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Determinants of Voluntary Disclosure in Non-Financial Listed Companies of

Pakistan

Working Paper · May 2017

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
Determinants of Voluntary Disclosure in Non-Financial Listed Companies of
Pakistan
Hammad Hassan Mirza1
Khwaja Fahar Muneeb2
Muhammad Jam e Kausar Ali Ashghar3

Abstract
The present study attempts to analyze the firms level determinants of voluntary
disclosure in non-financial companies listed at Pakistan Stock Exchange (PSX).
For this purpose the disclosure data of 214 companies is selected and analyzed
using cross sectional regression. The study recommends a firm specific disclosure
index in the light of existing literature. The relationship of exogenous firm-level
factors including profitability, firm size, audit quality, age and leverage is
estimated with disclosure index. The estimated results show that except leverage
other firm specific factors are positively related with firm tendency to disclose
information voluntarily.
Keywords: voluntary disclosure; agency problem; cross sectional regression

1. Introduction
By disclosure, we study mean provision of information by companies in their annual reports
either to fulfill regulatory and listing requirements or to reduce the information asymmetry
among the managers and shareholders. The former is mandatory and its dynamics are different
from the latter i.e. voluntary disclosure. As earlier stated, voluntary disclosures are meant to
reduce information asymmetry between managers and shareholders therefore, the agency theory
proposed by Jensen and Meckling (1976) is the right perspective to understand the need and
benefits which the firm may expect to avail.

1
Dr. Hammad Hassan Mirza, Assistant Professor/Incharge Department of Business Administration, University of
Sargodha. 40100, Pakistan. Email: hammadhassan@uos.edu.pk
2
Khawaja Fahar Muneeb, MS Management Science Scholar, Department of Business Administration, University of
Sargodha40100, Pakistan. Email: faharmuneeb@yahoo.com
3
Dr. Jam e Kausar Ali Asghar, Assistant Professor, Department of Business Administration, University of Sargodha,
Gujranwala Campus.

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
The agency theory suggests that managers have the power to expropriate the rights of
shareholders by buying the company’s assets at low price than market or they can invest
companies funds in projects which are expected to yield a greater private benefit to managers
than company or in extreme case the managers can expropriate shareholders rights by outright
theft (La Porta et al., 2000). If shareholders suspect the managers’ maligning intention they may
react either by asking high dividends in annual general meetings so as to reduce funds under
managers control or in extreme case they may replace the company’s management by using their
voting power. The reduction in funds under managers’ control is not something desirable by
managers because it exposes them to strict scrutiny of external capital market where they
ultimately need to go for acquisition of funds for investment in upcoming investment projects
(Rozeff, 1982; Easterbrook, 1984; Jensen, 1986;. Therefore, it is important for managers to keep
the shareholders in confidence by providing them information according to their needs. The
increased confidence of the shareholders positively affect the stock market performance of the
company and helps managers in achieving the goal of shareholders’ wealth maximization. In
addition to the agency theory perspective, researchers have discussed several firm specific
attributes which effect company’s willingness to disclose its financial information voluntarily.

Before discussing the firm specific factors it is important to understand that companies reveal
their private information to a certain level at which they anticipate an optimal return either in
terms of reduced agency cost or decrease in information asymmetry (Ferguson et al. 2002). The
negative impacts for voluntary disclosure could also occur in form of rival action’s costs, for
example, if information is being achieved by rivals then it can be used for the deterioration of
company’s competitive position (Depoers, 2000). Jensen and Meckling (1976) and Stanga (1976)
stated that costs of agency in large size company is higher as compared to smaller one therefore,
large size company needs to disclose relatively more information. In addition to the firm size,
audit quality is another important determinant of voluntary disclosure. Firth (1979) argued that
the bigger audit consultants can influence the companies to provide the inclusive related
information, about companies policies to preserve their reputation. Hence, companies in which
audit firms belongs to any of the big four audit firm may disclose more information voluntarily.
Several researchers (See forinstance; Akhtaruddin, 2005; Glaum & Street, 2003; Haniffa &
Cooke, 2002) argued the firm age to be a significant determinant of voluntary disclosure.
Owusu-Ansah (1998) describes that recently established companies may face the viable

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
difficulties if they provide the information according to their progress and enhancement. Newly
established companies have to assume the larger initial costs than the older firms for the
provision of voluntary disclosure of the related information because they don’t have sufficient
funds at the start. Inchausti (1997) established that the managers of more profitable firm
encourage to disclosure more information in order to get the individual bonuses and rewards and
to regain their strong positions and remunerations in the firm. It is also argued that profitable
firms are not reluctant to provide information as it is necessity for them to provide more of the
voluntarily disclosed information about companies operations in annually published reports for
the validation of firm performance and minimizing political interventions (Inchausti, 1997; R.
Wallace & Naser, 1995). Finally, leverage of the firm is considered as a negative factor which
reduces the level of voluntary disclosure (See for example; Hossain, et al. 1995; Jaggi & Low,
2000; Khanna & Srinivasan, 2004). As high leverage is not something appreciated by the
shareholders therefore, companies with high debt to total asset ratio avoid disclosing much of its
leverage information to the shareholders.
Rest of the study is organized as follows. Literature review is presented in the next section while
research methodology is discussed in the third section. Fourth section provides the statistical
analysis and discussion on estimated results and conclusion is given in the last section.
2. Literature Review:
Several researchers focused on importance of voluntary disclosures by companies in their annual
reports (See for example: Heitzman et al. 2010; Hossain & Hammami, 2009; Sharma & Davey,
2013; Tagesson et al. 2013). Covering such a vast literature is beyond the scope of this study
therefore, few recent studies are discussed below which is sufficient to identify the research gap.
From Omar and Simon (2011) have analyzed the financial disclosures of listed companies. They
collected data from 145 Jordanian companies listed on the Amman stock exchange (ASE) for the
year 2003. They employed univariate ANOVA and multiple regression to examine the
determinants of disclosure. They found that firm size, profitability, number of shareholders,
listing status, industry type, audit firm size and company age are significant determinants of
disclosure among Jordanian companies.

Adelopo (2011) studied voluntary disclosure in Nigerian listed companie. By employing

multivariate analysis he found negative relationship of block holders and managerial ownership
with firm’s voluntary disclosures. Similarly, Blacconiere et al. (2011) studied the determinants of

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
voluntary disclosure and reported trading history and stock price volatility as the determining
factors. Deopers (2011) found firms size, foreign trading and property cost to be significant
determinants of voluntary disclosure in French listed companies. Sun et al. (2012) studied
dynamics of voluntary disclosure in Chinese listed companies and reported that information
asymmetry to be the main reason behind voluntary disclosures by the firm. They argued that if
number of independent directors is increased then firm is more likely to disclose its voluntary
information. Guidry and Patten (2012) analyzed the financial data from 95 listed companies and
suggested that firm disclose its information voluntarily to reduce the information asymmetry.
However, their study reported a negative relationship between firm performance and voluntary
disclosures. Qu et al. (2013) studied 297 Chinese listed companies by using panel regression and
reported no relationship of state ownership and legal person ownership with level of voluntary
disclosures. However, corporate governance, leverage and number of independent directors are
found to be significantly related. Tagesson et al. (2013) and Allegrini and Greco (2013) also
found social and voluntary disclosures positively associated with municipalities’ size tax rate, tax
base, and financial strength.

The existing literature shows that most of the studies conducted on voluntary disclosures
addressed this issue in context of developed economies. In context of developing economies,
especially Pakistan the evidence is very limited. Therefore, present study intends to fill this gap
by providing evidence on determinants of corporate disclosures from emerging economy of
Pakistan.

3. Research Methodology
For the purpose of present study a random sample of 214 non-financial listed companies from
PSX is selected and their disclosure index for the year 2013 is calculated. Using the firm specific
factors as exogenous variables the relationship is estimated using the cross sectional regression.
Regarding disclosure index, several methods are suggested by previous researchers to develop a
format of scores to calculate the degree of disclosure from annual reports. These methods can be
classified into two types. Firstly, un-weighted disclosure index is recommended by Cooke,
(1992); Inchausti, (1997) and Mohammed Hossain, (2008) while the method of weighted index
is mainly suggested by Marston & Shrives (1991) and Ahmed & Courtis (1999). However,
following Hosain and Hammami, (2009) the present study has calculated the disclosure index
using the following formula:

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
∑𝑛𝑑=1 𝑅𝑆𝐶𝑅𝑑
𝐷𝐶𝑂𝑅𝐸𝑖 = 𝑛 ; 𝑖 = (1, 2, … … . 𝑛); 𝑑, 𝑘 ∈ (1,0) … … … … … … … … . . (1)
∑𝐾=1 𝑀𝑆𝐶𝑅𝑘

Where 𝐷𝐶𝑂𝑅𝐸𝑖 stands for disclosure index of firm 𝑖 and 𝑅𝑆𝐶𝑅 is the firm specific raw score
where each disclosure 𝑑 is the element from binary system whose value is 1 if firm has disclosed
the particular information and 0 otherwise. Similarly, 𝑀𝑆𝐶𝑅 represents the maximum score or
maximum number of disclosure 𝑘 by any firm.
The firm specific factors include leverage (LVG) measured through debt to total asset value, firm
age (FAGE) measure by taking the log of number of years since incorporation, profitability
(PRFT) proxy by return on assets, firm size (FSZ) measured by natural log of sales and audit
firm size (ADT) which is a dummy variable with value of 1 if audit firm is among the big five
and 0 otherwise. The following model is used for estimation of linear relationship between firm’s
specific factors and disclosure index.

𝐷𝐶𝑂𝑅𝐸𝑖 = 𝛽0 + 𝛽1 𝐿𝑉𝐺𝑖 + 𝛽2 𝐹𝐴𝐺𝐸𝑖 + 𝛽3 𝑃𝑅𝐹𝑇𝑖 + 𝛽4 𝐹𝑆𝑍𝑖 + 𝛽5 𝐴𝐷𝑇𝑖 + 𝜀𝑖 … … … (2)

4. Statistical Analysis
Initially descriptive and correlation analysis is conducted to analyze the structure and
associations of variables of the study and then cross sectional regression is estimated. Descriptive
analysis is presented in table 1 below. Total number of cross sectional observations is 214 for
each proxy variable. The mean and standard deviation show that the data is not suffered from
extreme values except in case of PRFT. The reasons of this high standard deviation is high
difference in the value of accounting returns earned by the sample companies.
Table 1: Descriptive Statistics
Variable Qbs Mean Std. Dev. Min Max
DCORE 214 0.424 0.205 0.11 0.94
ADT 214 0.537 0.499 0.00 1.00
FAGE 214 1.423 0.275 0.30 2.01
PRFT 214 2.332 13.848 -110.14 63.72
FSZ 214 4.600 1.552 2.00 8.26
LVG 214 0.344 0.359 -0.71 1.42

Table 2 presents the correlation analysis of the variables. The linear co-movement among the all
dependent and independent variables is estimated. The positive correlation of independent
variables with dependent variables show positive co-movement and predicts a positive

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
relationship between firm level factors and disclosure index. However, the results show no
multicolinearity among independent variables as the highest correlation among any two
independent variables is up to 33% which indicates that research model (equation 2) is not
suffered from multicolinearity.
Table 2: Correlation Analysis:
Variable DCORE ADT FAGE PRFT FSZ LVG
DCORE 1.000
ADT 0.224* 1.000
FAGE 0.298* -0.063 1.000
PRFT 0.208* 0.097 0.093 1.000
FSZ 0.692* 0.294* 0.164* 0.284* 1.000
LVG 0.129 0.160* 0.117 0.334* 0.214* 1.000
* Represents variable is significant at 5% or less.
Table 3 presents the estimated results of equation 2 using cross sectional regression. As
indicated in table 2 above, the estimated results of cross sectional analysis show that audit size,
firm age and firm size is significantly and positively related with firm willingness to disclosure
proxy by disclosure index (see equation 1). The P value of these variables is less than 1% and
coefficient values are positive which shows that as the quality of audit, firm age and size
increases the firm level of disclosure increases. Similar results are reported by several
researchers including Ahmed & Courtis, (1999); Choi, (1973); Chow & Wong-Boren, (1987);
Depoers, (2000); Healy & Palepu, (2001); Leftwich et al. (1981); Smith & Warner, (1979) and
Stanga, (1976).The coefficient of profitability is also positive but significant at the level 5%
which shows a comparatively less confidence on the relationship between profitability and
disclosure. The insignificant value of leverage show that the evidence is not sufficient to reject
the null hypothesis of no relationship between leverage and disclosure and the coefficient o LVG
is not statistically different from zero. Value of R2 of this analysis is 0.518 which is its
determining coefficient. This shows that the variables in the model captures on 52% of the total
change in the disclosure index. This means that there are some other variables which are
responsible for corporate voluntary disclosure which the present study might have ignored.
Finally the value of F statistics is significant and ensures the model fitness.
Table 3: Regression Analysis
Variable Coef. St. Error t-stat P-Value
ADT 0.092 0.028 3.344 0.001*
FAGE 0.233 0.047 4.913 0.000*
PRFT 0.002 0.001 2.486 0.014*

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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
FSZ 0.086 0.007 12.149 0.000*
LVG -0.027 0.030 -0.911 0.363
Intercept 0.374 0.020 18.415 0.000*
2 2
F= 44.495*, R = .518, Adjusted R = .506. * represents variable is significant at 5% or less.

5. Conclusion
This research examines the relationship between firm specific variables and the extent of
voluntary disclosures in non-financial listed companies in Pakistan. The estimated results show
that firms size, age and audit quality are the most important determinants of voluntary
disclosures. However, the study did not find any evidence that leverage restricts the firm from
voluntarily disclose information in annual report. There are several factors which reduces the
generalizability of results of this study. Primarily, limited number of variables is considered in
the model. There might be other factors which are more important determinants of disclosures.
Secondly, availability of published reports of all firms is the constraints of this research study.
Further, the current research is conducting in the non-financial sector of Pakistan. The future
researchers may also study the disclosures and its dynamics in financial sector of Pakistan.
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10. Ferguson, M. J., Lam, K. C., & Lee, G. M. (2002). Voluntary disclosure by state‐owned
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368.Rozeff, 1982

APPENDIX 1: Voluntary disclosure items in annual reports

1. Brief narrative history

2. Basic organization structure/chart/description of corporate structure
3. General descriptions of business activities
4. Official address/registered address/address for correspondence, web address, email
address.
5. Management's objectives and strategies/corporate vision/motto/statement of corporate
goals or objectives.
6. Future strategy — information of future expansion
7. General development of business
8. Detail about the chairman (other than name/title) background of the
Chairman/academic/professional/business experiences
9. Details about directors (other than name/title) background of the directors/
10. Academic/professional/business experiences
11. List of senior managers (not on the board of directors)/senior management structure
12. Directors' engagement/directorship of other companies
13. Picture of all directors/board of directors
14. Picture of chairperson
15. Number of BOD meetings held and dates.
16. Graphical representation of financial information
17. Discussion of overall risk management philosophy and policy/framework
18. Narrative discussions on risk assets, risk measurement and monitoring
19. Information on risk management committee
20. Information on assets–liability management committee
21. Information on risk management and reporting system
22. Disclosure of credit rating system/process
23. General descriptions of market risk segments
24. Sponsoring public health, sponsoring of recreational projects
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 Submitted to: South Asian Journal of Banking and Social Sciences (2017)
25. Information on donations to charitable organizations
26. Supporting national pride/government — sponsored campaigns
27. Age of key employees
28. Information on ISO 9001: 2000 certification
29. Graphical presentations of performance indicators
30. Performance at a glance

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