreign ownership
Institutional ownership
Firm characteristics Firm size Leverage External auditor firm Profitability Liquidity Control Industry type
Source of information
Ratio of non-executive directors to total number of directors on the board Dichotomous, 1 or 0 Total number of directors Dichotomous, 1 or 0
Company annual reports and NSE records, i.e. annual fact book Company annual reports Company annual reports Company annual reports
Percentage of shares owned by top 20 shareholders to total number of shares issued Percentage of shares owned by foreigners to total number of shares issued Percentage of shares owned by institutional investors to total number of shares issued
NSE company filing
Total assets Debt ratio defined as total debt to total assets Big four vs Non-Big four i.e. 1 for Big four, 0 otherwise Return on equity defined as net profit to total shareholders’ funds Current asset to current liabilities
Company annual reports Company annual reports
Agriculture, commercial and services, finance and investments, and industries and allied
NSE Handbook 2002
NSE company filing
NSE company filing
Company annual reports Company annual reports Company annual reports
Table 4: Voluntary corporate disclosure score: selected years Disclosure score* (%)
1992
1996
2001
No. of companies
%
No. of companies
%
No. of companies
%
27 10 6 0 0 0
62.8 23.2 14.0 0.0 0.0 0.0
25 8 7 3 0 0
58.1 18.6 16.3 7.0 0.0 0.0
2 16 16 5 3 1
4.7 37.2 37.2 11.6 7.0 2.3
50
*Disclosure score is computed as the total disclosure score obtained by a company expressed as a percentage of the maximum possible score.
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Table 5: Sample characteristics Independent variables Board size 1992 2001 Board composition 1992 2001 Board audit committee 1992 2001 Dual board leadership 1992 2001 Big-four auditor 1992 2001 Total assets (Kenya Shillings) 1992 2001 Return on equity (%) 1992 2001 Liquidity (times) 1992 2001 Debt–asset ratio (%) 1992 2001 Shareholder concentration 1992 2001 Foreign ownership 1992 2001 Institutional ownership 1992 2001
Max
Min
Mean
Median
SD
14 15
3 3
7.8 8.2
8.0 8.0
2.7 2.6
100 90
11 11
66.7 68.0
70.5 71.5
21.2 20.5
25,866 102,018
35 47
1,883 7,440
721 2,259
5,968 17,024
72.38 41.80
−4.68 −45.40
18.52 0.50
14.93 4.85
15.77 21.27
33.25 13.88
0.64 0.91
2.18 2.14
1.22 1.27
4.89 2.14
27.09 66.80
0.00 0.00
3.05 9.03
0.05 2.40
5.63 14.21
21% 52% 21% 75% 33% 99%
95.13 99.80
42.1 42.2
71.5 72.0
74.8 75.3
15.2 15.6
87.1 87.5
0.0 0.0
28.1 28.3
13.4 13.5
30.1 30.2
91.5 91.5
7.2 7.1
60.1 58.4
65.3 63.6
23.2 23.4
we note that there was a high concentration among the top 20 shareholders, high institutional and foreign ownership.
Results The results of the multivariate test of the hypotheses developed above are documented in Table 6. In conducting the test, we pooled our cross-section and time series data. To accommodate the panel data, we have in-
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cluded year dummies in each of the regression equations. In addition, due to the panel nature of our data, we estimated regression coefficients by performing pooled Ordinary Least Square (OLS) with Panel-Corrected Standard Errors (PCSEs). Our earlier observation that disclosure by Kenyan companies had increased over the 10-year period is clearly evident by the positive estimated coefficients for the year dummies, and significantly so over the most recent periods.
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Table 6: Pooled regression estimates: 1992–2001 (dependent variable: weighted disclosure score) Independent variables
Test variables Board composition Board leadership structure Board audit committee Shareholder concentration Foreign ownership Institutional ownership Firm size Leverage External auditor type Profitability Liquidity Constant
Predicted sign
Estimated coefficient
Asymptotic t-ratio+
P-value
+ − + + + + + + + + +
−0.12 −0.71 6.00 −0.13 0.07 0.17 0.00 0.22 −0.19 −0.01 −0.09 13.43
−4.58* −0.87 5.83* −8.21* 6.74* 16.50* 3.18* 4.84* −0.32 −0.59 −1.06 5.51
0.000 0.387 0.000 0.000 0.000 0.000 0.001 0.000 0.752 0.550 0.289 0.000
2.33 1.59 1.18 0.58 0.79 0.71 0.93 1.88 2.82 3.35 9.25 10.29
4.14 3.60 1.54 3.22 4.36 3.11 3.04 5.40 6.78 8.41 14.54 14.92
0.000 0.000 0.124 0.001 0.000 0.002 0.002 0.000 0.000 0.000 0.000 0.000
Control variables Agriculture industry Finance and investment Industrial and allied 1993 1994 1995 1996 1997 1998 1999 2000 2001 R-square = 53.4%; F-value = 24.13; Sig. F = 0.000; N = 430. *Significant at less than 1% confidence level. +Based on Panel-adjusted standard errors.
The board composition variable is significant but negative and this does not support the positive association predicted in H1. This is consistent with the result of Eng and Mak (2002) for voluntary disclosure practices in Singapore. They suggest that one explanation for this result is that the presence of independent directors is a substitute for voluntary disclosure. This may also be the case in Kenya. Another possible explanation for the result in Kenya is that while many directors may be outside the company they may not be truly independent. Recent reforms in Kenya aimed at tightening the definition of an independent director provide some support for this assertion. Although it has the expected negative sign, the board leadership variable lacks statistical significance (ρ > 0.01) and therefore H2 is not supported. This result is consistent with Ho and Wong (2001), who reported a lack of a
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significant relationship between board leadership structure and the extent of voluntary disclosure by Hong Kong listed companies. However, it contradicts the findings by Forker (1992), who reported a weak relationship between board leadership structures and the level of voluntary disclosure for the 100 largest and smallest quoted companies in the United Kingdom. However, it should be noted that the Forker study only examined disclosures about share options. Overall, the results here suggest that a firm’s board leadership structure does not influence the level of voluntary disclosure by Kenyan companies. The presence of an audit committee is positively and strongly associated with companies’ voluntary disclosure practices and provides strong support for H3. It is the most important predictor of the extent of voluntary disclosure, with the highest estimated coefficient of 6.00 significant at less than the 0.001
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level. This result is similar to that of Ho and Wong (2001), who reported a positive and significant relationship between the existence of an audit committee and the extent of voluntary disclosure by the Hong Kong listed companies. The board composition variable has significant negative association with the extent of voluntary disclosure, contrary to the hypothesised positive relationship. Eng and Mak (2002) found a similar result with respect to Singapore listed companies. Although a significant predictor, the result for shareholder concentration, however, is not in the direction predicted and thus H4 is not supported. We find that the higher the proportion owned by the top 20 shareholders, the lower the disclosure. This negative relationship is consistent with the results of Hossain et al. (1994) and is evidence that a more dispersed ownership structure implies a lack of monitoring capacity due to the low ownership stake of individual shareholders (Zeckhauser and Pound, 1990). The proportion of foreign ownership and percentage of institutional ownership are also found to be significant predictors of the extent of voluntary disclosure. Both variables have the predicted positive signs and are significant at the 0.01 level and therefore both H5 and H6 are supported. Company size as measured by total assets is a very important firm attribute associated with the voluntary disclosure in the annual reports. As hypothesised in H6, company size has a positive relationship with the extent of voluntary disclosure and thus provides strong support for H7. Similarly, a company’s leverage level is found to be significantly and positively associated with the extent of voluntary disclosure and H8 is supported. Hence, companies with large amounts of debt voluntarily provide more information in the annual report. The external audit firm variable lacks statistical significance to show its impact on the extent of voluntary disclosure in our multivariate analysis and hence H9 is not supported. A possible reason for this finding is that there may be an association between
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the establishment of an audit committee and utilisation of the big-four audit firm service. To investigate whether there is an association between the presence of an audit committee and the big-four audit firm, a chisquare test was conducted. The test yielded a chi-square value of 24.974 and suggests that there is a significant (ρ < 0.001) association between the two variables. Hence, when simultaneously considered in a multivariate test, audit committee appears to be a better predictor of the level of voluntary disclosure in the annual report. Neither the profitability nor the liquidity variables are significant in explaining corporate disclosure of companies and hence H10 and H11 are not supported. These results are consistent with Wallace et al. (1994) who did not find any relationship between profitability and disclosure. Belkaoui-Riahi and Kahl (1978) found no relationship between liquidity and disclosure, consistent with the finding in this study. The results also suggest that disclosure by firms in the agricultural sector is marginally higher relative to the other sectors.
Robustness checks As Cooke suggested, “no one procedure is the best but that multiple approaches are helpful to ensure the results are robust across methods” (1998, p. 209). The hypotheses were also tested against an unweighted measure of the disclosure index. Although not reported in detail here, the results for the unweighted index mirrored those for the weighted index. A summary of the results for all hypotheses for both the weighted and unweighted indexes is shown in Table 7. Another approach we used as a robustness measure is the rank regression analysis. With respect to disclosure studies, as cited in Ho and Mathews (2002) and Wallace et al. (1994), Cheng et al. (1992) suggested that rank transformation provides additional confidence in statistical results because it: (i) yields a distribution-free data; (ii) provides results sim-
Table 7: Summary of the results of the hypotheses tested Regression hypotheses Weighted index Multiple regression Unweighted index Multiple regression
H1
H2
H3
H4
H5
H6
H7
H8
H9
H10
H11
SS
NS
SS
SS
SS
SS
SS
SS
NS
NS
NS
SS
NS
SS
SS
SS
SS
SS
SS
NS
NS
NS
NS = not significant; SS = strongly significant (ρ < 0.05).
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ilar to those that can be derived from ordinal transformation and (iii) mitigates the impact of measurement errors, outliers and residual heteroscedasticity on the regression results. Although not reported in this paper, rank regression results also support our finding about the significant influence of the presence of an audit committee on disclosure practices, and this is true for weighted and unweighted rank regressions. The other variables found to have a significant relationship with disclosure are: board composition, foreign ownership, institutional ownership, firm size and leverage. Common to the multivariate tests and rank regression is the fact a company’s voluntary disclosure is explained by a blend of its governance attributes, ownership structure and company-specific characteristic.
Summary and conclusions A basic and fundamental concern is whether listed companies in Kenya provide voluntary information in their annual reports. This study documents disclosures across a broad range of items including General and Strategic; Financial; Forward Looking; Social and Board of Directors. The study then tests for correlations with a number of independent variables relating to corporate governance attributes, ownership structure and company characteristics. The independent variables tested were derived from previous research largely based in developed countries. One of the aims of this study is to investigate if variables that explain voluntary disclosures in developed countries also explain voluntary disclosure practices in developing countries. In general the results confirm that many of the drivers of voluntary disclosures in developed countries also apply in developing countries. However, the aggregate disclosure levels are lower than levels that are generally reported in many studies in developed countries. The study finds that in all years (1992–2001), listed companies do voluntarily disclose information in their annual reports. More importantly, the trend analysis suggests that there is an increase in the level of information voluntarily disclosed by these companies. The extent of voluntary disclosure in the annual report is related to a company’s corporate governance attributes, ownership structure and company characteristics. Corporate governance attributes associated with voluntary disclosure are the audit committee and board composition (ratio of independent nonexecutive directors to total number of directors), though the latter was in the opposite direction to our expectations. The proportion of foreign ownership and percentage of stock
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owned by institutional shareholders are ownership structures that influence the level of voluntary disclosure. Company characteristics related to the extent of voluntary disclosure are size and leverage. Based on the explanatory power (R square) of the regression model, board characteristics appear to have more influence on the extent of voluntary disclosure than company and ownership attributes. While the findings provide credence to previous research findings, they are of particular relevance for policy makers and regulators in Kenya. In this regard, the findings have direct implications on corporate governance issues raised in the Corporate Governance Practices for Listed Companies in Kenya Draft (2000). One of the issues was the establishment of audit committees, which since 2003 has become mandatory for all listed companies. The strong association between audit committee and the extent of voluntary disclosures suggests that mandating companies to establish audit committee is a step in the right direction in improving corporate governance practices in general and quality of financial reporting in particular. Board composition measured as the ratio of non-executive directors to total number of directors was consistently negatively related with the level of voluntary disclosure. One limitation we had was in the operational definition of an independent non-executive director. We have used non-executive directors in this study, but it is well known that in many cases, they may not be “independent”. Institutional shareholding and foreign ownership are positively related with the extent of voluntary disclosures. This therefore implies that companies with less or no institutional shareholding and which are mainly locally owned should upgrade their voluntary disclosure practices so as to effectively reach potential investors (locally and abroad). It is important that the management of Kenyanowned companies understand that effective communication with the market has a direct link with the cost of raising external finance, which also impacts on the value of the firm and subsequently wealth creation for the shareholders. Size and leverage were significantly and positively associated with voluntary disclosure practices. Larger firms appear to voluntarily provide more information. This could be due to greater financial capacity and requirements of large enterprises. Creditors such as banks also have an impact on disclosure decisions. In this paper the disclosure index is based on 47 items across four categories. In another paper we test the same variables for the four
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individual categories. The results overall are broadly consistent with the results reported here, although there are some differences in some categories, for example, the identity of the external audit firm is a significant predictor of information in the financial data category but not in the general and strategic information. Finally, this study focused on one avenue of company disclosure, namely corporate annual reports and the extent to which companies voluntarily release information through other means, such as the media and the internet, represent a limitation of this study.
Notes 1. For further discussion on the role of stock market in developing countries, see Tessema (2003). 2. Studies on disclosure by companies in developing countries include: India (Singhvi, 1968); Mexico (Chow and Wong-Boren, 1987); Nigeria (Wallace, 1988); Malaysia (Hossain et al., 1994); Bangladesh (Ahmed and Nicholls, 1994); Zimbabwe (Owusu-Ansah, 1998). 3. For details concerning statutory requirements about corporate financial reporting in Kenya, refer to The Companies Act, Chapter 486, Laws of Kenya, 1978, pp. 109–126. 4. For a detailed discussion of the agency theory view of a firm, see Jensen and Meckling (1976). Eisenhardt (1989) presented an overview of applications of agency theory in empirical research, while Fox (1984) described and illustrated agency theory in a sequence of contracts events between owners and managers. 5. The list was sent to: the head of internal audits of NSE, the head of internal audit of CMA, five registered stockbrokers, three certified public accountants who work for CBK. They screened the list with reference to: the International Financial Reporting Standards (IFRS), the Kenya Companies’ Act 1978, the Banking Act 2000, CMA disclosure guidelines, NSE listing requirements and any other relevant statutes or pronouncements that may be mandated in Kenya to isolate voluntary items. Responses were also received from one stockbroker and the three CPAs. These responses were in agreement as to which items were voluntary in the Kenyan context.
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Chow, C. W. and Wong-Boren, A. (1987) Voluntary Financial Disclosure by Mexican Corporations, The Accounting Review, 62, 533–541. Cooke, T. E. (1989) Voluntary Corporate Disclosure by Swedish Companies, Journal of International Financial Management and Accounting, 1, 171–195. Cooke, T. E. (1991) An Assessment of Voluntary Disclosure in the Annual Reports of Japanese Corporations, The International Journal of Accounting, 26, 174–189. Cooke, T. E. (1992) The Impact of Size, Stock Market Listing and Industry Type on Disclosure in the Annual Reports of Japanese Corporations, Accounting and Business Research, 22, 229–237. Cooke, T. E. (1998) Regression Analysis in Accounting Studies, Accounting and Business Research, 28, 209–224. Cotter, J., Shivdasani, A. and Zenner, M. (1997) Do Independent Directors Enhance Target Shareholder Wealth During Tender Offers? Journal of Financial Economics, 43, 195–218. Craswell, A. T. and Taylor, S. L. (1992) Discretionary Disclosure of Reserves by Oil and Gas Companies: An Economic Analysis, Journal of Business Finance and Accounting, 19, 295–308. DeAngelo, L. (1981a) Auditor Independence, “Low Balling” and Disclosure Regulation, Journal of Accounting and Economics, 3, 113–127. DeAngelo, L. (1981b) Auditor Size and Audit Quality, Journal of Accounting and Economics, 3, 183–199. Depoers, F. (2000) A Cost-Benefit Study of Voluntary Disclosure: Some Empirical Evidence from French Listed Companies, The European Accounting Review, 9, 245–263. DeZoort, F. T. (1997) An Investigation of Audit Committees’ Oversight Responsibilities, Abacus, 33, 208–227. Dixon, K., Coy, D. and Tower, G. (1994) Tertiary Education Institutions Annual Reports. New Zealand: New Zealand Ministry of Education Study. Eisenhardt, K. M. (1989) Agency Theory: An Assessment and Review, Academy of Management Review, 14, 57–74. Eng, L. L. and Mak, Y. T. (2002) Corporate Governance and Voluntary Disclosure. Paper presented at the AAANZ Conference. Eng, L. L., Hong, K. F. and Ho, K. Y. (2001) The Relation Between Financial Statement Disclosures and the Cost of Equity Capital of Singapore Firms, Accounting Research Journal, 14, 35–48. Fama, E. F. and Jensen, M. C. (1983) Separation of Ownership and Control, The Journal of Law and Economics, 26, 301–325. Firer, C. and Meth, G. (1986) Information Disclosure in Annual Reports in South Africa, Omega, 14, 373–382. Firth, M. (1984) The Extent of Voluntary Disclosure in Corporate Annual Reports and its Association with Security Risk Measures, Applied Economics, 16, 269–277. Forker, J. J. (1992) Corporate Governance and Disclosure Quality, Accounting and Business Research, 22, 111–124. Fox, R. P. (1984) Agency Theory: A New Perspective, Management Accounting, 62, 36–38.
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Dulacha G. Barako is a Kenyan national, and works in the department of bank supervision at the Central Bank of Kenya. He recently completed his PhD with the Graduate School of Management at the University of Western Australia. His PhD research was in the area of corporate financial reporting and corporate governance practices of Kenyan companies. Phil Hancock is currently Associate Dean of Teaching and Learning at the Business School and Senior Teaching Fellow at the Graduate School of Management at the University of Western Australia. He is the author of many articles on financial reporting and is also a co-author of a very successful introductory accounting text-book used in over 16 tertiary institutions in Australia and New Zealand. Phil was appointed to the Urgent Issues Group in Australia on 1 May 2002. He is the only academic member of the UIG. He is a Fellow of CPA Australia and an Associate of the Institute of Chartered Accountants in Australia. Professor Izan is currently Deputy Dean of the Business School at the University of Western Australia. Her research interests reflect her broad multidisciplinary background in economics, accounting and finance. She is a Fellow of the Australian Academy of Social Sciences and a Fellow of the Australian CPA. Key appointments in the last ten years include: Deputy Chair, UWA Academic Board; Executive Dean, Division of Business, IT and Law, Murdoch University; Chair, Promotions and Tenure Committee, UWA; Head, Department of Accounting and Finance, UWA; Director, AlintaGas; Director, Black Swan Theatre Company.
Volume 14
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