Essay on "Voluntary Disclosure"

Essay 10 pages (3050 words) Sources: 15 Style: Harvard

[EXCERPT] . . . .

Voluntary Disclosure

Many studies have examined the voluntary disclosure of accounting information, as well as its association with the accounting practice in the capital market. The voluntary disclosure of accounting information is argued to reduce information asymmetry along with reducing agency costs. In viewing the literature available regarding the concept of the voluntary disclosure of accounting information, one can clearly see the motivations of firms to disclose such information to the public, along with gaining a clear understanding of the empirical methods employed by researchers to both examine and measure these accounting disclosures. Further, one can garner the relationship between voluntary disclosure and agency costs in order to more fully understand the reasoning behind accounting entities' decisions to disclose such information.

Voluntary Disclosure in Accounting

In recent years the decision for corporations and firms to disclose information about their financial positions and performance has risen to the forefront in the field of Finance. Such disclosure has long been presented to the public in the form of mandated annual reports, but as time continues to progress, more firms are opting to support the tactic of voluntary disclosure of company positions, performance and assets, both physical and intangible to enhance transparency within the market for stakeholders and competitors alike.

In order to more accurately gauge the impact of voluntary disclosure on a company, one must first understand the difference between tangible and intangible assets within that company and the accounting that has historically been completed for each. Companies have long released financial statements, which are technically historical documents that show onlookers what a company was worth at one point in time. These statements have long disclosed companies' tangible assets -- or those that have a physical or financial embodiment -- such as buildings, equipment, stocks and bonds (Garger 2010, pp. 28). In essence, a tangible asset is clearly-accounted-for entity within a company whose status is reported in company financial statements and can be viewed as having a discernible profit and value-projection in the future. As tangible assets must be recorded in company books at the value for which they are purchased, stakeholders and competitors alike are able to more accurately gauge how these assets will hold up in the market dependent upon changes in economic conditions, currency and the like.

Alternately, a company's intangible assets have historically not been mandated for disclosure to the public, as their non-physical nature leaves significant uncertainty as to the future benefits that such entities will bring to a company. Such assets are those that do not have a physical form, but nonetheless provide value to the firm that possesses them. Examples of intangible assets include contracts, patents, brand names and even unique organizational infrastructures that a company possesses (Gray and Kang 2008, pp. 58). As stated, such assets have long been hidden from the public, but the recent growth of the service sector along with the prevalence of information technology related businesses and the dramatic increase in the size and number of international mergers and acquisitions has made the accounting for intangible assets extremely significant as the value they bring to respective companies is significant in turn (Diga and Saudagaran 2008, pp. 44). More succinctly, the voluntary disclosure of a firm's intangibles, accounts for the projected profitability of that firm in a manner that was long overlooked (Apostolou and Nanopoulos 2009, pp. 396).

Motivations and Empirical Research Regarding Voluntary Disclosure

The Financial Accounting Standards Board (FASB) and Enhanced Business Reporting Consortium (EBRC) suggest that companies should be encouraged to make more voluntary disclosures, especially in the fields of nonfinancial performance and intangible asset disclosure (Reddy and Subramanian 2010, p.31). However, voluntary disclosures are only useful if they are perceived as credible, and the voluntary disclosure of information raises potential questions about the motivations for the disclosure and its perceived credibility (Coram, Monroe, and Woodliff 2009, pp.137). Such questioning as to the motivation of companies to disclose accounting information, both financial and in terms of assets is an issue that has raised significant questioning in years past, and research has shown that the reasoning for companies' alignment with voluntary disclosure tactics is largely in order for that company to remain favorably viewed in the social contexts in which they exist.

In viewing this reasoning in terms of a social context, one must look into the groups that corporations are looking to satisfy through their use of voluntary disclosure of accounting information. Largely, corporations have cited their decisions to utilize voluntary disclosures upon the reduction of information asymmetry between managers and outsiders, and many have further cited the desire for companies to reduce uncertainty about their respective firm's prospects through such disclosure (Giorgioni, Hassan, Power, Romilly 2011, pp. 33). Such prospects have long been viewed as the prime motivation for companies to release such information, as without future prospects, a company will cease to exist.

Additionally, such prospects cannot come to fruition without the support of the general public and the assistance of stakeholders in pushing these corporate goals through to completion. In noting this fact, it can be assumed that corporations also tend to disclose information to keep these participants happy and align with the business model of "acting consistently with widely shared social priorities (Crawford and Williams 2010, pp. 512). In acting accordingly, companies are able to ensure that the social and environmental landscape in which they function, remains maintained in terms of that corporation's ability to make informed, long-term decisions that focus on the corporation's interests (Adams and Frost 2007, pp. 2)

Research has shown that regulatory pressures have pushed many companies toward the use of voluntary disclosure, and these pressures come in turn, with the public's perception of how companies abide by the changing rules and regulations in the market around them. In deciding not to comply or embrace such standards, corporations begin to appear to the public as if they have something to hide. Therefore, corporate motivation to account and publicize its accounting information can be largely attributed to corporate desire to enhance transparency and lower the veil that has long existed between the internal-workings of a company and those who remain outside it.

Companies have chosen to act in accordance with this rising standard of voluntary disclosure in what can be viewed as a preemptive maneuver in terms of company dealings. For example, large companies have recently come under fire and have been publically scrutinized for hiding information from the market and consumers, only to have this information disclosed publicly in later court proceedings. In acting proactively to avoid such proceedings at a later date, companies choose instead to disclose information in a manner which they themselves construct in order for such information to be dealt with in terms of a public response in a manner that is timely and does not open up the possibility of causing later problems.

Researchers have long investigated the motivations for corporate voluntary disclosure of information by surveying a large number of financial executives, and such research has presented information regarding the specifics of accounting disclosures. In viewing the empirical research that has been gathered in recent years regarding the benefits of voluntary disclosure in corporate accounting, several findings rise to the forefront in terms of accessibility and public understanding.

For instance, in combining the aforementioned motivational reasons for companies to disclose accounting information in terms of research and social responsibility, recent empirical research has found that pension fund pressure, for example, is successful in increasing the social responsibility of the companies they own, in particular on the environmental and corporate governance dimensions, which can be held as reasoning for corporations to seek out the use of voluntary disclosure tactics (Chatterji and Listokin 2009, pp. 299). Such empirical research has been conducted in viewing the motivations for disclosure, but additionally has been completed in order to pinpoint the relationships between this disclosure and certain internal aspects of the companies who employ them.

Empirical studies in this area have largely concentrated on investigating the relationship between disclosure level and stock liquidity, or testing the link between disclosure level and an overall proxy for the cost of equity capital (Giorgioni, Hassan, Power, Romilly 2011, pp.33). Studies have also shown that a company's decision to voluntarily disclose accounting information can be directly correlated to market competition. A 2008 study empirically investigated the effect of product market competition on voluntary disclosure of proprietary information, which proposed that there are two types of strategic interaction settings relevant to voluntary disclosures: capacity competition and price competition (Bushman and Smith 2007, pp. 75). The results of the study found that when firms compete on capacities alone, the disclose more information to lower the costs of capital needed for investments, and when they compete on prices, they disclose less because proprietary costs would be high, allowing the company to benefit from any decreased cost of capital due to lesser need for additional capital (Reddy and Subrarmanian 2010, pp.41). In viewing this, the reasoning for voluntary disclosure aligns less with social responsibility as previously hinted,… READ MORE

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