accounting disclosure and firms' financial attributes: evidence from the uk stock market

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International Review of Financial Analysis 17 (2008) 219–241

Accounting disclosure and firms' financial attributes:Evidence from the UK stock market

George Iatridis *

University of Thessaly, Department of Economics, 43 Korai Street, Volos 38 333, Greece

Received 11 November 2005; received in revised form 23 May 2006; accepted 29 May 2006Available online 17 July 2006

Abstract

This paper focuses on the disclosure of accounting information in the financial statements of UK firms.The primary objective of the study is to analyse the financial characteristics of firms that provide extensivedisclosures, and assess the financial impact of their motives, such as for example the need to raise equityfinance. The study examines the financial attributes of firms that disclose information about key accountingissues including risk exposure, changes in accounting policies, use of international financial reportingstandards and hedging practices. Firms are inclined to disclose accounting information in order to assure themarket participants that their accounting policies are consistent with the accounting regulation and meet theinformation needs of their stakeholders. The study shows that in order to raise finance in the capital anddebt markets, firms tend to provide extensive accounting disclosures. Firms that provide informativeaccounting disclosures appear to display higher size, growth and leverage measures. The findings also showthat the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact,firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementationof international financial reporting standards enhances the quality and the comparability of financialstatements; hence it promotes consistency and reliability in financial reporting and facilitates companies inraising capital internationally.© 2006 Elsevier Inc. All rights reserved.

JEL classification: M41Keywords: Accounting disclosure; Accounting policy choice; Debt covenants; Changes in accounting policies;International Financial Reporting Standards; Risk profile; Hedging

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220 G. Iatridis / International Review of Financial Analysis 17 (2008) 219–241

1. Introduction

Accounting policy choice and incentive considerations affect the quality of accountingdisclosure and the communication between firms and users of accounting information. There arecases where managers influence the reported earnings in order to maximise their interests, such asto improve their reputation and reinforce the stock returns and their compensation plans (Fields,Lys, & Vincent, 2001; Hand & Skantz, 1998). Managers also tend to influence their accountingnumbers in order to meet their financial obligations and abide by the debt covenants that are set bylenders (Lambert, 2001). The violation of debt covenants would be a negative signal of corporateperformance, and would therefore have negative implications for the creditability and stockbehaviour of the firm. Earnings management is also related to managers' objective to avoidpolitical costs and attention, regulatory costs, taxes, etc. It appears that the behaviour of managersmay sometimes be opportunistic, which implies that their corporate goals may be in contradictionto stakeholders' interests (Weil, Fung, Graham, & Fagotto, 2006). Overall, accounting policychoice and disclosure can be regarded as part of the contracting process (Smith & Watts, 1992;Skinner, 1993).

The informativeness of disclosed accounting information varies from firm to firm (see Alford,Jones, Leftwich, & Zmijewski, 1993; Ball, Kothari, & Robin, 2000). Firms are usually more eagerto disclose good information, while they tend to delay the announcement of bad information(Aboody & Kaznik, 2000). Thus, good information is essentially reflected in stock returns when itis announced, while bad information constitutes new information to investors (Hand, Holthausen,& Leftwich, 1992). Firms with informative disclosures tend to exhibit larger analyst following andless dispersion in analyst forecasts (Lang & Lundholm, 1993). The extent to which voluntarydisclosure is effective and contributes to the efficient allocation of resources in the stock market isclosely related to the credibility of the accounting information that is disclosed. The credibility ofaccounting disclosures can be verified by comparing managers' earnings forecasts with the actualfinancial results. The literature shows that the stock market responds positively to forecasts ofearnings increases, but negatively to forecasts of earnings decreases (Ajinkya & Gift, 1984;Junttila, Kallunki, Kärja, & Martikainen, 2005; Waymire, 1984).

The motivation for studying the extent of disclosure of listed firms is to assess the financialcharacteristics of firms that provide more or less extensive accounting disclosures. The study isalso motivated by the need to determine whether the provision of extensive disclosures improvesthe financial measures and performance of firms (see Brown, Hillegeist, & Lo, 2005; Francis,Schipper, & Vincent, 2002). Another motivation of the study is to assist the accounting standardsetting bodies when they form the regulatory framework and the disclosure requirements. Thestudy is also motivated by the implementation of International Financial Reporting Standards(IFRSs), which is compulsory for listed firms that belong to member-states of the EuropeanUnion, the effective date being 1 January 2005. Here, the paper studies the impact of theimplementation of IFRSs on UK firms' financial performance. The main research question of thestudy is how the disclosure or non-disclosure of certain accounting information affects thefinancial position of firms. Such information would be useful for the accounting standard settingprocess, particularly with regards to whether more frequent and stricter financial reporting shouldbe imposed (see Levitt, 1998).

The structure of the paper is as follows. Section 2 presents the theoretical background ofthe study. Section 3 shows the research hypotheses. Section 4 describes the data sets and thelimitations of the study. Section 5 discusses the empirical findings, and Section 6 presents theconclusions of the study.

221G. Iatridis / International Review of Financial Analysis 17 (2008) 219–241

2. Theoretical background

2.1. Motives for voluntary disclosure

Firms are inclined to provide voluntary disclosures when they plan to issue public debt or equity orto acquire another company in order to give investors explicit information and influence theirperceptions (Healy & Palepu, 1993, 1995). Disclosure is anyway required because managers are heldresponsible and have tomeet certain business and financial targets.Managers tend to provide voluntarydisclosure in order to make investors aware of their managerial ability and avoidmisevaluation of theiractions and performance. It is evident that poor corporate performance is likely to result in high CEOturnover (Morck, Schleifer, & Vishny, 1990). The size of voluntary disclosure is a matter of question,because the provision of extensive disclosure in good periods would of course improve managers'corporate picture, but would question their skills and decision-making in bad periods.

Managers tend to disclose information about their performance in order to favourably affectthe firm's stock returns and ultimately their stock-related compensation plans (McKnight &Tomkins, 1999). Managers appear to plan the timing of disclosing good and bad news in order tomaximise their compensation (Aboody & Kaznik, 2000). In periods of uncertainty, managers tendto provide earnings forecasts in order to reassure investors and restore their confidence, andtherefore avoid (extreme) variability in the stock returns and their compensation (Dye, 1998).Also, in case the stock is undervalued by the stock market, managers are inclined to providevoluntary disclosures in order to correct the undervaluation (Verrecchia, 1983, 1990).

The threat of litigation due to inadequate disclosures can motivate managers to provide voluntarydisclosures to reduce the cost of litigation (Skinner, 1994). Thus, managers may be able to managethe timing of the disclosure of good and bad news. This implies that litigants would concentrate onwhether there are deliberate delays in the disclosure of bad news (Healy& Palepu, 2001). Firmswithbad news are more likely to provide voluntary disclosures than firms with good news, while firmsthat predisclose bad news may be subject to lower litigation costs than firms that do not (Skinner,1994). On the other hand, firms that operate in high litigation risk industries are more likely to makeforecasts of positive future earnings than firms in low litigation risk industries (Skinner, 1997).

Managers are likely to provide voluntary disclosures and forecasts to show to investors that areaware of the firm's economic environment and able to quickly respond to changes (Trueman, 1986).This would give a positive signal to investors about managers' abilities, and would positively affectthe stock returns and the market value of the firm (La Porta, Lopez-de-Silanes, Shleifer, & Vishny,2000; Reese &Weisbach, 2002). Voluntary disclosures would also be necessary when firms employcomplicated and/or aggressive accounting methods, which need further clarifications andexplanations. In contrast, in the case of conservative accounting policies, firms may not be requiredto provide extensive or costly voluntary disclosures (Gietzmann & Trombetta, 2003).

Firms are inclined not to disclose information that will damage their competitive position, evenif this increases the cost of issuing new capital (Gigler, 1994; Newman & Sansing, 1993). In suchcases, they tend to disclose aggregate information about their performance, concealing informationthat might harm their financial position (Hayes & Lundholm, 1996). On the other hand, firms thatdisplay lower profitability and lower volatility in profitability across business segments are likelyto provide voluntary disclosures about the performance of the respective segments (Verrecchia,2001). The size of voluntary disclosures is also affected by the potential political and contractingcosts that might arise from firms' accounting disclosures (Watts & Zimmerman, 1986).

The reduction of discretion over the choice of accounting methods tends to reduce managers'inclination to provide forward-looking accounting information and increase the voluntary


provision of non-financial information (Gigler & Hemmer, 2001). This follows from the fact thataccounting discretion would allow managers to identify their management forecast errors andlessen the related negative implications (Kaznik, 1999). Hence, the reduction of accountingdiscretion would tend to lead to higher costs, subject to management forecast errors taking place.Another consideration that might affect firms' willingness and the value of voluntary accountingdisclosures is the requirements of mandatory disclosures and how these affect managers' dis-cretion (Gigler & Hemmer, 1998).

2.2. Benefits of voluntary disclosure

Accounting disclosure reduces the uncertainty regarding firms' financial targets, the means ofmeeting these targets, i.e. the accounting methods and policies that are chosen, and firms'potential for wealth and growth. In certain cases, e.g. stock valuation, depreciation of tangiblefixed assets, etc., the accounting regulation gives firms the right to choose among a number ofalternative accounting methods for a given accounting transaction/event. It appears, therefore,that the disclosure of firms' accounting policies is of particular use especially where there isflexibility in financial reporting.

Accounting disclosure reduces the information asymmetry between informed and uninformedinvestors (Bushman & Smith, 2001), which would otherwise lead to market inefficiencies and themispricing of firms' stocks (Diamond & Verrecchia, 1991; Kim & Verrecchia, 1994). Firms thatprovide extensive disclosures tend to exhibit a significant appreciation in their stock returns,which may be unrelated to their current financial performance (Gelb & Zarowin, 2002; Healy,Hutton, & Palepu, 1999). The provision of accounting information through voluntary disclosuresgives financial analysts a better picture of firms' financial performance and capacity, and enablesthem to issue superior and more reliable forecasts (Bhushan, 1989a, 1989b; Lang & Lundholm,2000). It is evident that analysts' ratings are positively associated with the amount of disclosure(Gigler & Hemmer, 2001). The above considerations would also have favourable implications forthe stock market efficiency (see Merton, 1987).

The reduction of uncertainty and information asymmetry would smooth the communicationbetween managers and other related interested parties, such as shareholders, lenders, regulatory,tax and supervisory authorities, financial analysts, etc. This would therefore tend to reduce therelated agency and political costs that might otherwise arise (Bushman & Smith, 2001; Healy &Palepu, 2001). Lower information asymmetry would also reinforce the liquidity of the market(Lev, 1988), and thus lead to lower costs in issuing equity capital (Glosten & Milgrom, 1985;Diamond & Verrecchia, 1991) and debt (Clarkson, Guedes, & Thompson, 1996; Sengupta, 1998).Indeed, firms that provide extensive accounting disclosures tend to display lower trading costs(Botosan, 1997) and bid-ask spreads (Botosan & Plumlee, 2002; Welker, 1995). In contrast,higher information asymmetry would result in wider bid-ask spreads and higher cost of capital,because investors would require a higher return to compensate them for bearing higherinformation risks (Amihud & Mendelson, 1986; Merton, 1987).

3. Research hypotheses

3.1. Quality of accounting information

The lower information asymmetry that results from the provision of extensive accountingdisclosures would tend to lead to lower cost of equity and debt capital. H0 1 and H0 1.1 examine


whether debt and equity capital dependence makes firms disclose more. Firms that need to raisedebt or equity finance would be expected to provide extensive disclosures (see Errunza & Miller,2003). The same considerations would apply in the case of growth options and liquidity measures,i.e. firms with high growth potential and liquidity would tend to disclose more (see Durnev &Kim, 2005; Martikainen, 1997; Reese & Weisbach, 2002). This would also be the case for firmsthat work to maintain and increase their market share and profitability, and therefore need to giveinformation to customers and other market participants about their objectives and plan of action togain their confidence. It follows that management compensation, which is closely related to firmprofitability and performance, would also tend to be positively associated with disclosure (Core,Holthausen & Larcker, 1999; Kern & Kerr, 1997; Mehran, 1995). While providing extensivedisclosures, firms give additional evidence and assurance that their actions are consistent with theexpectations and interests of investors (Zimmerman, 1983). Such assurance would lead to lowerpolitical, agency and regulatory costs. Following that political costs are closely related to firms'size and reported earnings, the above considerations would be stronger especially for large firms,which are subject to political attention and scrutiny (see Ali & Kumar, 1994; Moses, 1987;Ndubizu & Tsetsekos, 1992). The hypothesis that is tested is as follows.

H0 1. There is no difference in the financial characteristics between firms that disclose detailedexplanatory accounting information and firms that disclose only the minimum requiredaccounting information. The alternative hypothesis is that firms that disclose detailed accountinginformation have distinctive financial characteristics compared to firms that disclose basicaccounting information.

To test H0 1, the study seeks to identify differences in the financial measures of firms that provideaccounting information of high quality and firms that disclose accounting information of low quality.This categorisation is based upon the quantity and quality of accounting information that firmsdisclose in their financial statements. Firms that present basic accounting information, i.e. theminimum required, such as report by the chief executive, balance sheet, profit and loss statement,cash flow statement and (brief) notes to the accounts with low informational value, are referred to aslow quality information providers. In contrast, firms that provide informative notes to the accountsand “sensitive” information relating to corporate governance, internal control systems, debtcovenants, risk profile, details on changes in accounting policies and impact on accounting figures,segmental information, use of financial instruments and derivatives,management remuneration, etc.,are referred to as high quality information providers. The logistic regression that is employed uses adummy variable as the dependent variable, which is dichotomous and takes two values, i.e. 1 for highquality information providers and 0 for low quality information providers.

As explained above, following that lower information asymmetry leads to lower cost ofcapital, firms that seek finance in the stock and/or money markets would appear to provide moreextensive disclosures (Frankel, McNichols, & Wilson, 1995). Here, the study focuses on equityfinance, and hypothesizes that firms that display increases in their equity capital would beexpected to provide extensive disclosures.1 In other words, firms that present an increase in theequity capital would tend to exhibit similar financial characteristics with high quality informationproviders. The hypothesis that is tested is the following.

H0 1.1. There is no difference in the financial characteristics between firms that provide extensiveaccounting disclosures and firms that display an increase in their equity capital. The alternative

1 With regards to the firms in the sample, the data that is available on debt issues is insufficient, and therefore the studyconcentrates only on equity issues.


hypothesis is that firms that provide extensive accounting disclosures exhibit similar financialattributes compared to firms that display an increase in their equity capital.

The dummy variable used in the logistic regression as a dependent variable takes the followingvalues: 1 for firms that show an increase in their equity capital, and 0 for firms that show no changein their equity capital. To examine whether firms that display an increase in their equity capitalprovide extensive disclosures, the dummy variable ACCDIS is placed in the logistic regressiontogether with the rest of the independent explanatory variables. ACCDIS takes the followingvalues: 1 for high quality information providers, and 0 for low quality information providers.

3.2. Debt covenants

The disclosure of debt covenants and other restrictions, such as on interest coverage andliquidity ratios, that accompany firms' loans reduces the information asymmetry between firmsand their lenders (see Beatty, Ramesh, & Weber, 2002; Dichev & Skinner, 2002). The reductionof information asymmetry would consequently reduce the uncertainty around firms' performanceand future prospects. This would in turn tend to lower the cost of capital and reinforce firms'credibility and creditability. The disclosure of debt covenants is important because it is a measureof risk for lenders and financial analysts. The violation of debt covenants signifies that there isvariability in key accounting measures, such as earnings, liquidity, etc., and increases the risk ofbankruptcy (DeFond & Jiambalvo, 1994; Sweeney, 1994). Such a situation would severely affectthe stock returns and managers' reputation and position. Therefore, firms are inclined to provideinformation about debt covenants and how these affect their financial position in order to gaininvestors' confidence (Holthausen, 1990; May, 1995). The hypothesis that is tested is as follows.

H0 2. There is no difference in the financial characteristics between firms that disclose in-formation about their debt covenants and firms that provide no information about debt covenants.The alternative hypothesis is that firms that disclose information about debt covenants havedistinctive financial characteristics compared to firms that disclose no information about debtcovenants.

The study seeks to determine whether the disclosure of debt covenants in the financialstatements affects the financial characteristics of firms. The dependent variable used in the logisticregression to test H0 2 is a dummy variable that takes the following values: 1 for firms thatdisclose information about debt covenants, and 0 for firms that present no information about debtcovenants.

3.3. Changes in the accounting policies

In general, firms tend to be in opposition to accounting methods that introduce variability inthe reported earnings or other accounting measures, such as liquidity, leverage, etc. (Dhaliwal,1982). In contrast, firms would tend to employ methods that are income-smoothing or increasingin order to show a solid and stable financial picture to investors. The employment of such methodswould tend to reinforce firms' profitability and financial position, and would therefore enablefirms to attract more (equity and/or debt) finance and lower the cost of capital. Hence, the changesthat firms perform in their accounting policies would be expected to lead to improved and betterfinancial measures. The hypothesis that is tested is the following.

H0 3. There is no difference in the financial characteristics between firms that report changes andfirms that report no changes in their accounting policies. The alternative hypothesis is that firms


that report changes in the accounting policies show improvements in their financial measurescompared to firms that report no changes in the accounting policies.

H0 3 examines whether the changes in firms' accounting policies are deliberate and lead tobetter financial numbers and performance. The dummy variable used in the logistic regression asa dependent variable takes the following values: 1 for firms that disclose changes in theiraccounting policies, and 0 for firms that disclose no changes in their accounting policies.

3.4. International Financial Reporting Standards

IFRSs are issued by the International Accounting Standards Board (IASB), formerly known asInternational Accounting Standards Committee (IASC) and established in 1973. IASB includesover 140 accounting bodies, representing over 100 nations. The main objective of IASB is “todevelop, in the public interest, a single set of high quality, understandable and enforceable globalaccounting standards that require high quality, transparent and comparable information infinancial statements and other financial reporting to help participants in the world's capitalmarkets and other users make economic decisions” (Epstein & Mirza, 2002, p. 11).

IASB cooperates with national accounting standard setters to achieve convergence inaccounting standards around the world. For example, IASB works with the US FinancialAccounting Standards Board (FASB) on a comprehensive project aimed at convergence betweenIFRSs and US Generally Accepted Accounting Practice (GAAP) (see Arestis & Basu, 2004; Vo &Daly, 2005). The International Organization of Securities Commissions (IOSCO) has approvedthe use of IFRSs for cross-border stock exchange listings. Several major stock markets, such asLondon, Frankfurt, Zurich, Hong Kong, Amsterdam and Rome, accept the preparation offinancial statements of foreign listed companies under IFRSs.

The adoption of IFRSs enhances transparency, disclosure and comparability, andessentially reinforces stock market liquidity (Biddle & Saudagaran, 1989). It is evident thatthe implementation of IFRSs leads to lower cost of capital and transaction costs, highermarket value and better reputation (Leuz & Verrecchia, 2000). Hence, it would be easier forfirms implementing IFRSs to obtain debt and equity capital (El-Gazzar, Finn, & Jacob, 1999).The higher disclosure requirements and financial reporting quality that stem from IFRSsimplies that the adoption of IFRSs gives a positive signal to investors as informationasymmetry and agency costs tend to diminish (Tarca, 2004). It appears, therefore, that firmsthat adopt IFRSs tend to display lower potential for earnings management and subjectivity(Leuz, 2003). The costs of adopting IFRSs relate to costs of transition to the IFRS regime,compliance for firms and enforcement for regulators and supervisory authorities. Thehypothesis that is tested is as follows.

H0 4. There is no difference in the financial characteristics between firms that provideinformation about the implementation of IFRSs and firms that make no reference about IFRSs intheir accounting statements. The alternative hypothesis is that there are distinctive financialdifferences between firms that provide and firms that do not provide information about theimplementation of IFRSs.

H0 4 examines whether firms' disclosure of information relating to the use of IFRSsdistinguishes them financially from firms that make no reference about IFRSs in their financialstatements. The dependent variable in the logistic regression is a dummy variable that takes thefollowing values: 1 for firms that disclose information about the implementation of IFRSs, and 0for firms that disclose no information about the implementation of IFRSs.


3.5. Risk profile and employee incentive schemes

In their effort to meet investors' needs, firms disclose information about several aspects of theirfinancial picture and performance. In certain cases, it may be that firms disclose immaterial, non-financial and qualitative information in order to disorientate investors and government authorities,especiallywhen their financial situation is unfavourable (seeKaznik, 1999). Here, the study focuses onthe extent to which firms disclose information about their risk profile and the incentive schemes thatthey provide to their employees. The disclosure of such information would contribute significantly tothe reduction of information asymmetry and give considerable insight to stakeholders about firms'financial and corporate picture. The hypotheses that are tested are the following.

H0 5. There is no difference in the financial characteristics between firms that discloseinformation and firms that disclose no information about their risk profile. The alternativehypothesis is that firms that provide information about their risk profile have distinctive financialcharacteristics compared to firms that provide no information about their risk profile.

H0 6. There is no difference in the financial characteristics between firms that discloseinformation and firms that disclose no information about employee incentive schemes. Thealternative hypothesis is that firms that provide information about employee incentive schemeshave distinctive financial characteristics compared to firms that provide no information aboutemployee incentive schemes.

The dummy dependent variables used in the logistic regression to test H0 5 and H0 6 arerespectively the following: 1 for firms that present information about their risk profile, and 0 forfirms that present no information about their risk profile; and 1 for firms that disclose informationabout employee incentive schemes, and 0 for firms that disclose no information about employeeincentive schemes.

3.6. Hedging practices

Derivatives tend to transfer risk and return between investors that are risk averse and investorsthat are willing to take higher risks with the expectation of higher returns (Foley, 1991). Theincentives for hedging relate to financial distress, debt covenants, growth options and liquidity(Cooper & Mello, 1999; Froot, Scharfstein, & Stein, 1993). Hedging can be used to reduceearnings volatility and stabilise firms' cash flows (Joseph & Hewins, 1997). Derivativesconstitute a means of off-balance sheet financing, and therefore, they do not appear on the face ofthe financial statements. This implies that, in certain cases, firms may structure their hedgingpractices so as to manipulate their reported financial figures and influence investors' perceptions(Stulz, 1984). Hedging costs also have a significant impact on firms' profitability. Hence, theprovision of disclosures on hedging activities affects firms' financial situation substantially,because it reveals information about their short and long market positions, their financial riskexposure and risk management strategy. The hypothesis that is tested is as follows.

H0 7. There is no difference in the financial characteristics between firms that discloseinformation and firms that disclose no information about hedging practices. The alternativehypothesis is that firms that provide information about hedging practices have distinctivefinancial characteristics compared to firms that provide no information about hedging practices.

H0 7 examineswhether the disclosure of “sensitive” information, such as about hedging practices,has a positive or negative impact on firms' financial accounts. The dependent variable in the logistic


regression is a dummy variable that takes the following values: 1 for firms that disclose informationabout hedging practices, and 0 for firms that disclose no information about hedging practices.

4. Data sets and limitations

4.1. Data sets

The study has used the binary logistic regression and the Kruskal–Wallis (K–W) test to test theresearch hypotheses. The empirical analysis concentrates on the accounting period January–December 2004.2 The sample consists of 284 UK firms. Accounting and financial data werecollected from DataStream. Information about the accounting policies and disclosure of thesample firms was obtained from their financial statements. The particular financial statementswere collected from the Financial Times Annual Report Service. All sample firms are listed on theLondon Stock Exchange. The analysis has excluded banks, insurance, pension and brokeragefirms, as their accounting measures are not always comparable with those of industrial firms.Appendix A presents the industrial sector structure of the sample firms. Appendix B shows theexplanatory variables that are employed in the empirical analysis.

4.2. Research limitations

The measurement of the extent of voluntary disclosure exhibits significant difficulties.Managerial behaviour and motives may not be directly observable or measurable, so anyinferences should be drawn with some caution. Although it is fairly easy to verify disclosures thatrelate to management forecasts of financial figures, by contrasting them to the actual results at theend of the period, it is quite difficult to assess voluntary disclosures that refer to items, such ascustomer satisfaction and human capital (Gietzmann & Trombetta, 2003). Also, investors havetheir own expectations and set of values, and may possess information of diverse or ambiguousquality. Therefore, they may interpret the accounting information that is published in differentways (Dye, 1998; Verrecchia, 2001).

The choices and actions of firms are closely related to analysts' forecasts and investors'expectations (Levitt, 1998). Therefore, the content of voluntary disclosures would be such as tosatisfy market participants, and avoid adverse impressions and negative evaluation reports. Thisimplies that voluntary disclosures may actually serve managers' opportunism, instead of presentingthe true and fair picture of the firm and satisfying users' needs. In such cases, voluntary disclosureswould be misleading and would lead to incorrect decision-making (see Lang & Lundholm, 1996,2000). In fact, firms' ability to manipulate the reported earnings tends to increase as the informationasymmetry between managers and other stakeholders increases (Richardson, 2000).

The motivation of managers relating to the timing or the size of the provision of voluntarydisclosures is difficult to be precisely determined. Thus, it is difficult to assess whether disclosurechanges are deliberate and relate to particular business objectives or accounting events, or simply aim tomeet the needs of accounting information users. It may be that firms increase disclosure when theydisplay favourable financial figures, which signifies that the level of disclosure is closely related to firmperformance (see Lang & Lundholm, 1993).

2 In order to strengthen the validity of the results, the analysis is repeated for the accounting periods January–December2003, 2002 and 2001. The results that are obtained (not presented here) are similar to those reported for the accountingperiod January–December 2004.


5. Empirical results

5.1. Quality of accounting information

Table 1 (Panel A) presents the results of the logistic regression and shows that firms that provideextensive disclosures tend to display higher size measures (SALETAS). Given their large size, firms

Table 1Logistic regression analysis

Panel A: Quality ofaccounting disclosure

Panel B: Increase inequity capital

Panel C: Debt covenants Panel D: Changes inaccounting policies

Variables Coefficients Variables Coefficients Variables Coefficients Variables Coefficients

CUR 4.7214*

(2.6983)RESTAS 8.4293***

(2.9462)SALESHA 0.1305*

(0.0708)SALETAS 2.65300***

(0.8686)CFM 8.6773**

(4.1611)EPSG 7.5361***

(2.9561)OPM 12.0334***

(5.8599)CGEAR 2.2341***

(0.8988)CGEAR 1.3813*

(0.7389)OPM 14.1047**

(7.1851)EPSG 0.9027*

(0.5487)RESTAS 8.8389**

(4.0794)EPS 10.2483*

(5.6889)QUI −1.1069

(0.8975)PEG 0.0280

(0.0783)ROCE 1.1456*

(0.6659)QUI −5.5110*

(2.9358)WCR 0.1202***

(0.0412)DIVSH −6.2257*

(3.7489)EPS 2.8648**

(1.4843)EDEBT 0.4466**

(0.2138)DSFU −1.5712***

(0.6263)CFM −11.1168*

(6.5631)PEG 0.5176**

(0.2491)DREMTA −137.5859**

(63.0555)TLSFU 0.8586***

(0.3172)DSFU 0.0332

(0.0957)CFM 5.1308*

(3.0126)SALETAS 1.7426*

(0.991)ACCDIS 1.9725*

(1.1332)EDEBT −0.1843

(0.1634)Constant −13.2899

(4.0329)Constant −3.4019

(2.4962)Constant −6.0583

(2.2685)CGEAR 0.4599*

(0.2847)DREMTA −25.9680

(37.2713)DIVCOV −1.2220***

(0.4869)Constant 1.6233

(1.8281)

Model χ2 28.682*** 36.148*** 30.979*** 25.158***

% correctlyclassified

85.366*** 83.783*** 87.368*** 77.358***

Sample size N1=122,N2=162

N1=76,N2=185

N1=246,N2=38

N1=204,N2=80

***,** and * indicate statistical significance at the 1%, 5% and 10% level (two-tailed) respectively. All the explanatoryvariables were entered/removed from the logistics regression using a step-wise procedure with a p-value of 0.05 to enterand a p-value of 0.10 to remove. The Wald statistic was used to test the null hypothesis that each coefficient is zero.


are inclined to disclose in order to reassure investors about their business plans and policy choice, andavoid political attention and scrutiny. The provision of extensive disclosures appears to be associatedwith higher leverage measures (CGEAR) and equity to debt (EDEBT), which shows that firms thatseek to raise external finance, such as debt capital and/or equity capital, tend to disclose in order toappeal to and attract investors and other capital providers. Overall, high quality informationproviders exhibit higher liquidity (CUR and CFM) and profitability (EPS)measures. This shows that

Panel E: IFRSs Panel F: Risk profile Panel G: Employeeincentive schemes

Panel H: Hedgingpractices

Coefficients Variables Coefficients Variables Coefficients Variables Coefficients

OPM −23.8586*

(14.4698)IGEAR 0.4452

(1.29468)DIVSHG 4.5596**

(2.0364)SALETAS 2.2818**

(1.1492)WCR −0.2459**

(0.1250)DREMTA −32.1334

(49.3015)EPS 7.4360*

(4.4539)EPSG −1.0214

(1.62996)CASH −41.0997**

(19.594)SALESHA −0.0220

(0.26374)ROSC −2.5304

(3.8077)DIVCOV −0.3182

(0.21917)NAVSH 7.4201*

(4.1150)SALETAS 4.7072*

(2.66099)CFSH −2.2612

(1.6859)DIVSH 9.5412

(7.90848)DIVSHG 17.9043**

(8.4131)DIVYI −146.2127

(97.3952)CUR −0.8773

(0.6327)DIVSHG 7.8057***

(3.33459)NPM 47.4751**

(22.787)DIVCOV 0.4164

(0.29626)QUI 4.4342**

(1.9115)OPM 73.5223***

(26.7672)ROCE 8.2849**

(4.0979)DIVSH 51.4549*

(31.0222)CFM 0.8891

(0.8322)NPM −46.1559**

(23.5519)DIVYI −1011.4485**

(519.2989)DIVSHG 2.4412

(3.41867)TLSFU 0.9696

(0.8735)ROSC −11.1760**

(4.85075)IGEAR −11.0223*

(6.0875)OPM 57.1721

(50.9992)CGEAR 0.3378*

(0.1946)CUR −3.2908***

(1.10055)DSFU 3.8078*

(2.0416)NPM 103.1767*

(62.2322)DREMTA −73.7480*

(40.568)QUI 3.8339***

(1.40015)EDEBT 0.2137

(0.2908)DSFU 6.8190**

(3.43592)Constant 0.3053

(1.6193)WCR −0.0445*

(0.02413)Constant 26.1236

(12.5202)CUR 5.6206

(4.66657)DSFU 2.9466**

(1.30981)QUI −12.5534*

(7.07315)CGEAR 0.5789*

(0.34722)CASH 8.6041

(5.72329)Constant 0.8910

(2.60687)WCR −0.1087**

(0.05731)Constant 17.0874

(10.1189)

Model χ2 37.703*** 33.748* 35.465*** 31.473***

% correctlyclassified

94.737*** 90.588*** 96.875*** 91.765***

Sample size N1=119,N2=165

N1=69,N2=215

N1=48,N2=236

N1=120,N2=164

Variables

Table 2Kruskal–Wallis statistic

Variables Panel A: quality ofaccounting disclosure

Panel B: increasein equity capital

Panel C: debtcovenants

Panel D: changes inaccounting policies

K–W statistic K–W statistic K–W statistic K–W statistic

SALES 59.7488a*** 1.7206b 31.2596a*** 10.3076a***SALESHA 26.9779a*** 4.8213b 15.4300a*** 4.6171a**SALETAS 0.1681b 3.8695b** 2.8634a* 0.5748a

RESTAS 1.0907a 2.6466a* 4.1644b** 0.0790a

NAVSH 30.9089a*** 2.6731b 8.7465a*** 7.1480a***TASSET 73.9583a*** 1.0594b 32.8356a*** 19.0316a***CAPEMP 74.9660a*** 0.7253b 27.2355a*** 17.4206a***TRES 49.5392a*** 0.2743b 13.2643a*** 18.2288a***EPSG 0.4473b 15.5516a*** 0.0486a 1.5909b

PEG 1.8723a 10.7382b 0.6630a 0.7222a

DIVYI 12.5837a*** 10.6096b*** 12.4929a*** 6.4784a***DIVCOV 2.2452a 5.0002a** 3.0506b* 0.0093a

DIVSH 6.7308a*** 1.3967b 6.6501a*** 1.8047a

DIVSHG 14.3215a*** 0.0285b 4.8803a** 0.1404a

ROCE 1.6433a 1.6135a 0.0500b 3.7065a**OPM 10.1222a*** 0.0420b 1.5615a 2.7777a*NPM 11.8126a*** 0.1417a 1.0711a 3.6954a**EPS 38.3539a*** 2.4544b 15.3990a*** 9.1916a***ROSC 17.7396a*** 0.3231b 6.8339a*** 7.8686a***CFSH 20.6449a*** 2.4561b 12.0910a*** 5.0770a**CUR 2.0308b 4.6731a** 2.8007b* 3.6783b**QUI 5.4539b** 4.8437a** 2.6407b* 5.8948b**CASH 8.3156b*** 7.8843a*** 3.8337b** 2.6067b*CFM 3.5022a* 0.0211b 1.2547a 0.5332a

WCR 2.1417b 1.9073a 0.0695a 1.3310b

DSFU 3.3939a* 0.0000b 5.7503a** 0.5262a

EDEBT 7.2662b*** 0.1806b 1.9058b 0.2499b

CLSFU 0.2711a 1.1185b 2.4577a 7.7039a***TLSFU 2.5966a* 1.9218b 10.4613a*** 7.3512a**IGEAR 5.1471b** 0.4842a 3.2188b* 0.1347a

CGEAR 5.2646a** 0.7806b 5.6299a** 6.7542a***TAXR 4.4091a** 0.7180b 2.3370a 0.1759a

TAXTA 12.8406a*** 0.9346b 0.6172a 4.3070a**DREMTA 69.1977b*** 5.6042a** 21.8941b*** 9.8230b***

***, ** and * indicate statistical significance at the 1%, 5% and 10% level respectively. a, bIndicate that the mean rank ofthe Kruskal–Wallis (K–W) statistic is larger for firms that: Panel A: provide high quality financial statements; Panel B:display an increase in their equity capital; Panel C: provide information about their debt covenants; Panel D: disclosechanges in their accounting policies; Panel E: disclose information about the implementation of IFRSs; Panel F: discloseinformation about their risk profile; Panel G: provide disclosures about employee incentive schemes; Panel H: disclosetheir hedging practices.


the extensive accounting disclosure has not affected their financial performance adversely. It mayalso signify that firms that perform well financially tend to provide extensive disclosures in order toimpress the market participants, while firms that under-perform seem to be reluctant to disclose toavoid investors' discontent and disapproval (see Kaznik, 1999). The lower management payout(DREMTA) that extensive disclosure providers display may be related to the higher leverage

Panel E: IFRSs Panel F: risk profile Panel G: employeeincentive schemes

Panel H: hedging practices

K–W statistic K–W statistic K–W statistic K–W statistic

46.3453a*** 6.0812a*** 25.8549a*** 48.5619a***29.4262a*** 4.6152a** 16.5313a*** 37.0491a***0.1267a 0.2527a 6.9150a*** 5.2473a**0.9089b 1.3280b 0.0308a 2.8717b*38.4058a*** 6.4929a*** 8.1746a*** 40.0299a***59.0375a*** 7.3250a*** 24.0462a*** 68.6854a***55.2195a*** 8.0393a*** 20.9746a*** 54.4870a***31.5981a*** 2.6597a* 11.6390a*** 30.1933a***0.0001b 0.1553a 2.3315a 0.0275a

0.8185a 0.0043b 5.1444b** 0.4885a

37.1505a*** 0.2843a 7.1689a*** 44.2403a***0.8403b 2.3399a 4.5489a*** 0.0436a

29.9162a*** 5.8593a** 5.6126a** 16.1303a***29.4688a*** 0.4436a 13.6310a*** 27.2325a***2.3190a 1.4309a 0.7908a 7.6266a***25.8069a*** 0.8153b 3.6450a** 22.4481a***19.0012a*** 1.8869b 0.9901a 17.2035a***53.1395a*** 6.3393a*** 17.9981a*** 57.1866a***32.2242a*** 5.6103a** 10.0768a*** 43.7723a***45.3421a*** 8.1850a*** 13.3927a*** 69.6127a***11.4625b*** 0.5866b 0.2775b 12.4951b***18.7089b*** 1.8864b* 1.7837b 17.1163b***16.7322b*** 5.3990b** 5.0717b** 10.8423b***17.9063a*** 0.0188a 0.0915a* 29.4973a***2.1157b 0.6517b 2.4008a 0.2482a

9.2849a*** 0.8846a 1.1492b 5.6058a**9.4506b*** 2.2736b 0.0959b 10.6703b***3.8692a** 2.4369a* 4.7590a** 5.5910a**11.5868a*** 2.5319a* 2.1809a 12.6231a***9.1504b*** 0.0712b 2.4257a 7.4228b***17.4729a*** 2.0434a 4.6293a** 6.9012a***5.9928a** 0.1271a 12.1875a*** 13.7824a***24.3457a*** 2.7032a* 11.0376a*** 30.1286a***43.0719b*** 7.8376b*** 5.1822b** 42.8418b***


measures that they exhibit and the associated high financial obligations and interest charges.Alternatively, following that the particular firms seek financing, as explained above, they maychoose to reduce managers' payout in order to save and reinvest the capital. It appears that firms thatdisclose detailed accounting information have distinctive financial characteristics compared to firmsthat disclose basic accounting information, and therefore, H0 1can be rejected. The K–W test


(Table 2, Panel A) provides consistent results with those of the logistic regression, and generallyshows that high quality disclosers display higher size, growth, profitability, leverage and taxationmeasures. Also, they exhibit higher cash flow margin (CFM) and cash flow per share (CFSH), andlower management payout.

Table 1 (Panel B) shows that firms that display an increase in their equity capital tend to exhibithigher size (RESTAS), growth (EPSG), profitability (OPM) and liquidity (WCR) measurescompared to firms that present no change in their equity capital. The findings above are reasonablebecause firms that seek to raise equity finance should display a solid financial performance andpicture in order to attract investors and make the equity offering successful. Firms that display anincrease in their equity capital also exhibit lower debt to shareholders' funds (DSFU). This would beexpected following the increase in their equity capital. Given the lower DSFU, it follows that thehigher total liabilities to shareholders' funds (TLSFU) relate to liability components other than debt.It appears that firms that display an increase in their equity capital exhibit financial characteristics thatare similar to those of high quality disclosers. In addition, the dummy variable ACCDIS is positiveand statistically significant, and confirms that firms that seek equity finance tend to provide extensivedisclosures. Therefore, H0 1.1 can be rejected. In a similar vein, the K–W test (Table 2, Panel B)shows that firms that display an increase in their equity capital exhibit higher growth, liquidity andmanagement payout. Following their needs in terms of equity finance, the specific set of firms showshigher plowback ratio, which signifies firms' intention to retain and reinvest capital. Also, theypresent higher reserves to total assets (RESTAS), while their sales to total assets ratio (SALETAS)appears to be lower.

5.2. Debt covenants

Table 1 (Panel C) shows that firms that disclose information about their debt covenants tend todisplay higher leverage measures (CGEAR) compared to firms that make no reference about debtcovenants in their financial statements. It appears that firm size is a significant factor in managerialdecision-making; it is evident that firms that provide disclosures relating to debt covenants tend to belarger (SALESHA). Large firms are inclined to disclose information about their financial positionand debt covenants, in order to make their financial situation clear to investors and avoid anydistortions in their stock returns thatmight result from the actions ofmisinformed ormisled investors.Firms that disclose information about their debt covenants tend to exhibit higher growth (EPSG) andprofitability (OPM) measures. Firms that operate in a growth area tend to provide extensivedisclosures of sensitive accounting issues, including debt covenants, in order to put away investors'(potential) doubts relating to their financial conditions, raise capital in debt and capital markets easierand improve their financial numbers. Following the higher leverage measures and the associatedfinancial obligations, firms that disclose information about their debt covenants tend to display lowerdividend payout (DIVSH and DIVCOV) and cash flow margin (CFM). Therefore, H0 2 can berejected. The results of the K–W test (Table 2, Panel C) are similar, and show that firms that discloseinformation about their debt covenants exhibit higher size, growth, profitability and leverage, andlower liquidity and management payout.

5.3. Changes in the accounting policies

Table 1 (Panel D) shows that firms that disclose changes in their accounting policies appear to showimprovements in their financial measures compared to firms that disclose no changes. Therefore, H0 3

can be rejected. In particular, the specific set of firms tends to display higher liquidity (CFM) and


profitability (ROCE and EPS) measures. In addition, firms that disclose changes in their accountingpolicies exhibit higher leverage (CGEAR) and growth (PEG) ratios. The higher leverage and growthpotential may essentially serve as motives for these firms to make changes in their accounting policiesin order to improve their financial performance and, consequently, satisfy investors' expectations andmeet financial analysts' forecasts. The considerations above would tend to apply especially for largefirms, which display larger financial and business exposure. Indeed, Panel D shows that firms thatdisclose changes in their accounting policies are larger (SALETAS and RESTAS). It appears that theparticular set of firms exhibits similar characteristics with those of firms that disclose information abouttheir debt covenants (see Section 5.2). This implies that firms may modify or change their accountingpolicies in order to enhance their reported earnings and abide by their debt covenants and lenders'requirements. The results of the K–W test (Table 2, Panel D) are generally similar, and show that firmsthat disclose changes in their accounting policies display higher size, growth, profitability, leverage andtaxation measures, but lower liquidity and management payout.

5.4. International Financial Reporting Standards

Table 1 (Panel E) shows that firms that disclose information about the implementation of IFRSsexhibit significantly different financial characteristics compared to firms that provide no informationabout IFRSs. Hence, H0 4can be rejected. In general, firms that provide information about theadoption of IFRSs tend to display higher profitability (NPM and ROCE), growth (DIVSHG) andleverage3 (DSFU) measures. Firms with such characteristics would be inclined to discloseinformation about their attitude towards the use of IFRSs and any implementation difficulties that arelikely to arise, in order to inform investors, lenders and other market participants about thestandardization, accessibility and validity of their financial statements. The preparation of uniformfinancial statements and the disclosure of internationally comparable accounting information wouldenable firms to access international capital and money markets and raise finance. Similarly,international investors could easier assess the financial performance and prospects of such firms, andpotentially finance their business activities. The considerations above would tend to apply especiallyfor large firms, which are subject to constant scrutiny and invigilation to a larger extent. Indeed, firmsthat disclose information about IFRSs tend to exhibit higher size measures (NAVSH). The higherleverage of the specific set of firms seems to have adversely affected their liquidity (WCR andCASH) and dividend yield (DIVYI). The results of the K–W test (Table 2, Panel E) are similar, andshow that firms that provide disclosures about the implementation of IFRSs display higher size,growth, profitability, leverage and taxation, and lower liquidity and management payout.

5.5. Risk profile and employee incentive schemes

Table 1 (Panel F) shows that firms that disclose information about their risk profile exhibitsignificant differences compared to firms that provide no information about their risk exposure. Inparticular, firms that provide risk disclosures tend to be larger (SALETAS). Given that large firms aremore visible and easier attract political attention, they tend to inform investors about their risk profile, inorder to describe their financial situation and avoid the development of false rumours or othermisperceptions among themarket participants. Firms that provide information about their risk exposurealso tend to exhibit higher profitability (NPM) and leverage (DSFU) measures. The explicit

3 The lower income gearing (IGEAR) that is observed for firms that disclose information about IFRSs may be due totheir higher profitability level (denominator), which in turn lowers the ratio.


presentation of firms' risk aspects together with their high profitability levels can give a means ofassurance to lenders and creditors, and reduce the risk of debt covenant violation or bankruptcy (seealso Section 5.2The provision of information regarding firms' risk profile would be expected to beappreciated by the stock market participants and make them less sceptical or suspicious about firms'future prospects and performance. The provision of risk disclosures with significant informationcontentwouldmake lenders and creditors aware of their risk burden and assist them to efficiently revisetheir borrowing policy. This would in turn lead to a potentially lower level of interest charge and debtcovenant restriction for firms. Hence, firms that are in a growth area would be inclined to discloseinformation about their risk profile. Indeed, Panel F shows that risk information disclosers displayhigher growth measures (DIVSH). The higher leverage that the specific set of firms exhibit would leadto lower liquidity measures (QUI andWCR). Therefore, it appears that H0 5 can be rejected. The K–Wtest (Table 2, Panel F) provides similar results, which show that firms that disclose their risk exposuregenerally tend to display higher size, growth, profitability, leverage and taxation measures, and lowerliquidity and management payout.

Firms need to be strong financially and to perform well in order to protect the interests of theiremployees, give them motives and enhance productivity and efficiency. Otherwise, firms maydisappoint investors, influence their market picture negatively and obtain negative stock marketbehaviour. Hence, firms would better present favourable financial figures and employee policies, ifthey were to disclose information about employee incentive schemes. Table 1 (Panel G) shows thatfirms that provide disclosures about employee incentive schemes tend to exhibit favourable accountingfigures and potential, and particularly higher growth (DIVSHG), profitability (EPS) and liquidity(QUI) measures. The higher leverage (CGEAR) that the specific set of firms displays seems not toaffect their profitability and liquidity adversely. This would tend to improve and strengthen firms'financial picture and further reinforce their creditability. It appears that given their higher leverage andthe related higher financial obligations, the specific firms choose to reduce their management payout(DREMTA), in order to leave their profitability and liquidity levels intact.4 The results show that H0 6

can be rejected. The results of the K–W test (Table 2, Panel G) are similar, and show that firms thatprovide information about employee incentive schemes generally appear to exhibit higher size, growth,profitability, liquidity, leverage and taxation ratios, and lower management payout.

5.6. Hedging practices

Table 1 (PanelH) shows that firms that disclose their hedging practices tend to exhibit higher growth(DIVSHG) and leverage (DSFUandCGEAR)measures. This shows that given the growth area,withinwhich the specific firms operate, the higher level of leverage urges them to hedge their open-marketpositions in order to safeguard their financial position against price volatility and other internal/externalfinancial risks. Disclosers of hedging information also appear to be larger (SALETAS). This shows thatdue to their large size and the sensitive and sometimes ambiguous nature of hedging instruments, firmsare inclined to disclose in order to assure the market participants that their hedging practices are inconsistency with the underlying regulation. Thus, firms would be able to avoid attracting politicalattention or triggering investors' scepticism about their risk management activities and impact on firmfuture performance. The use of hedging may be costly, depending on the hedging instruments that areemployed. Hence, the employment of such practices may affect firm profitability and liquidityadversely. Panel H shows that firms that disclose information about their hedging practices generally

4 The comparative examination of management payout and stock option schemes and employee share option schemescould be an issue for future research.


exhibit lower profitability (NPM and ROSC) and liquidity (CUR andWCR) measures. Therefore, thefindings show that H0 7 can be rejected. The K–Wtest (Table 2, Panel H) shows that firms that discloseinformation about their hedging practices generally display higher size, growth, profitability, leverageand taxation measures, and lower liquidity and management payout.

6. Conclusions

Following the differences in accounting disclosure among firms, it appears that there may be amismatch between the interests of managers and stakeholders. This study captures the financialattributes of the providers and non-providers of extensive disclosures.

The study shows that size, growth and leverage affect the quality and quantity of accountingdisclosure significantly. In particular, firms that provide extensive accounting disclosures tend to belarger, have higher growth potential, and use more debt than equity to finance their operations. Itappears, therefore, that firms are inclined to disclose information about sensitive accounting issues,such as risk profile, changes in accounting policies and hedging, in order to reassure investors andlenders that their accounting policies abide by the accounting regulation. Thus, firms would be able toavoid political attention and scrutiny, or making stakeholders sceptical about firm future prospects.Extensive accounting disclosures can also reduce any uncertainty relating to firms' accountingpractices and decision-making, and thus, facilitate firms' expansion and enhance their growth potential.In other words, the provision of accounting disclosures tends to reduce the overall level of risk that isattributed to a firm, and can therefore enable the firm to easier raise capital in the stock and debtmarkets. The study also shows that providers of extensive disclosures exhibit higher profitability. Thisshows that extensive disclosure does not affect firms' profitability adversely.Higher profitabilitywouldin fact allow firms to efficiently cover their financial obligations and meet investors' expectations andfinancial analysts' forecasts.

The study shows that firms that increase their equity capital appear to provide extensiveaccounting disclosures. This finding is in consistency with the results presented above, and showsthat in order to make an equity issue successful and appealing to investors, firms tend to make keyaccounting information available and accessible to stock market participants. Similar considera-tions apply in the case of the implementation of IFRSs. The adoption of IFRSs would make firms'financial statements comparable and would therefore reduce information and transaction costs.This would be expected to lead to a positive stock market reaction. Given that the effective date forthe implementation of IFRSs by firms operating within member-states of the European Union is 1January 2005, future research could concentrate in the analysis of adopters' financial attributesbased on the timing of their actual adoption, i.e. early, normal or late adoption.

6.1. Implications of research

The imposition of accounting regulation, such as the UK Financial Reporting Standard (FRS) 3“Reporting Financial Performance” and the International Accounting Standard (IAS) 1 “Presentation ofFinancial Statements”, which require firms to provide detailed information about their activities andperformance, tends to increase investors' expectations and requirements. This implies that poor ac-counting disclosures would be expected to be penalised, while the provision of extensive disclosureswould be expected to be rewarded by the stock market (Chung, Firth, & Kim, 2002). Hence, it appearsthat the provision of extensive accounting disclosures is vital for listed firms. Future research could alsoconcentrate in the extent to which the stock market appreciates the provision of high quality accountingdisclosures, and which categories of accounting information it considers to be more essential and useful.


The implementation of IFRSs improves the quality of financial reporting and the reliability andcomparability of financial statements. Hence, it reduces the costs of information disclosure andfacilitates companies in raising capital internationally. By standardizing accounting practice,IFRSs enhance the transparency of the reported accounting numbers and reduce the scope forjudgment and earnings manipulation. Consistency of accounting practices assists majorinternational accounting firms in the use of a common approach, and also helps firms integrateinternationally and penetrate foreign markets. IFRSs assist investors and financial analysts in theevaluation of firms' financial position and the making of predictions and forecasts about firms'future performance. The adoption of IFRSs leads to the preparation of financial statements thatreflect the true and fair firm financial picture, and thus, reduce uncertainty and improve thecommunication between managers and other market participants, such as shareholders andlenders. The implications of the implementation of IFRSs, described above, signify that the latterreinforce significantly the stock market efficiency and, in turn, the flow of foreign capital and thewelfare of the economy. It follows that the use of IFRSs would significantly help new member-states of the European Union and countries with little tradition of accounting regulation andrelatively weak investor protection mechanisms.

The correct utilisation of accounting disclosures for decision-making purposes depends on howefficient the stock market is. In the case of an inefficient stockmarket, investors maymisvalue the piecesof information relating to firms' corporate performance, which would in turn lead them to incorrectpredictions and decisions (Botosan, 1997). Information asymmetry between managers and stakeholdersand the resulting potential for earningsmanipulation can be reduced by efficient contracting, and financialanalysts and rating agencies, who make evaluations and forecasts of firms' corporate performance(Beaver, 1998). Given that disclosure is essential for enhancing the stockmarket efficiency, the questionsthat arise are what types of disclosure are needed, and how flexible financial reporting should be. Thefindings of the study together with the identification of users' needs enable accounting regulators to setaccounting standards that enhance the quality of financial reporting and reduce information asymmetryand earnings management. Such accounting regulation would assist investors in making correct pre-dictions and evaluations of firms' performance, andwould therefore reinforce the stockmarket efficiency.

Acknowledgements

The author would like to thank the Associate Editor Professor Jonathan Batten and theanonymous referees for their useful comments which helped improve the paper.

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Appendix A. Sample industrial sectors

Industry No. of firms

Aerospace and defence 7Automobiles 3Beverages 4Chemicals 15Construction and building materials 17Electricity 2Engineering and machinery 15Food and drug retailers 6Food producers and processors 4General retailers 9Health 8Household goods and textiles 8Information technology hardware 8Leisure entertainment and hotels 8Media and entertainment 20

(continued on next page)

Mining 14Oil and gas 19Personal care and household products 2Pharmaceuticals and biotechnology 15Real estate 18Software and computer services 30Support services 33Telecommunications services 4Transport 10Utilities 5Total 284

Appendix B. Accounting measures used as explanatory variables

SizeSALES TurnoverSALESHA Sales per shareSALETAS Sales to total assetsRESTAS Reserves to total assetsNAVSH Net asset value per shareTASSET Total assetsCAPEMP Capital employedTRES Total reserves

GrowthEPSG Earnings per share growthPEG Price to earnings growthDIVYI Dividend yieldDIVCOV Dividend coverDIVSH Dividend per shareDIVSHG Dividend per share growth

ProfitabilityROCE Return on capital employedOPM Operating profit marginNPM Net profit marginEPS Earnings per shareROSC Return on shareholders' capital

LiquidityCFSH Cash flow per shareCUR Current ratioQUI Quick ratioCASH Cash ratioCFM Cash flow marginWCR Working capital ratio

LeverageDSFU Debt to shareholders' fundsEDEBT Equity to debtCLSFU Current liabilities to shareholders' fundsTLSFU Total liabilities to shareholders' fundsIGEAR Income gearingCGEAR Capital gearing

Appendix A (continued )

Industry No. of firms


TaxationTAXR Tax charge on profit and loss to pre-tax profitTAXTA Tax charge on profit and loss to total assets

ManagementpayoutDREMTA Management remuneration to total assets

General variablesACCDIS Dummy variable that takes the following values: 1 for high quality information providers, and 0 for

low quality information providers

Appendix B (continued )


accounting disclosure and firms' financial attributes: evidence from the uk stock market

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