The Firm Characteristics Associated with the Voluntary Issuance of the New Style Audit Report in the Netherlands

An Empirical Investigation

Fabian Meijs

September 2014

This thesis examines the firm characteristics associated with the voluntary disclosure of the new style

audit report over 2013 in the Netherlands. This country was selected, as the new style audit report is

already mandatory over 2013 in the UK, while in other countries firms do not yet engage in publishing

their audit report ‘new style’. The research sample consists of 111 Dutch firms, of which 30 voluntary

issued a new style audit report. The research, which is conducted by means of a logistic regression

analysis, contains a wide range of independent variables. These variables were selected based on

theories applicable to voluntary disclosure and a review of previous literature on voluntary disclosure

determinants. It was found that listing age, ownership dispersion and having a Big Four auditor are

significantly positively associated with the voluntary disclosure of the new style audit report. On the

other hand, competitive pressure and being cross-listed exhibit a significantly negative relation with

the issuance of the new style audit report. Industry-related significantly positive associations with

disclosure of the new style audit report were found for firms in the sectors Industrials and Consumer

Services.

Table of contents

Page

Table of contents 2

1. Introduction to the thesis 4

1.1 Introduction to the subject 4

1.2 Research question 5

1.3 Relevance 6

1.4 Methodology 7

1.5 Structure 8

2. Institutional background 9

2.1 The new style audit report 9

2.1.1 ISA 701 – Communicating key audit matters 10

2.1.2 Materiality and an overview of the scope of the audit 11

2.1.3 ISA 570 – Going concern 12

2.2 Voluntary disclosure 13

2.2.1 Agency theory 14

2.2.2 Positive accounting theory 15

2.2.3 Signaling theory 18

2.2.4 Capital need theory 19

2.2.5 Legitimacy theory 19

2.2.6 Institutional theory 19

2.2.7 Litigation cost theory 20

2.3 Measuring voluntary disclosure 21

2.4 Content analysis 22

2.5 Research models in voluntary disclosure literature 23

3. Literature review on empirical research 24

3.1 Determinants of voluntary disclosure 24

3.2 Environmental voluntary disclosure indicators 29

3.3 Determinants of early IFRS adoption 30

3.4 Conclusion 31

4. Hypotheses 37

4.1 Firm size 37

4.2 Leverage 37

4.3 Big Four auditor 38

4.4 Cross-listing 39

4.5 Board size 40

4.6 Age 41

4.7 Competitive pressure 41

4.8 Ownership dispersion 42

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4.9 Industry 44

4.10 Concluding remarks 45

5. Research design 46

5.1 Research sample 46

5.2 Variables 47

5.3 Research model 52

5.4 Descriptive statistics 54

5.5 Statistical testing 56

6. Results 58

6.1 Correlation 58

6.2 Results of the statistical tests 59

6.3 Discussion of the results 62

6.4 Analysis 66

6.5 Robustness tests 71

7. Summary and conclusion 73

References 78

Appendix 85

1. Introduction to the thesis

1.1 Introduction to the subject

This thesis examines the differences in characteristics of voluntary adopters of the new style

audit report compared to non-adopters in the Netherlands for the year 2013. The characteristics

included in the research are primarily determined on the basis of previous literature examining

the factors related to voluntary disclosure. In short, this study tries to find out what the main

drivers are behind the choice to voluntarily issue a new style audit report.

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The objective of the new style audit report is to provide stakeholders with more ‘behind-the-

scenes’ information about the work of the auditor and about the financial state and important

issues of the audited firm. The most important additions to the new style audit report in the UK

are paragraphs about 1) the key audit matters/areas of particular focus, 2) materiality issues and

an overview of the scope of the audit, and 3) the firm’s going concern.

According to the IAASB (2013a), the key audit matters are “those matters that, in the auditor’s

professional judgment, were of most significance in the audit of the financial statements of the

current period.” All key audit matters must be selected from issues communicated with the

firm’s Board of Directors. A study by PwC (2014a) found that the three most reported key audit

matters among Dutch listed firms are the acquisition or sale of firm activities, tax issues and the

valuation of goodwill. In the paragraph about materiality it is explained what materiality exactly

involves and at what percentage the materiality is set for a particular audit. The going concern

paragraph states whether or not the firm can be considered as going concern. Previously, the

audit report only reported about going concern in case of hesitation about the continuity of a

firm.

As of now, the UK is the only country in which the new style audit report is mandatory for listed

firms. However, there are strong signs that from 2015 on the International Auditing and

Assurance Standards Board (IAASB) will make it obligatory for all listed firms to publish new

style audit reports in their Annual Report. This implies that the new style audit report will

become effective for audit reports over the year 2014. However, firms under the jurisdiction of

the IAASB are not yet obliged to issue new style audit reports from 2015, as the IAASB is still

discussing this issue. The IAASB is an independent institution for the accountancy profession

which sets “high-quality international standards for auditing, quality control, review, other

assurance, and related services”, and facilitates “the convergence of international and national

standards” (IAASB, 2014). As a result of the imminent new style audit report regulations, many

Dutch listed firms have already voluntarily published a new style audit report over the fiscal year

2013 in cooperation with their auditor. To be precise, 32 out of 114 examined firms listed on a

Dutch stock exchange (i.e. the AEX, AMX, ASCX and other stocks) have published their audit

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report according to the future regulations. Four of them are also listed on the London Stock

Exchange, meaning that these firms were obliged to issue a new style audit report over 2013.

Consequently, these firms are excluded from the sample. Two non-listed Dutch firms issuing a

new style audit report over 2013, ABN AMRO and PGGM, are also included in the sample. This

means that this research includes 30 voluntary adopters of the new style audit report. According

to Piersma (2014), the Netherlands is the leading country when it comes to voluntarily issuing

the new style audit report. This is supported by the fact that not a single firm on the major stock

indices in surrounding countries like Germany, Belgium and France has published a new style

audit report in 2014. That is the primary reason this thesis only concentrates on the Dutch

market. This means that this study concentrates on the characteristics of Dutch firms that

reported voluntarily according to the rules of the new style audit report.

1.2 Research question

In the past, there have been plenty of studies about the (management) characteristics and features

of firms voluntarily disclosing information on certain issues in their Annual Report. Of course

this has never been done before when it concerns the new style audit report, as this report is only

issued since the beginning of 2014. This means that this is the first study investigating the

relationship between firm characteristics and the voluntary issuance of the new style audit report.

By investigating the Dutch firms that have voluntary issued the new style audit report, it is

possible to find out whether there are associations with certain firm characteristics. As a

consequence, the main research question of this study is:

What are the firm characteristics associated with the voluntary issuance of the new style audit

report in the Dutch stock market?

In order to adequately answer the main research question, the following sub-questions are

constructed:

1) What are the differences in the new style audit report compared to the old format audit

report?

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2) What are the reigning voluntary disclosure theories, and how can they be related to the

voluntary issuance of the new style audit report?

3) According to previous literature, which factors are of influence on the choice whether or not

to disclose voluntary items?

4) What are the appropriate hypotheses for this study?

5) What is the best research design for this study?

6) What are the results of the research regression?

7) What are the conclusions of this research?

All sub-questions are addressed throughout this study.

1.3 Relevance

Besides being the first paper examining this particular relationship, another aspect making this

study interesting is the research on the new style audit report. Daboo (2013) characterizes the

introduction of the new style audit report as “the most significant advance in auditor reporting in

decades”. The work of an auditor involves a lot more than can be derived from the audit report.

However, the audit report is the only information about the audit the public sees, and that is the

reason it is so important to expand the audit report in order to provide stakeholders with more

valuable information about the audited firm. The audit report is basically the representation of

the audit profession towards the public.

Examining the factors associated with voluntarily providing a new style audit report improves

the understanding of investors and other stakeholders about a firm’s reporting strategy. By

linking the voluntary disclosure of the new style audit report to various voluntary disclosure

theories, managers’ motives behind voluntary disclosure can be recognized. Moreover, with the

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results of this study, stakeholders are able to assess which firm characteristics determine

innovation, as the new style audit report is a very innovative addition to the audit. Knowing these

characteristics may be of influence on the decision to invest in a firm, since innovativeness in

financial reporting may be an indication of innovativeness in business operations, which might

lead to enhanced future growth prospects. The results of this study can also be used by standard-

setters when asking the question which kind of firms should be subjected to this new regulation.

Suppose that firm size is found to be significantly positively associated with the voluntary

issuance of the new style audit report. When that happens, it might be a confirmation to the

IAASB that their (likely) decision to impose this regulation only on listed firms is a good choice.

1.4 Methodology

This study tries to link the voluntary issuance of the new style audit report to the prevalent

voluntary disclosure theories. Therefore, this study discusses several theories that can be applied

to voluntary disclosure practices, namely the agency theory, positive accounting theory,

signaling theory, capital need theory, legitimacy theory and institutional theory. Based on a

review of previous literature about the determinants of voluntary disclosure, the firm

characteristics that will be included in the hypotheses and regression model are established. After

constructing the hypotheses, the Dutch firms fitting in the research are determined. In order to

distinguish voluntary audit report issuers from old format audit report issuers, a dummy variable

is constructed which assigns a value of ‘1’ to voluntary issuers and a value of ‘0’ otherwise.

Next, to investigate the factors attributable to the voluntary issuers, a regression model will be

developed. This model includes the voluntary disclosure firm characteristics found by previous

literature. By running the regression, it is possible to examine the factors that are significantly

related to the firms voluntarily issuing the new style audit report. The results will be analyzed

and compared with theory, expectations and results of prior research.

1.5 Structure

The paper is organized as follows. Section 2 provides an overview of the background and

implications of the new style audit report and a discussion of theories and practices applicable to

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voluntary disclosure. Section 3 deals with a study of previous empirical literature on the subject

this paper investigates. In Section 4, the hypotheses are constructed and motivated. Section 5

discusses the research method, the sample, and the proxies that are used in the regression model.

In Section 6 the results will be reviewed and analyzed. Finally, Section 7 provides the summary

and conclusion of this thesis.

2. Institutional background

The first part of this section provides a background of the new style audit report. Thereafter, the

most prominent voluntary disclosure theories are discussed. The remainder of this section is

about the ways to measure voluntary disclosure, the recognition of new style audit report

adopters and the research models applied in previous literature. The main objective of this

section is to find links between the new style audit report and the theories applicable to voluntary

disclosure.

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2.1 The new style audit report

Currently, the UK is the only jurisdiction in which the issuance of a new style audit report is

mandatory for all listed firms. The new style audit report in the UK is effective since January 1,

2014. According to the Financial Reporting Council (FRC), the objective of the new style audit

report is “to enhance the transparency of the auditor’s report with the aim of better

communication to investors” (FRC, 2013). In the UK, the FRC is the body in charge of the

promotion of high quality corporate governance and reporting. The style audit report was

implemented by the Auditing Practices Board (APB), which is one of the six divisions of the

FRC (FRC, 2013).

In other countries, the choice to issue a new style audit report is still voluntary. However, the

IAASB, which is the independent standard setting body of the International Federation of

Accountants (IFAC), has hinted that it wants to make the new style audit report mandatory from

2015 (Piersma, 2014). It seems like only some Dutch firms already anticipate on the proposed

new style audit report, since they are the forerunners of the voluntary disclosure of the new style

audit report. In 2014, 28 firms listed on the NYSE Euronext Amsterdam and 2 non-listed Dutch

firms have voluntarily issued a new style audit report. To put this into perspective, none of the

listed firms in the surrounding countries France, Germany and Belgium has done so.

The IAASB (2013b) lists several advantages of the new style audit report. First of all, the

transparency of the audit increases. Second, management might shift focus to items that recur in

the audit report by covering them more extensively in their annual report. This increases

financial reporting quality. Third, reporting key audit matters might renew the auditor’s attention

on the issues to be covered. This would lead to more professional skepticism, hence resulting in a

higher audit quality. Fourth, communication between auditor and management might improve, as

there will be more dialogue about the reported key audit matters.

The most important mandatory additions to the new style audit report in the UK are paragraphs

about the key audit matters/areas of particular focus, materiality issues and an overview of the

scope of the audit, and the firm’s going concern. The proposed IAASB requirements do not

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include the paragraph about materiality and the scope of the audit (PwC, 2014b). As a result,

some voluntary issuers in the Netherlands do not report on all three subjects, as there are some

firms that do not include a paragraph about the materiality and the scope of the audit. However,

because many Dutch firms include all three new additions in their new style audit report, each

new style audit report regulation is discussed in detail.

2.1.1 ISA 701 – Communicating key audit matters

According to the definition provided by the IAASB (2013a), key audit matters are “those matters

that, in the auditor’s professional judgment, were of most significance in the audit of the

financial statements of the current period.”

The IAASB (2013b) mentions three circumstances under which the auditor should report a key

audit matter:

“1) Areas identified as significant risks in accordance with ISA 315 (assessing risk of material

misstatements) or involving significant auditor judgment.

2) Areas in which the auditor encountered significant difficulty during the audit, including with

respect to obtaining sufficient appropriate audit evidence.

3) Circumstances that required significant modification of the auditor’s planned approach to the

audit, including as a result of the identification of a significant deficiency in internal control.”

(IAASB, 2013b)

(Cursive text added)

In a study of PwC (2014a), it was found that the most recurring key audit matters for Dutch firms

are the acquisition or sale of firm activities, tax issues and the valuation of goodwill. Other

examples of key audit matters are the valuation of real estate, derivatives, pensions and the risk

of fraud. On average, four key audit matters are included in an audit report.

2.1.2 Materiality and an overview of the scope of the audit

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Materiality is a concept applied in the audit process of a firm. When assessing the fairness of a

firm’s financial statements, auditors collect evidence in order to verify that the line item amounts

in the financial statements correspond to reality. When an auditor finds out that a line item in the

financial statements significantly differs from reality, so that it influences the decision-making of

the user, the difference is considered material. For each line item, a so-called materiality

threshold is constructed. This materiality threshold is usually set at 3-5% of the total amount of

the line item. When the difference exceeds the predetermined materiality threshold, an adverse

opinion might be issued by the auditor, which implies that a firm did not fairly present its

financial statements.

The new style audit report contains information about a firm’s materiality level and the scope of

the audit. In the UK, paragraphs on these subjects are mandatory. However, since the new style

audit report is still voluntary outside the UK and this paragraph is not a proposed requirement by

the IAASB, about half of the Dutch firms publishing a new style audit report does not provide

information about the materiality levels and the scope of the audit (PwC, 2014a). According to

PwC (2014a), a reason for this abstention might be that auditors have trouble to define the

concept of materiality and report on the corresponding choices that come along with the

determination of the materiality level of an audit. Moreover, auditors might find it difficult to

explain their approach and discuss the structure of the audit, issues that are normally defined in

the new paragraph about the scope of the audit. In this research however, firms that have

published their audit report mostly in accordance with the new style audit report regulations but

only lack information on materiality levels and the scope of the audit àre considered new style

audit report adopters. This is done, because the remainder of their audit report is similar to the

new style audit report regulations proposed by the IAASB.

In the materiality paragraph of the new style audit report, first the concept of materiality is

explained. Second, the auditor reports on the materiality level applied during the audit. This level

is expressed both in percentages and in absolute amounts. By providing absolute numbers and

percentages, the degree of transparency about materiality has increased considerably.

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The new style audit report paragraph on the overview of the scope of the audit mainly explains

how an audit is performed. Since there are no clear IAASB guidelines for the content of this

paragraph, the enclosed information differs between firms. Certain factors that are discussed in

this paragraph are the overall audit approach, the collection of evidence and the type of work

performed. Usually, the amount of reporting components for which a full scope audit was

required is given as well. Furthermore, it sometimes provides information on which parts of the

firm were exactly audited.

By inspecting new style audit reports, it could be determined that in contrast to the remainder of

the text, the last sentence of this paragraph is normally fixed: “This gave us sufficient evidence

we needed for our opinion on the financial statements as a whole.”

2.1.3 ISA 570 – Going concern

This ISA already existed, meaning that this is an amended proposal. The IAASB does not only

want auditors to evaluate a firm’s going concern, but also to report their findings in the audit

report. That is the core of this amended regulation.

A firm is considered a going concern when there is substantial doubt that the firm will remain in

business for the foreseeable future. Under IFRS, the foreseeable future is defined as the twelve

months following the audited reporting period (IFRS, 2013). So in case a firm’s reporting period

ends at year-end 2013, the auditor has to assess whether the firm is still in business as at year-end

2014. This period is the minimum required ‘look-forward’ period. However, auditors have the

flexibility to extend this period and assess a firm’s operating continuance over a longer time

frame (Laudato, 2012). According to the still existing (‘old’) audit report regulations, auditors

only have to report on going concern in case the audited firm is considered a going concern.

However, in line with the new audit report regulation (ISA 570), auditors have to include a

separate paragraph on a firm’s going concern, no matter their financial state.

In the new style audit report paragraph about going concern, the auditor first states that the firm’s

financial statements have been prepared using the going concern basis of accounting. Second, if

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necessary, the auditor explains in which cases the going concern basis of accounting is

considered to be inappropriate. Third, there is a sentence about the appropriateness of the going

concern basis of accounting for this firm. In case there is no doubt about going concern, the

second part of the paragraph starts with the statement that the auditor has not discovered any

material uncertainties that “may cast significant doubt on the firm’s ability to continue as a going

concern” (p. 15). The paragraph concludes by explaining that no guarantees can be given with

respect to the firm’s going concern (IAASB, 2013b).

2.2 Voluntary disclosure

An important question to ask is how voluntary disclosure can be defined. Meek, Roberts & Gray

(1995) define it as “free choices on the part of company managements to provide accounting and

other information deemed relevant to the decision needs of users of their annual reports.” The

two most vital concepts of voluntary disclosure are embedded in this definition. First of all, it is a

free choice. Voluntary disclosure as defined by the FASB (2001) emphasizes this, as they

explain that a voluntary disclosure item is “not explicitly required” by a governing body.

Moreover, the objective of voluntary disclosure in the annual report is to provide stakeholders

reading this report with relevant information. With this additional information, users should be

better able to evaluate a firm. Based on that, they can make a more legitimate decision whether

or not, for example, to invest in the firm.

It is essential to distinguish between mandatory and voluntary disclosure. Mandatory disclosure

is required by a legislative body, while voluntarily disclosing information is a firm’s own choice.

However, as Hassan & Marston (2010) point out, voluntary disclosure can also be recommended

by an authoritative institute. This is also more or less the case for the new style audit report, as

the IAASB is planning on implementing this report on short notice. However, they still give

firms an opportunity to ‘voluntarily’ get acquainted with the new style audit report before it

becomes mandatory.

The 2014 issuance of a new style audit report by Dutch firms is an example of voluntary

disclosure. Since publishing a new style audit report is still non-mandatory in the Netherlands,

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firms disclose new style audit reports strictly out of free will. Of course, there are certain

motivations behind the choice of voluntarily disclosing information to the public. These

voluntary disclosure theories are discussed in this subsection and linked to the new style audit

report.

Shehata (2014) identifies four theories that are applicable to voluntary disclosure: the agency

theory, signaling theory, capital need theory and legitimacy theory. Moreover, the positive

accounting theory, institutional theory and litigation cost theory are discussed.

2.2.1 Agency theory

This is the most often applied theory in articles about the determinants of voluntary disclosure.

The agency theory is a normative theory, meaning that the assumptions are value-based. The

agency theory is not about imposing, but about advising and prescribing. Normative theories

describe what ought to be. This is in contrast to positive theories, which are often based on

factual statements and deal with what is (Friedman, 1953).

The agency theory assumes that there is an imaginary contract between the managers of a firm

and its shareholders. The managers are labeled as the ‘agents’. They perform their tasks and run

the firm on behalf of the ‘principal’, the firm’s shareholders (Jensen & Meckling, 1976). So

according to this theory, managers are expected to act according to the will of the shareholders.

However, the agency theory points out that this is often not the case, as the two groups might

have different interests. This is called the ‘principal-agent problem’.

The principal-agent problem consists of two central problems: self-interest and information

asymmetry. When the interests of management are not aligned with the interests of the

shareholders, management might follow a strategy in order to maximize its own wealth at the

cost of the returns of the shareholders. Information asymmetry exists when managers have more

information than shareholders. This way, it is difficult for the shareholders to ensure that

management is acting in line with the shareholders’ interests.

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In order to reduce management’s self-interest and information asymmetry, agency costs have to

be made. Agency costs are composed of monitoring costs, bonding costs and residual loss. The

former is the cost of shareholders monitoring managers’ activities. Bonding costs are paid by the

agents to ensure the principal that their actions will not negatively affect shareholder value.

Residual loss is the difference between management’s choices and the decisions that would have

led to shareholder welfare maximization (Shehata, 2014).

Moreover, there are costs of risks and rewards. Suppose that the interests of managers and

shareholders are perfectly aligned. In that case, managers make decisions with the purpose to

maximize shareholder value. Many firms apply an incentive system for managers. When

shareholder value rises, manager compensation increases. So when managers’ decisions turn out

to be profitable, there are costs of reward for the firm, as manager compensation increases.

However, there is always the risk that management makes the wrong choices. In that case,

shareholder value declines. This is called the cost of risks.

Voluntary disclosure is a way to reduce information asymmetry and subsequently reduce agency

costs, since it benefits shareholders with inside information.

2.2.2 Positive accounting theory

The positive accounting theory is based on the agency theory. The positive accounting theory

can be seen as a subset of the agency theory which is focused on accounting. This theory aims to

explain and predict why managers choose certain accounting policies, and why accounting

policies differ across firms. The original positive accounting theory as developed by Watts &

Zimmerman (1978) was founded upon three main attributes: the bonus plan hypothesis, the debt

covenant hypothesis and the political cost hypothesis.

The bonus plan hypothesis assumes that managers only take into account their own wealth when

making (accounting) decisions. To give an example, according to this hypothesis, managers

choose to disclose a new style audit report with the aim to enhance their reputation on the

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managerial labor market. This serves their own interest, because chances increase to get a higher-

paid job.

The debt covenant hypothesis states that managers try to enhance profits in such a way, so that

the firm does not violate its debt covenants by exceeding predetermined borrowing limits. When

a firm exceeds its borrowing limits, it has to pay off its debt on an accelerated basis. This is

disadvantageous for the firm, because it might cause liquidity problems. Furthermore, in case of

a debt covenant violation, the bank may wish to receive a higher interest rate on the debt the next

time they do business with the firm. Translating this to the new style audit report, managers may

issue such a report with the objective to lower information asymmetry and improve transparency.

Higher transparency results in less uncertainty among the creditors of a firm, which is associated

with a lower cost of capital.

According to the political cost hypothesis, managers tend to report lower accounting profits as

they want to reduce their firm’s visibility to the government. Because governments are inclined

to place stricter regulations on highly profitable industries, firms in those industries try to

downplay their accounting profits. However, the political cost hypothesis is not only about

government pressure. Also environmental organizations might be troublesome for firms.

Especially firms with high emission and large public visibility are likely to be pinpointed by

environmental organizations. Take Royall Dutch Shell as an example. Their oil winning

activities in Nigeria were subject to large-scale protests of environmental (and non-

environmental) organizations. Understating accounting profits is a way to reduce public

visibility, and, consequently, attention of environmental organizations. Converting the political

cost hypothesis to voluntary disclosure practices, firms might report more on environmental

issues. Openly providing information on, for example, CO2 emissions, diminishes the chance

that the government investigates a firm’s environmental practices. Because of that, the

government is less likely to impose stricter environmental regulations. Environmental

organizations are probably less likely to attack a firm, as they have more information about a

firm’s environmental practices. Moreover, when disclosing environmental information, firms

often provide solutions to reduce their emission. This further reduces the chance that

environmental organizations revolt against a firm.

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Related to the positive accounting theory, Graham, Harvey & Rajgopal (2005) examined the

reasons managers engage in voluntary disclosure based on a survey among more than 300

executives. In their theoretical background, they provide five arguments in favor of voluntary

reporting: information asymmetry, increased analyst coverage, stock price motivations, stock

compensation and management talent signaling. Information asymmetry was already discussed

as part of the agency theory, while management talent signaling can be linked to the bonus plan

hypothesis, as this motivation only has the objective to increase managerial wealth. The

management talent signaling principle states that managers would report voluntarily in order to

signal their character to the managerial labor market.

According to Graham et al. (2005), another argument to choose for voluntary disclosure is to

attain more analyst coverage. The reasoning behind this thought is that more firm-specific

information becomes available as a consequence of voluntary reporting. This makes it more

attractive for analysts to follow a firm, as it becomes easier to make predictions about a firm’s

future performance. Voluntary disclosure can also be explained by stock price motivations. It is

argued by the authors that voluntary disclosure can be used to increase share price, and, if

necessary, to distract investors’ attention from poor financial performance. The stock

compensation theory assumes that managers want to reduce contracting costs by providing

voluntary information. Related to stock compensation, managers would be concerned that new

employees might ask a risk premium in case they feel that managers have an information

advantage. It is argued that voluntary disclosure can mitigate this problem, as the information

advantage might disappear (Graham et al., 2005).

In conducting their research, the authors found three reasons that were most significant when

asking the question why managers choose to report information voluntarily. Voluntarily

communicating information namely “promotes a reputation for transparent/accurate reporting,

reduces the ‘information risk’ that investors assign to the stock, and provides important

information to investors that is not included in mandatory financial disclosures” (Graham et al.,

2005).

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2.2.3 Signaling theory

This theory assumes that firms voluntarily disclose information to the outside world in order to

show that they are better than their competitors. They want to signal their superiority to the

market by disclosing additional, positive information about the firm. These disclosures make it

easier for the firms to attract capital. Moreover, it is good for the firm’s reputation (Shehata,

2014; Verrecchia, 1983).

As for how the signaling theory can explain the voluntary disclosure of the new style audit

report, there seems to be no real association regarding the content of the new style audit report.

The new style audit report only includes objective, neutral information. It does not contain any

positive information which is favorable to the firm. The paragraphs about the areas of focus and

materiality are included to objectively inform users of the annual report about the audit. Only the

extra paragraph about going concern, which (almost always) concludes that a firm’s use of the

going concern basis of accounting is appropriate, might be favorable to the firm.

However, the choice to voluntarily issue a new style audit report signals to the market that a firm

is innovative in its reporting choices. So the signaling theory can be used in explaining the mere

fact that a firm issues a new style audit report, but there seems to be no link between the

signaling theory and the content of the new style audit report.

2.2.4 Capital need theory

The capital need theory argues that firms voluntarily disclose information with the objective to

attract more capital at a lower cost. This theory resembles the debt covenant hypothesis. It is

generally believed and has often been showed that more (voluntary) firm disclosures lead to a

lower cost of capital (Diamond & Verrecchia, 1991; Cheynel, 2013; Petrova, Georgakopoulos,

Sotiropoulos & Vasileiou, 2012).

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The FASB (2001) explains that a firm’s cost of capital includes a premium for investor

uncertainty. It is motivated that voluntary disclosure results in a decrease in investor uncertainty.

Hence, the premium on the cost of capital is lowered, which also decreases the cost of capital in

general.

2.2.5 Legitimacy theory

According to the legitimacy theory, the voluntary reporting decisions of a firm depend on

management’s views on what society considers to be appropriate for the firm. The connection

between firm and society relies on the notion of a social contract. This is a fictitious contract

which consists of the community expectations about the behavior of a firm. The legitimacy

theory believes that in case a firm diverges from its social contract, it loses its ground to continue

as an organization (Suchman, 1995).

Relating this information to the new style audit report, the legitimacy theory argues that a firm

takes the wishes of society into consideration when making the decision whether or not to issue

the new style audit report. So according to the legitimacy theory, the chance that firms engage in

voluntary disclosure is bigger when society expects them to do so.

2.2.6 Institutional theory

Another widespread theory applied in explaining voluntary disclosures is the institutional theory.

This theory illustrates how mechanisms for obtaining and preserving legitimacy become

institutionalized. The institutional theory consists of two main elements, of which one is

applicable to this study: isomorphism. The ‘institutional model of isomorphic change’ was

developed by DiMaggio and Powell (1983). The authors identified three forms of isomorphism:

coercive, normative and mimetic isomorphism. Coercive isomorphism implies that firms

voluntarily disclose information in response to stakeholder pressures of, for example,

governmental organizations. Normative isomorphism expects firms to voluntarily report in order

to follow group norms and values. Mimetic isomorphism implies that firms only engage in

19

voluntary disclosure in order to copy the disclosure practices of other firms in their industry.

They do this out of uncertainty about their own organization. Mimicking others is seen as a safe

solution.

The institutional theory is different from most other previously discussed theories in that it

provides more than one explanation for the choice of voluntary disclosure. This theory actually

consists of multiple layers. Coercive and mimetic isomorphism might be applicable to the new

style audit report. As stated earlier, the IAASB attempts to make the new style audit report

mandatory from 2015. Firms might feel pressure to practice with the new style audit report in

2014, before it becomes obligatory one year later. Mimetic isomorphism could also be associated

with voluntary disclosure. To examine this, it could be tested whether there are significant

differences in voluntary reporting among industries. As shown in the next section, this relation

has also been tested in previous studies.

2.2.7 Litigation cost theory

Palepu & Healy (2001) add another theory which can explain the choice for voluntary reporting.

However, there are two sides to this theory. On the one hand, it can be argued that managers

engage more in voluntary reporting, as an inadequate disclosure policy might result in

shareholder litigation. On the other hand, managers might also restrain from voluntary reporting

as a result of the threat of shareholder litigation. This is especially the case when providing

forward-looking information. Managers might face shareholder litigations when the projected

voluntary information turns out not to be correct.

For the voluntary disclosure of the new style audit report, the first reasoning seems to be more

appropriate, as there is no forward-looking information involved. However, when a firm’s

auditor does not report on the areas of risk, which is one of the additions to the new style audit

report and could be useful in predicting the continuance of a firm, shareholder litigations might

follow.

20

The theories discussed in this section will be used to motivate the hypotheses. The aim is to

explain the predicted direction of the hypotheses by looking at both the previous literature and

the relevant theories. Furthermore, when analyzing the regression results in Section 6, the

discussed theories can be utilized to explain the outcomes.

2.3 Measuring voluntary disclosure

Often, articles not only examine whether a voluntary disclosure item is included in the Annual

Report, but they also evaluate the quality of the information. Beattie, McInnes & Fearnley (2004)

list numerous ways to determine disclosure ratings. Five methods are discussed in detail:

subjective ratings, disclosure index studies, a thematic content analysis, readability studies and a

linguistic analysis.

When authors employ subjective ratings, it usually means that they use disclosure ratings

constructed by analysts. Analyst ratings measure the informativeness of the disclosed

information. Disclosure index studies is “a partial form of content analysis where the items to be

studied are specified ex ante” (Beattie et al., 2004). Most studies analyzing the determinants of

voluntary disclosure employ this technique, which is based on the analysis of the Annual Reports

of firms. In the case of these studies, the pre-specified items are voluntary disclosure items. By

examining these voluntary disclosure items, they can assign a voluntary disclosure rating to each

firm.

The remaining three rating techniques are textual analyses. In a thematic content analysis the

whole text to be studied is analyzed, sentence per sentence, and is evaluated based on

predetermined criteria. For example, does the sentence imply good news or bad news? Does it

describe the past, the present or the future? Those kinds of issues are investigated in a thematic

content analysis. This technique is applied especially to compare different industries in order to

determine which disclosures are useful and represent good practice for which industries.

Readability studies assess how hard it is to read a text by examining the difficulty of the text and

the amount of complex words and sentences included in the text. A linguistic analysis resembles

a thematic content analysis in that the whole text is examined. However, the difference is that

21

instead of the content, the linguistic analysis looks more at the structure, connectivity and

communicative value of the text (Beattie et al., 2004).

2.4 Content analysis

In order to distinguish new style audit report adopters from non-adopters, a content analysis is

performed. The content analysis performed in this study exhibits most resemblances with the

disclosure index studies method. Namely, only a part of the Annual Report is evaluated (the

audit report) and the items to be studied are specified ex ante. The audit report of each firm in the

sample is evaluated based on the three main attributes of the new style audit report, which are

paragraphs about 1) the key audit matters/areas of particular focus, 2) materiality issues and an

overview of the scope of the audit, and 3) the firm’s going concern. When at least two out of

three paragraphs are included in a firm’s 2013 audit report, the firm is considered to be a new

style audit report adopter. The inclusion of these paragraphs can be recognized by reading the

audit reports carefully. Almost all firms clearly head their paragraphs, making it easy to assess

whether the paragraphs characterizing for the new style audit report are included. However, in

contrast to the disclosure index studies method, this study does not rate the information in the

audit report on quality. It only looks at whether certain information is included in the audit

report, in order to distinguish between new style audit reports and ‘old’ style audit reports.

Authors of studies that construct a voluntary disclosure index to measure the quality of voluntary

disclosure often have to read a firm’s Annual Report in detail in order to assign a voluntary

disclosure score to each firm. The advantage of the method this study takes is that it is quite easy

to tell whether a firm engaged in voluntary disclosure, as only the audit reports of the sampled

firms have to be studied.

2.5 Research models in voluntary disclosure literature

The research models applied in previous literature can be used to construct the research model of

this study. Therefore, this sub-section provides a short review of the research techniques used in

previous literature about the determinants of voluntary disclosure.

22

The articles which will be discussed in Section 3 apply a wide range of research models. The

three research models that are most often applied in these studies are the Ordinary Least Squares

(OLS), logistic and multiple regression models. Other research techniques included a.o. the

Poisson, linear, binomial, probit and panel data regression model. For an overview per article,

see Table 7. Five articles used a dummy variable as their dependent variable in the research

model (i.e. André, Walton & Yang, 2012; Gassen & Sellhorn, 2006; Zunker, 2011; Sheu, Liu &

Yang, 2008; and Spiegel & Yamori, 2003). This method is also applied in this study. The former

three aforementioned studies performed a logistic regression, while the latter two applied an OLS

regression. This empirical part of this study is performed by running a logistic regression, as this

research technique is constructed specifically for the purpose of regressions of which the

dependent variable is binary (i.e. it can only have two values). The choice for a logistic

regression model will be discussed in detail in Section 5.

The research design of this study will be modeled after André et al. (2012), as out of the three

articles applying a logistic regression with a dummy dependent variable, this article is the only

one solely focusing on one issue, the determinants of IFRS adoption. Zunker (2011) does not

only examine the determinants of voluntary employee-related disclosures, but she also measures

the firm characteristics related to the quality and quantity of voluntary disclosure. Besides the

determinants of IFRS adoption, Gassen & Sellhorn (2006) measure the consequences of IFRS

adoption by comparing the post-IFRS differences between IFRS adopters and non-adopters in,

for example, the bid-ask spread and stock price volatility. Both studies employ multiple

regression models for different purposes. This is in contrast to André et al. (2012), whose

research design is quite basic. This makes the research design of this article the easiest and

therefore the most applicable research design to model this study after.

3. Literature review on empirical research

This section discusses previous literature about the determinants of voluntary disclosure. The

information obtained in this section is used in order to develop the hypotheses and the research

model. Since there are no studies in this field that are specifically audit-related, all recent articles

about the characteristics explaining voluntary disclosure are considered. Mainly research about

23

the voluntary disclosure of financial information is taken into account. However, at the end of

this section, also studies related to the voluntary disclosure of non-financial, environmental

information and the early adoption of IFRS are reviewed. The order in which the articles are

discussed is based on the geographical area the articles focus on. First, studies with data of firms

on the American continent are discussed. After that, articles founded upon data from firms in

respectively Europe, Africa, East Asia and Oceania, and the Middle East are observed. All

relationships and associations discussed in this section are statistically significant.

3.1 Determinants of voluntary disclosure

In his study among 198 U.S. firms in the period 1993-2003, Premuroso (2008) examined the

determinants of the voluntary disclosure on initial outsourcing. It was found that leverage, the

total cost ratio (operating expenses over net sales) and the return on assets (ROA) were

positively associated with this voluntary disclosure item. Examining 570 U.S. firms, Zhu &

Gong (2013) found that economic performance was negatively associated with the voluntary

disclosure of executive compensation. El-Gazzar, Fornaro & Jacob (2006) also investigated

American firms. In their research, containing a sample ranging from 1996 to 2000 including 500

firms, they examined the voluntary disclosure of the report of management’s responsibilities,

which was non-mandatory at the time. The percentage of independent audit committee members,

the percentage of voting shares owned by institutional owners and the frequency of audit

committee meetings, new public debt issues and new equity issues were positively related to

voluntary disclosure. On the other hand, financial statement restatements, the percentage of

voting shares owned by management and the average interest rate on debt were found to be

negatively related to voluntary disclosure. Studying 68 Brazilian firms with executive stock

option (ESO) plans in 2007, Schiehll, Terra & Victor (2013) found that a firm’s Board size and

the presence of a compensation committee are positively related to the voluntary disclosure of

ESOs. Moreover, firms audited by a Big Four firm were found to have higher voluntary

disclosure. The authors also showed that family-controlled businesses tend to disclose less

information about ESO plans.

24

Coebergh (2011) and Braam & Borghans (2010) examined voluntary disclosure in the Dutch

market. In his research containing 399 firm-year observations over the period 2003-2008,

Coebergh (2011) found that firms with a foreign exchange listing and a high listing age are

inclined to voluntarily disclose more about corporate strategy. However, a high return on equity

(ROE) is associated with less corporate strategy disclosure. Furthermore, it was found that the

choice of disclosing voluntary information also depends on the firm’s industry. Last, the author

found that firms listed on the AEX have a higher tendency towards voluntary disclosure than

firms listed on the AMX and the ASCX, which are the second and third tier stock indices in the

Netherlands. Braam & Borghans (2010) studied the factors associated with the voluntary

disclosure of financial and non-financial performance measures, based on a sample of 149 firms

in the year 2004. In case a person associated with one firm sits on the Board of Directors of

another firm, that firm’s voluntary disclosure is higher. Moreover, disclosure tends to be higher

when other businesses, to which the firm is related via their external auditor, disclose similar

performance measures. This implies that firms tend to mimic other organizations when it comes

to voluntary disclosure, as indicated by the institutional theory.

In his study among 161 Swiss firms in 1991, Raffournier (1995) explored a positive association

between a firm’s size and international diversification and the extent of voluntary disclosures in

its annual report, measured by a disclosure index. Kateb (2012) examined the determinants of

voluntary disclosure of structural capital information in France in 2006. Applying a sample of 55

firms, it was found that firm size is positively associated with voluntary disclosure of structural

capital information, while the author found a negative relation with managerial ownership

concentration and leverage. Alves, Rodrigues & Canadas (2011) studied voluntary disclosure of

140 firms in Spain and Portugal in 2007. For each firm, a voluntary disclosure index was

measured, based on the presence of voluntary disclosure items in their annual report. The authors

found that a high proportion of the board’s remuneration that is not fixed is related to more

voluntary disclosure. In addition, firm size, growth opportunities, economic performance,

organizational performance, board compensation and shareholder ownership are positively

related to voluntary disclosure. On the other hand, a high bid-ask spread and the presence of a

large shareholder have a negative association with the level of voluntary disclosure. Oxelheim &

Thorsheim (2012) investigated the association between firm characteristics and the voluntary

25

disclosure of macroeconomic effects on corporate performance in Europe. In their sample, the

authors included 100 firm-year observations over the period 2000-2009. Cross-listing, corporate

governance strength and leverage are positively related to the voluntary disclosure of

macroeconomic effects on corporate performance. Also firms in industries with a high threat of

entry are associated with a higher level of voluntary disclosure. However, capital intensity,

which is measured as a firm’s PP&E scaled by total assets, has a negative association with the

level of voluntary disclosure.

Chakroun & Matoussi (2012), Dhouibi & Mamoghli (2013) and Kolsi (2012) all examined the

determinants of voluntary disclosure of Tunisian firms, measured by voluntary disclosure

indices. The research of Chakroun & Matoussi (2012) included 144 observations over the period

2003-2008. The authors found that firms with a high degree of regulatory reform, managerial and

institutional ownership, a large board size, a combination of the functions ‘general manager’ and

‘board chairman’, high indebtedness and a high firm age tend to disclose more voluntary items in

their annual report. Businesses in industries with an intense competition on the market for goods

and services that are family-controlled and have a high degree of board independence and

ownership concentration are associated with a low level of voluntary disclosure. The research

sample of Dhouibi & Mamoghli (2013) consists of 10 banks in the period 2000-2011. Foreign

ownership and firm size have a positive relation with voluntary disclosure, while board size,

blockholder ownership and state ownership are negatively related to voluntary disclosure.

Kolsi’s (2012) study included 52 observations from 2009 and 2010. Firms audited by a Big Four

auditor are, just like firms with a high leverage and ROA, inclined to disclose more voluntary

information. Furthermore, firms in the financial sector are associated with higher voluntary

disclosure than firms in other sectors. Barako (2007), whose research focused on 43 Kenyan

firms in the period 1992-2001, also found that firms audited by a Big Four member tend to

disclose more voluntary information. Just like the three Tunisian studies, Barako (2007)

measured voluntary disclosure on the basis of a voluntary disclosure index. Audit committee,

foreign and institutional ownership, firm size and ROE are positively related to voluntary

disclosure as well.

26

The articles of Wang, Sewon & Claiborne (2008) and Lan, Wang & Zhang (2013) also measured

voluntary disclosure by employing a voluntary disclosure index for each firm. Both studies

focused on the Chinese market. The research of Wang, Sewon & Claiborne (2008) included 109

observations from 2005. They explored that firms having a high ROE and a large degree of state

ownership and foreign ownership are associated with more voluntary disclosure. Also firms

having a Big Four auditor tend to disclose more voluntary information. In their study containing

1,066 observations from 2006, Lan, Wang & Zhang (2013) found that firm size, leverage and

assets-in-place are positively related to voluntary disclosure. However, it was found that firms

audited by a Big Four auditor disclose less voluntary information, which is in contrast to the

findings of previously discussed studies (Schiehll, Terra & Victor, 2013; Kolsi, 2012; Barako,

2007; Wang, Sewon & Claiborne, 2008).

Spiegel & Yamori (2006) examined the determinants of the voluntary disclosure of non-

performing loans in Japan. Using a sample of 814 observations from 1996 and 1997, they found

that firms with a large size and high competitive pressure are more inclined to voluntarily

disclose information about non-performing loans. On the other hand, bad loan problems and

leverage are negatively associated with the voluntary disclosure of this item. The study of Sheu,

Liu & Yang (2008) included 3,841 observations of Taiwanese firms in the period 1998-2005. The authors investigated the factors that explain the voluntary disclosure of directors’ compensation. The sum of the directors’

compensation, board size, diversified ownership and managerial ownership are positively related

to the voluntary disclosure of this item. Government ownership and native institutional

ownership were found to be negatively related to the voluntary disclosure of directors’

compensations. Besides a microeconomic perspective, Ho (2009) also takes a macroeconomic

point of view in examining the factors influencing voluntary disclosure. Applying a sample of

Malaysian firms, measuring firms’ voluntary disclosure indices in 1996, 2001 and 2006, the

author found that voluntary disclosure has increased over time. Also the occurrence of global

corporate scandals has a positive relation with voluntary disclosure. Furthermore, external

regulatory pressures, the strength of the corporate governance structure, ownership concentration

and firm size are positively associated with voluntary disclosure. Vu (2012), whose research

focused on 252 firms in the Vietnamese market over the year 2009, also found a positive relation

27

between corporate governance strength and voluntary disclosure. Moreover, size, profitability

and listing duration are associated with higher disclosure. Also a firm’s industry and auditor are

explanatory factors in voluntary disclosure. Vu (2012) found that organizations audited by a Big

Four firm are more inclined to voluntarily disclose information. State ownership and managerial

ownership are negatively related to voluntary disclosure. Zunker (2011) investigated the

determinants of the voluntary disclosure of employee-related information in Australia. Applying

a sample 970 observations from 2004, she found that firms with high past and current economic

performance, a large size and more adverse publicity tend to voluntarily disclose more

employee-related information.

The research sample in the study of Hossain & Reaz (2007) included 38 Indian banking firms in

the period 2002-2003. The authors measured firms’ voluntary disclosure levels by means of

constructing voluntary disclosure indices, which are based on firms’ annual reports. It was found

that firm size and assets-in-place are positively related to voluntary disclosure. Sehar, Bilal &

Tufail (2013) examined the determinants of voluntary disclosure also by means of composing

voluntary disclosure indices. Their sample consisted of 372 Pakistani firm observations from

2012. Profitability, firm size, firm age and a Big Four auditor were all associated with higher

voluntary disclosure, while leverage was found to be negatively related to the disclosure of

voluntary information. The study of Almutawaa (2013), who examined 206 firms from Kuwait

over the period 2005-2008, also determined the voluntary disclosure level of a firm by looking at

firms’ voluntary disclosure indices. Firms with a high degree of government ownership tend to

exert more voluntary disclosure. Firms that are cross-listed and large-sized are also associated

with higher voluntary disclosure. On the other hand, the authors found that cross-directorships, a

large board size, role duality and firm growth are related to less voluntary disclosure. Hossain &

Hammami (2009) investigated the firm characteristics associated with voluntary disclosure on

the basis of a sample of 25 Qatari firms in 2007. To measure voluntary disclosure, they

composed a disclosure checklist, which examines 44 voluntary items in firms’ annual reports. It

was found that firm age, total assets and assets-in-place are positively connected to voluntary

disclosure. Moreover, the higher the complexity of a firm, which is determined as the firm’s

number of subsidiaries, the higher the voluntary disclosure tends to be.

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3.2 Environmental voluntary disclosure indicators

So far, primarily determinants of financial voluntary disclosure items were discussed. Although

new style audit reports are mostly about financial information, research about firm characteristics

related to the disclosure of non-financial, environmental information will also shortly be

reviewed. This way, it can be detected whether the determinants of disclosing non-financial

information radically differ from those associated with the voluntary disclosure of financial

information.

Gamerschlag, Möller, Verbeeten (2011) examined the determinants of voluntary CSR disclosure

by using a CSR disclosure index for each firm. The research sample consisted of 470 firm-year

observations of German firms over the years 2005-2008. The authors found that a firm’s size,

visibility, profitability (return on invested capital) and shareholder structure (freefloat in

percentage of shares) are positively related to the voluntary disclosure of CSR information.

Sukcharoensin (2012) studied the same relationship, also applying a CSR disclosure index, but

now for Thai firms. Applying a sample of 50 firms, the author found that firms with a high

corporate governance rating and a large degree of public ownership and ownership dispersion

tend to disclose more CSR information. On the other hand, financial leverage is negatively

related to voluntary CSR disclosure. Using a sample consisting of 300 firm-year observations

from the period 2009-2011, Borghei-Ghomi & Leung (2013) investigated the firm factors

associated with the voluntary disclosure of greenhouse gas emission (GHG) information in

Australia. It was found that firm size, ownership concentration and leverage are positively

related to the disclosure of GHG information. In addition, the larger the proportion of non-

executive directors on a firm’s board, the higher the voluntary disclosure of GHG information

tends to be. Also, cross-listed firms are more inclined to report on GHG than single-listed firms.

Prado-Lorenzo, Rodríguez-Domínguez, Gallego-Álvarez & García-Sánchez (2009) examined the

determinants of GHG disclosure based on a sample of 101 firms worldwide in the year 2005.

They found that firms that are large-sized and have a high market-to-book ratio disclose more

information on GHG. A firm’s industry is an essential factor in explaining the choice for GHG

disclosure as well. Besides airlines, also corporations doing business in chemicals, forest and

paper products, metals, mining, motor vehicles and utilities display a higher amount of GHG

29

disclosure than firms in other sectors. On the other hand, firms in the aerospace and defense

industry report less GHG information. Also firms with a high ROE tend to report less on GHG.

As can be seen, determinants of voluntary disclosure are largely the same when comparing non-

financial disclosures with financial voluntary disclosures.

3.3 Determinants of early IFRS adoption

In 2005, the new accounting framework IFRS (International Financial Reporting Standards)

became mandatory for listed firms in European Union countries. Many firms anticipated on this

regulation by preparing their financial statements in accordance with IFRS before it became

mandatory. The issuance of the new style audit report is similar to the early adoption of IFRS,

because in both cases firms anticipated on the upcoming regulation by voluntarily adopting the

new standard. Therefore, also studies about the determinants of early IFRS adoption are

discussed.

Gassen & Sellhorn (2006) examined the determinants of IFRS adoption between 1998 and 2004

for German firms. The authors found that firm size, international exposure, ownership dispersion

and recent IPOs are positively related to early IFRS adoption. Furthermore, it was showed that

firms that are also listed in the U.S. were more inclined to adopt IFRS. André, Walton & Yang

(2012) investigated the determinants of voluntary IFRS adoption for non-listed UK firms in

2009. In contrast to listed firms in the European Union, IFRS is still non-mandatory for non-

listed firms. By applying a sample of 8,417 firms, the authors found that firm size, leverage,

internationality and having a Big Four auditor are positively related to voluntary IFRS adoption.

Kolsi & Zehri (2013) examined both microeconomic and macroeconomic determinants of

voluntary IFRS adoption. In their sample, they included 700 firm-year observations from 74

developing countries worldwide. Half of those countries adopted IFRS in 2008. Countries with

an Anglo-Saxon culture, a common law system, a good educational system and a high degree of

foreign operations and economic growth are more inclined to adopt IFRS than other countries.

Of the microeconomic determinants, firm size and having a Big Four auditor were found to be

positively related to IFRS adoption. From the discussed articles, it can be derived that the

determinants of IFRS adoption are similar to the explanatory factors for voluntary disclosure.

30

3.4 Conclusion

Concluded, is can be stated that certain firm characteristics are often significantly related to

voluntary disclosure. In many studies, firm size and profitability, which is often measured as the

ROA or ROE of a firm, are found to be significantly positively associated with voluntary

disclosure. Moreover, a large majority of the articles provided evidence that firms with a Big

Four auditor disclose more voluntary information than those audited by non-Big Four firms. In

addition, cross-listed firms tend to be more active in voluntary disclosures than single-listed

firms. Other recurring (at least two times) significantly positive relations have been found for

firm age, listing age, corporate governance strength and assets-in-place. Also industry type

frequently is a factor in explaining the choice for voluntary disclosure. Evidence is mixed

concerning the relation of competitive pressure, leverage, role duality and board size with

voluntary disclosure. No recurring significantly negative associations could be derived from the

studied articles.

Many studies also included variables related to stock ownership in their research. Overall,

institutional ownership and foreign ownership are positively associated with voluntary

disclosure. There is mixed evidence on the relation of voluntary disclosure with managerial and

state ownership, while ownership concentration is negatively related to voluntary disclosure in a

large majority of the articles. In addition, some studies found evidence that family-controlled

businesses are less willing to disclose voluntary information.

Table 13 (see appendix) is constructed with the purpose to show the number of significant

relations for each of the most recurring voluntary disclosure determinants. The numbers are

constructed based on all articles discussed in this section. In the next section, the hypotheses are

developed on the basis of the information acquired in this section. Table 13 is helpful in

recognizing which variables have exhibited most significant associations with voluntary

disclosure in prior studies.

Two tables summarizing the articles discussed in this section are provided below.

31

Table 1: Summary of articles about the determinants of voluntary disclosure

Authors Geographical area

Sample Research method

Voluntary disclosure item

Positive association

No association

Negative association

Premuroso (2008)

U.S. 1993-2003;198 firms

Binary logistic regression

Initial outsourcing

Level of debt, total cost ratio, ROA

Zhu & Gong (2013)

U.S. 570 firms Regression analysis

Executive compensation

Economic performance

El-Gazzar, Fornaro & Jacob (2006)

U.S. 1996-2000; 500 firms

Logistic regression; OLS regression

Report of management’s responsibilities

Ratio of independent to total audit committee members, frequency of audit committee meetings, new public debt issues and new equity issues, institutional ownership

ROA, debt/equity ratio

Financial statement restatements, management ownership, interest rate on debt

Schiehll, Terra & Victor (2013)

Brazil 2007;68 firms with ESO plans

OLS regression

Executive stock options

Board size, presence compensation committee, Big 4 auditor

Proportion of independent directors, CEO duality, ownership concentration

Family-controlled

Coebergh (2011)

Netherlands 2003-2008;399 firm-year observations

Panel data regression

Corporate strategy

Foreign exchange listing, listing/national ranking status, listing age, sector (e.g. basic materials, food producers, retail, media, fixed line telecommunications, financial, software & computer services)

Size, leverage, ownership concentration

Profitability (ROE), sector (i.e. pharmaceutical & biotechnology)

Braam & Borghans (2010)

Netherlands 2004;149 firms

Linear regression

Financial and non-financial performance measures

Disclosure of performance measures of other companies to which the firm is related via their board interlocks,

32

disclosure of performance measures of other companiesto which the firm is related via their external auditor

Raffournier (1995)

Switzerland 1991;161 firms

Regression analysis

Voluntary disclosure index

Size, internationality (i.e. international diversification)

Oxelheim & Thorsheim (2012)

Europe 2000-2009; 100 firms

Logistic regression

Macroeconomic effects on corporate performance

Cross-listing, corporate governance strength, leverage, threat of entry

Introduction IFRS, profitability (ROA), stock turnover

Capital intensity (= PP&E scaled by total assets)

Kateb (2012) France 2006;55 firms

Poisson regression; negative binomial regression

Structural capital

Size Firm age, industry, economic performance, interest in stakeholder pressure, competitive pressure

Managerial ownership, level of debt

Alves (2011) Spain, Portugal (i.e. the Iberian Peninsula)

2007;140 firms

Multiple regression analysis

Voluntary disclosure index

Management incentives (= proportionof the board’s remuneration that is not fixed),size, growth opportunities, economic performance, organizational performance, board compensation

Managerial ownership, government ownership, board independence, board size, existence of monitoring structures, board expertise, leverage, ownership concentration, turnover ratio

Bid-ask spread, large shareholder

Chakroun & Matoussi (2012)

Tunisia 2003-2008; 144 observations

Multiple regression analysis

Voluntary disclosure index

Regulatory reform, board size, managerial ownership, role duality, institutional ownership, leverage, firm age

Size, Big Four auditor)

Board independence, ownership concentration, family-controlled, competition on the market

Dhouibi & Tunisia 2000-2011; Linear- Voluntary Foreign Number of Board size,

33

Mamoghli (2013)

10 banks multiple regression

disclosure index

ownership, size independent directors, role duality, Big 4 auditor

blockholder ownership, state ownership

Kolsi (2012) Tunisia 2009-2010; 52 firms

Multiple regression analysis

Voluntary disclosure index

Leverage, Big Four auditor, ROA, financial sector

Large shareholder, size

Barako (2007) Kenya 1992-2001; 43 firms

Pooled OLS regression with panel-corrected standard errors

Voluntary disclosure index

Audit committee, foreign ownership, institutional ownership, size, Big 4 auditor, ROE

Lan, Wang & Zhang (2013)

China 2006;1,066 firms

OLS regression

Voluntary disclosure index

Size, leverage, assets-in-place (= ratio fixed assets/total assets), ROE

Big Four auditor

Wang, Sewon & Claiborne (2008)

China 2005;109 firms

Multivariate regression analysis

Voluntary disclosure index

State ownership, foreign ownership, ROE, Big 4 auditor

Spiegel & Yamori (2003)

Japan 1996-1997;814 observations

OLS regression; probit regression (dummy dependent variable)

Non-performing loans

Competitive pressure, size

Bad loan problems, leverage

Sheu, Liu & Yang (2008)

Taiwan 1998-2005; 3,841 observations

OLS regression (dummy dependent variable)

Directors’ compensation

Directors’ compensation, board size, diversified ownership, managerial ownership

Government ownership, native institutional ownership

Ho (2009) Malaysia 1996, 2001, 2006 (statistically significant increase in voluntary disclosure over time)

Regression analysis

Voluntary disclosure index

Global corporate scandals, external regulatory pressures, corporate governance strength, ownership concentration, size

Vu (2012) Vietnam 2009;252 firms

OLS regression

Voluntary disclosure index

Corporate governance strength, size, profitability,

Foreign ownership

State ownership, managerial ownership

34

industry, Big 4 auditor, listing age

Hossain & Reaz (2007)

India 2002-2003;38 banking companies

OLS regression

Voluntary disclosure index

Size, assets-in-place

Age, diversification, board composition, cross-listed, complexity of business

Sehar, Bilal & Tufail (2013)

Pakistan 2012;372 firms

Cross-sectional multiple regression

Voluntary disclosure index

Profitability, size, firm age, auditor size

Leverage

Almutawaa (2013)

Kuwait 2005-2008; 206 firms

Multivariate regression analysis

Voluntary disclosure index

Government ownership, cross-listing, size

Family-controlled, audit committee

Cross-directorships, board size, role duality, company growth

Hossain & Hammami (2009)

Qatar 2007;25 firms

OLS regression

Voluntary disclosure index

Firm age, assets, number of subsidiaries, assets-in-place

ROE

Zunker (2011) Australia 2004;970 firms

Binary logistic regression (dummy dependent variable)

Employee-related disclosures

Economic performance, size, adverse publicity

Gamerschlag, Möller, Verbeeten (2011)

Germany 2005-2008; 470 firm-year observations

Probit regression

CSR disclosure index

Visibility, profitability (ROIC), freefloat in percentage of shares, U.S.-listed, size

Sukcharoensin (2012)

Thailand 50 firms Regression analysis

CSR disclosure index

Corporate governance rating, public ownership, ownership dispersion

ROE, ROA, Tobin’s Q

Financial leverage

Borghei-Ghomi & Leung (2013)

Australia 2009-2011;300 firm-year observations

Cross-sectional regression

Greenhouse gas emission (GHG) disclosure index

Size, corporate governance strength, cross-listed, ownership concentration, leverage

Industry

Prado-Lorenzo, Rodríguez-Domínguez, Gallego-

World 2005;101 firms

Linear OLS regression

Greenhouse gas emission (GHG) disclosure index

Size, market-to-book ratio, sector (i.e. airlines, chemicals, forest and paper

Leverage, ROA

ROE, sector (i.e. aerospace and defense)

35

Álvarez & García-Sánchez (2009)

products, metals, mining and crude-oil production, motor vehicles and parts, utilities)

Table 2: Summary of articles about the determinants of early/voluntary IFRS adoption

Authors Geographical area

Sample Research method

Positive association No association Negative association

Gassen & Sellhorn (2006)

Germany 1998-2004;708 firm-year observations

Logistic regression (dummy dependent variable)

Firm size, international exposure, ownership dispersion, recent IPOs, U.S.-listed

Level of debt, number of exchange listings

André, Walton & Yang (2012)

UK 2009;8,417 firms

Logistic regression (dummy dependent variable)

Firm size, leverage, internationality, Big Four auditor

Profitability, capital intensity, sector (manufacturing and financial), growth, ownershipstructure, productivity

Kolsi & Zehri (2013) Developing countries worldwide

2008;700 firms from 74 developing countries

Logistic regression

Firm size, Big Four auditor

Cross-listed, ROE, leverage

4. Hypotheses

36

In this section, the hypotheses are developed and explained. Most voluntary disclosure

determinants on which sufficient evidence was provided in Section 3 are included in the

hypotheses.

4.1 Firm size

In the previous section it could be seen that many prior studies had found a positive relation

between firm size and voluntary disclosure. Citro (2013), whose study reviews previous

literature on the determinants of disclosures, provides three arguments for this positive

association. First of all, collecting and producing voluntary information is more costly for

smaller firms, since they have fewer resources. Secondly, large firms are exposed to a higher

degree of public visibility, which results in more pressure to disclose additional information.

Thirdly, large firms are more inclined to attract capital from investors. Hence, they disclose more

voluntary items, since extra information usually leads to higher confidence and less uncertainty

among investors.

Since there is extensive evidence on a positive relation between firm size and voluntary

disclosure, it is hypothesized that this also holds for the issuance of the new style audit report.

H1: Firm size is positively associated with the voluntary disclosure of the new style audit report.

4.2 Leverage

Citro (2013) and Jensen & Meckling (1976) explain the relationship between leverage and

voluntary disclosure by means of the agency theory. In contrast to the mixed evidence this study

found, the articles Citro (2013) examined point into the direction of a positive association

between leverage and voluntary disclosure. She argues that highly leveraged firms incur more

monitoring costs. In order to reduce their monitoring costs, they tend to disclose more voluntary

information. As a result, leverage is assumed to be related to voluntary disclosure as there is

more need for highly leveraged firms to please their creditors by providing them extra

information. Jensen & Meckling (1976) follow the same line of reasoning. The authors explain

37

that when a firm engages more into debt contract covenants, they aim to reduce their monitoring

costs by providing more voluntary information to their bondholders and other stakeholders.

A study by Khlifi & Bouri (2010) proposes an argument against a positive association between

leverage and voluntary disclosure. The authors state that, conform the signaling theory, firms

with low leverage are more willing to signal their good performance to the market than highly

leveraged firms. Converting this theory to the new style audit report, an explanation in favor of a

negative relationship could be that low leverage firms have less to hide. Since the new style audit

report is focused on firms’ risk areas, low leverage might serve as an incentive to voluntarily

publish a new style audit report.

Since the evidence found in the Section 3 is inconclusive, but leaning towards a positive relation,

the hypothesis follows the theories predicted by Citro (2013) and Jensen & Meckling (1976).

H2: There is a positive association between leverage and the voluntary disclosure of the new

style audit report.

4.3 Big Four auditors

Schiehll, Terra & Victor (2013) state that the choice for a Big Four auditor is an indication that a

firm wants to achieve higher disclosure quality. A Big Four Auditor is more costly than a non-

Big Four auditor, meaning that the choice for a large audit firm really signals to the market that

the firm aims to achieve high disclosure quality. Furthermore, big audit firms likely tend to start

earlier with innovations such as the new style audit report, since these are the auditors that have

most in-house knowledge and experience in auditing.

From the examination of past studies it could be concluded that a large majority found that firms

with Big Four auditors are more inclined towards voluntary disclosure than firms audited by a

non-Big Four auditor. Hence, the same direction of the relationship is hypothesized in this study.

38

H3: There is a positive association between Big Four-audited firms and the voluntary disclosure

of the new style audit report.

4.4 Cross-listing

According to Oxelheim & Thorsheim (2011), presence on various capital markets gives more

pressure to provide investors with information. Different markets are characterized by different

needs. Information that is beneficial to investors on one capital market might be meaningless to

investors on another exchange. Moreover, Cooke (1989) explains that a cross-listing leads to a

greater distance between owners and management. As a result, agency costs, like monitoring

costs, increase. In order to offset this rise in agency costs, cross-listed firms are assumed to

engage more in voluntary reporting.

Four of the articles discussed in the previous section have found a significantly positive relation

between a cross-listing and voluntary disclosure (i.e. Coebergh, 2012; Almutawaa, 2013;

Oxelheim & Thorsheim, 2011; and Borghei-Ghomi & Leung, 2013). No negative associations

were encountered. Based on this information, one would expect that cross-listed firms are more

inclined to disclose a new style audit report than other firms. However, there are quite some non-

Dutch firms listed on the NYSE Euronext Amsterdam, which are all included in the sample.

These firms are almost by definition cross-listed, as it is normal for a firm to have its IPO (Initial

Public Offering) at the local stock exchange. Non-Dutch firms might be less aware of the

existence of the new style audit report, as it is presumably popular in the UK and the

Netherlands. It can be argued that non-Dutch firms, which are almost always cross-listed, are

probably less likely to voluntarily disclose the new style audit report. With this information in

mind, and in contrast to what empirical evidence and theory says, this study predicts a negative

relation between being cross-listed and voluntarily issuing the new style audit report.

H4: There is a negative association between cross-listed firms and the voluntary disclosure of

the new style audit report.

4.5 Board size

39

One of the most often-heard arguments in favor of a positive association between board size and

voluntary disclosure, is that large boards have more resources (i.e. knowledge and capital) to

engage in additional, non-mandatory reporting practices (Schiehll et al., 2013). Notice that by

‘board’, the Board of Directors is meant. Dhouibi & Mamoghli (2013) add that large Supervisory

Boards are more likely, and have more possibilities, to monitor the Board of Directors. More

attention from the Supervisory Board might serve as an incentive for the Board of Directors to

voluntarily provide investors with more information. It is often assumed that a large Board of

Directors corresponds to a large Supervisory Board. For example, the correlation between the

size of the Supervisory Board and the size of the Board of Directors in this study is 0.48.

Therefore, this theory by Dhouibi & Mamoghli (2013) can also serve as a predictor of the

relation between Board of Directors size and voluntary disclosure.

Yermack (1996) found that small boards are more inclined to provide managers with

compensation incentives or fire them when results are insufficient. Following this line of

reasoning, it is expected that managers in firms with small boards tend to engage more in

voluntary reporting, as the performance-based rewards and threats are more extreme. Other

arguments for a negative relationship are provided in the article by Sheu, Liu & Yang (2008).

Large boards would be less flexible in initiating strategic changes and exhibit fewer consensuses,

leading to the postponement of decisions (Goodstein, Gautam & Boeker, 1994; Golden & Zajac,

2001). Both arguments would be detrimental for engaging in voluntary reporting.

Five articles discussed in the previous section found a significant relationship between board size

and voluntary reporting, of which three were positive and two were negative. As can be seen, the

evidence on this relationship is inconclusive. However, in order to construct a hypothesis, this

study follows the small majority. Thus, it is proposed that a positive relation exists between

board size and the voluntary issuance of the new style audit report.

H5: Board size is positively associated with the voluntary disclosure of the new style audit

report.

4.6 Age

40

For practical reasons, this study applies listing age as a proxy for age. This is extensively

explained in the next section. Sehar, Bilal & Tufail (2013) mention two reasons why older firms

tend to engage more in voluntary disclosure than younger firms. First of all, they state that

younger firms have lower investment funds, making it less profitable for them to voluntarily

disclose information. In addition, the younger the firm, the fewer records there are. As the

second argument, the authors bring forward that a young firm might have insufficient records of

operations, making them bound to disclose less information. Coebergh (2011) states that firms

that have been listed for a long time have often established a vast reputation, in contrast to new

firms on the capital market. Because of this better reputation, the market usually expects a higher

amount of disclosure by long-listed firms. On the other hand, Coebergh (2011) argues there

usually is more uncertainty surrounding younger firms. To reduce the information asymmetry,

younger firms might be more willing to disclose voluntary information. However, the evidence

obtained in the previous section points towards a positive association (e.g. Hossain & Hammami,

2009; Sehar, Bilal & Tufail, 2013; and Chakroun & Matoussi, 2012). Hence, it is expected that

age is positively related to the issuance of a new style audit report.

H6: Age is positively associated with the voluntary disclosure of the new style audit report.

4.7 Competitive pressure

The evidence on the relation between competitive pressure and voluntary disclosure is mixed.

Spiegel & Yamori (2003) found a positive relation, while Chakroun & Matoussi (2012) found

that competitive pressure is negatively related to voluntary reporting. According to Spiegel &

Yamori (2003), firms operating in a competitive market experience higher stakeholder pressure

to disclose extra information, in order to achieve or maintain a competitive advantage over

competitors. Not disclosing information that rival firms do disclose might lead to a competitive

disadvantage. Chakroun & Matoussi (2012) define competition as the degree of entry barriers in

an industry. High entry barriers are associated with a low degree of competition in an industry.

They state that the profits of firms in industries with high entry barriers are materially affected by

the entrance of a newcomer, in contrast to earnings of firms in sectors with low entry barriers.

41

Because there is more pressure on their profits, it is theorized that high entry barrier industry

firms are more willing to satisfy their stakeholders. One of the ways to achieve this is by

reporting voluntary information. This is called the proprietary cost theory. As is clear, evidence

and theories on the relationship between competitive pressure and voluntary disclosure are both

mixed, so the direction of the hypothesis is based on a closer look at both studies examining this

association. For three reasons, the hypothesis of this study follows the research of Chakroun &

Matoussi (2012). First of all, this study is much more recent. Second, in contrast to the research

of Spiegel & Yamori (2003), the study of Chakroun & Matoussi (2012) has been published in an

academic journal. Third, the relation between competitive pressure and voluntary disclosure has

a higher significance level in the research of Chakroun & Matoussi (2012). Therefore, it is

hypothesized that there is a negative association between competitive pressure and the issuance

of the new style audit report. As will be explained in the next section, market concentration will

serve as a proxy for competitive pressure.

H7: Competitive pressure is negatively associated with the voluntary disclosure of the new style

audit report.

4.8 Ownership dispersion

Ownership structure is believed to be related with the extent of voluntary disclosure. Let’s give

an example relating to managerial ownership. The main objective of shareholders is to gain a

return on their investment as a result of a rise in the share price. This can be achieved by a good

performance of the firm they invest in. For this, shareholders are dependent on the choices of

management. A high degree of managerial ownership results in a greater alignment between the

goals of management and shareholders. When managers own shares of the firm, they want, just

like the shareholders, to achieve a higher share price. It is assumed that voluntary disclosure is

advantageous for the share price of a firm, so when managerial ownership increases,

management might be more inclined to engage in voluntary disclosure.

Another example is government ownership. The government invests in firms for strategic

purposes. Profit maximization is often not the main objective for state-owned firms. They are

42

more focused on the public interest. Voluntarily disclosing information might be one of the

things that satisfy this public interest. On the other hand, Alves (2011) argues that managers of

state-owned firms are likely to face less discipline from the market for corporate control. This, in

turn, might lead to less voluntary disclosure.

Many studies discussed in Section 3 found evidence of a relation between voluntary disclosure

and a firm’s ownership structure. A majority showed a positive association for institutional and

foreign ownership, while there was mixed evidence on the association of managerial and state

ownership with voluntary disclosure. Negative relationships were found for family-controlled

businesses.

This study only focuses on ownership dispersion, as there are no data available for Dutch listed

firms about the percentage of shares held by different types of owners. As will be explained in

the next section, ownership dispersion will be represented by a variable measuring a firm’s

portion of freefloat shares.

In case of a dispersed ownership structure, shareholders have little authority over management.

Therefore, they have to guard their interests by effectively monitoring management, as theorized

by the agency theory, which assumes that the principal monitors the agent. Gamerschlag et al.

(2011) argue that because large shareholders have more direct authority over management, they

do not engage in monitoring management but try to influence decisions themselves. The

presence of large shareholders is associated with a concentrated ownership structure. With that in

mind, managers in firms with dispersed ownership might feel more need to report voluntary

information, as they are monitored more effectively. Furthermore, according to Chau & Gray

(2002), firms with a dispersed ownership structure face higher public demand for voluntary

information. This is the result of a broader shareholder base. As a consequence, managers of

dispersed ownership firms have more incentives to report voluntarily.

Gamerschlag et al. (2011) found that a high percentage of freefloat shares, which indicates a high

level of ownership dispersion, is related to more voluntary disclosure. Other prior studies also

found positive associations between ownership dispersion and voluntary disclosure. On the other

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hand, negative associations were found between voluntary disclosure and ownership

concentration, which is the opposite of ownership dispersion. Therefore, this study predicts a

positive relation between ownership dispersion and the voluntary issuance of the new style audit

report.

H8: Ownership dispersion is positively associated with the voluntary disclosure of the new style

audit report.

4.9 Industry

According to Dahawi (2009), the association between industry type and voluntary disclosure

stems from a difference in transparency between industries. He argues that, for example,

financial firms engage less in voluntary disclosure because of greater opacity. Arya & Mittendorf

(2005) explain differences in voluntary disclosure among industries by the ‘herd behavior’

principle. This principle resembles mimetic isomorphism, discussed in Section 2. When one firm

in an industry reports voluntarily, other firms in the same industry feel like they cannot stay

behind, because that would lead to a competitive disadvantage. This can lead to significant

differences in voluntary reporting among industries.

Some studies discussed in Section 3 examined whether a firm’s industry is of effect on its degree

of voluntary reporting (i.e. Coebergh, 2011; Kolsi, 2012; Vu, 2012; and Prado-Lorenzo et al.,

2009). Most of the articles found significant industry effects. Combined with convincing

theoretical arguments, it seems evident that associations between industry type and voluntary

disclosure exist. Hence, the following hypothesis is constructed:

H9: Associations exist between the voluntary disclosure of the new style audit and the industry of

firms.

4.10 Concluding remarks

44

Two often-applied voluntary disclosure determinants, corporate governance strength and assets-

in-place, could not be hypothesized. Corporate governance strength is normally measured as the

proportion of independent directors on a company’s board. However, for the measurement of this

proxy, a one-tier corporate governance structure is needed. Very few firms in the Netherlands

apply this structure. Hence, it is not feasible to include this variable in the regression model.

Assets-in-place is measured as the ratio of fixed assets over total assets. However, almost a

quarter of the firms in the research sample consist of financial institutions, which have no to very

few fixed assets on their balance sheet. This would lead very low ratios, which might bias the

research results. In other studies, financial institutions are often excluded from the sample, in

order to measure variables like assets-in-place. However, because of the low amount of

observations, financial institutions are not excluded from this study’s research sample. As a

result, also this variable cannot be hypothesized. Furthermore, it was decided not to examine the

relation between a firm’s profitability and the voluntary disclosure of the new style audit report.

There are many small firms in the sample, whose profitability, in contrast to large firms, often

fluctuates heavily from year to year. Therefore, it does not seem fair to test this relationship, as it

would represent a snapshot in time.

5. Research design

45

The empirical objective of this study is to examine the firm characteristics related to the

voluntary disclosure of the new style audit report. This section provides the statistical

background of this study. As explained in Section 2, the research design and research model are

largely modeled after André et al. (2012). First of all, the research sample is discussed. Second,

the variables applied in this research are reviewed. Finally, the logistic research model is

presented. Section 6 follows this section and analyzes the main results of the research regression.

5.1 Research sample

The research sample consists of 109 firms listed on the NYSE Euronext Amsterdam, plus ABN

AMRO, a formerly listed Dutch bank, and PGGM, a Dutch pension fund. Both issued a new

style audit report over 2013. ABN AMRO and PGGM are, as of May 2014, the only non-listed

Dutch firms of which it is known that they have issued a new style audit report over 2013. These

firms are included in sample, as more observations lead to stronger and more convincing

regression results, especially when the amount of observations is already quite low, as is the case

in this research. The NYSE Euronext Amsterdam actually consists of 114 firms. However, Reed

Elsevier, Royal Dutch Shell, Royal Bank of Scotland and Unilever are excluded from the

sample. These firms are listed on the London Stock Exchange, meaning that they had to

mandatorily publish a new style audit report over 2013. Novisource is also excluded from the

sample, as this firm reported zero revenues over 2013, and the latest ‘real’ earnings number

could not be found. This means that in total, there are 111 firms included in the research sample.

All audit reports in this research are over the fiscal year 2013. The large majority of the audit

reports are dated in the period February-April 2014. Some firms had a year-end of June 30, 2013

or September 30, 2013. These firms are also included in the sample.

5.2 Variables

46

The dependent variable is represented by the new style audit report (NEWit). Voluntary adopters

of the new style audit report are distinguished from non-adopters by the construction of a dummy

variable. Firms wíth a new style audit report are assigned a value of 1, while firms without a new

style audit report are assigned a value of 0.

In total, 10 independent variables are included in the regression model. All independent variables

were hypothesized in the previous section and are projected to exhibit a significant relationship

with the dependent variable.

Firm size is measured by the variable REVit, which is the total revenue of a firm over the year

2013. Some firms in the sample provided their earnings number in U.S. dollars. The revenues of

these firms were transformed to Euro by applying the US$ - Euro exchange rate as at December

31, 2013. Two firms did not report any earnings over the year 2013, as they are so-called ‘empty

shells’. This means that these firms do currently not have any operating activities. For these

firms, the earnings number of the latest available year with ‘real’ earnings numbers is taken as a

measure of firm size. Many studies used (the log of) total assets as a proxy for firm size (e.g.

Oxelheim & Thorsheim, 2012; André et al., 2012; and Gamerschlag et al., 2011). However,

when examining the financial statements of the sampled firms in this study, it was found that a

firm’s amount of total assets is much more volatile than the level of total revenue. Since the time

frame of this study is only one year, it is believed that total revenue as a proxy for firm size is a

better option, as this variable is more constant over time and therefore gives a better

representation of the size of a firm. Studies by Roberts (1992) and Prado-Lorenzo et al. (2009)

also applied (average) total revenue as a proxy for firm size.

Leverage (LEVit), which is an indicator of a firm’s level of debt, is calculated as the ratio of total

liabilities to total assets. The balance sheet amounts used to determine leverage are those of year-

end 2013. This method to measure leverage was also applied by a.o. Chakroun & Matoussi

(2012), Oxelheim & Thorsheim (2012) and André, Walton & Yang (2012).

BIG_4it, which is a dummy variable, relates to a firm’s auditor. Firms audited by a Big Four

audit firm (i.e. KPMG, PwC, Deloitte and EY) are assigned a value of 1, while firms audited by

47

a non-Big Four firm (e.g. BDO, Mazars and Baker Tilly Berk) are assigned a value of 0. In this

research sample, only 15 out of 111 firms are audited by a non-Big Four firm.

The variable CROSSit, which is also a dummy variable, assigns a value of 1 to cross-listed

firms and a value of 0 to other firms. Being cross-listed means that a firm is listed on two or

more stock exchanges. Also firms trading on foreign OTC (over-the-counter) markets,

predominantly in the U.S., are labeled as being cross-listed.

BOARD_SIZEit measures the number of members of a firm’s Board of Directors as of

December 31, 2013. The large majority of the sampled firms has a two-tier corporate governance

structure, implying that there is both a Board of Directors and a Supervisory Board. However,

some firms have a one-tier corporate governance structure, meaning that they do not have a

separate Supervisory Board, but only a Board of Directors. Within the Board of Directors, these

firms normally make a distinction between independent directors and executive directors. Unlike

executive directors, independent directors are not involved in the day-to-day operations of the

firm. Therefore, they are regarded as the supervisory body of the Board of Directors. Just like a

normal Supervisory Board, they monitor the managers (executive directors). As a result, for one-

tier corporate governance structure firms, this study applies only the number of executive

directors on the Board of Directors as a substitute for board size. All studies discussed in Section

3 which included board size as a variable in their regression also measured board size as the

number of Board of Directors members (e.g. Sheu et al., 2008; and Schiehll et al., 2013).

AGEit corresponds to listing age, which is the number of years since a firm’s initial listing.

Listing age as a proxy for firm age is often applied in academic literature (e.g. Pástor &

Veronesi, 2003; Fama & French, 2004; Chun, Kim, Morck & Yeung, 2008). Shumway (2001)

argues that listing age is the best measure of firm age, as it is one of the milestones of a firm’s

life. Furthermore, listing age is a popular method because it is easy to measure. It also exhibits

reality, as firms with a rich history are often listed longer.

Another method to measure a firm’s longevity is to simply take the firm age. However, the

problem with this method is that for almost all companies there is not one single firm age, as

48

most of them have experienced many mergers and acquisitions throughout their lives. Therefore,

it is hard to determine the year the firm was founded.

Two firms in the sample, both new style audit report issuers, are not listed. In order to keep the

results as unbiased as possible, this study simply takes the average of the listing age of all new

style audit report issuers for these two firms, which corresponds to a listing age of 31 years.

MRKT_CONCit is an indicator of the competition in a firm’s market. This variable measures

the market concentration in a firm’s industry by taking the sum of the market shares of the four

largest firms in the market. Market concentration is used as a measure for competitive pressure.

Namely, the higher the total market share of the four largest firms, the more concentrated the

market is. Bikker & Haaf (2002) found that a highly concentrated market is associated with

lower competitiveness. Also in other studies, concentration measures often serve as proxies for

competitive pressure (Cetorelli, 1999; Berger et al., 2004). Since it is hypothesized that there is a

negative association between competitive pressure and the issuance of the new style audit report,

it is expected that there is a positive relation between MRKT_CONC and the disclosure of the

new style audit report.

The numbers for the variable MRKT_CONCit are based on U.S. data, as there are no European

or Dutch data available. The U.S. data seem to be usable for this thesis, as they exhibit

resemblances to the Dutch market. For example, the market share of the four largest delivery

service firms in the U.S. is 94%. This market is highly concentrated in the Netherlands as well

(Consumer Postal Council, 2014). On the other hand, the market share of the four largest U.S.

firms in electronic equipment is just 14.5%. The electronics sector has always been known to be

highly competitive, also in the European market (CBI, 2014). The classification of firms into

sectors is done based on the ICB Classification Benchmark (ICB) system. The ICB system is

“used globally to divide the market into increasingly specific categories, allowing investors to

compare industry trends between well-defined subsections” (Euronext, 2014). The ICB system

assigns 4-digit numbers to firms (e.g. 6535). The first digit stands for the industry. This digit

only represents a broad indication of a firm’s industry. The second, third and fourth digit are

applied to make a firm’s classification more specific. These digits correspond to, respectively, a

49

firm’s ‘supersector’, ‘sector’ and ‘subsector’. According to Euronext (2014), firms can be

classified into 10 industries, 19 supersectors, 41 sectors and 114 subsectors. To measure market

concentration, each firm is carefully classified based on its sector or subsector. For each ICB

sector/subsector, a similar market is found in the database, which provides the corresponding

market shares.

The variable FREEFLOATit measures the amount of freefloat shares as a percentage of total

outstanding shares. Thomson One (2014) calculates freefloat as shares outstanding less the sum

of positions held by strategic entities (i.e. corporations, holdings and individuals) and

government agencies. A firm’s freefloat is defined as “the portion of its shares that can be

publicly traded” (Financial Times Lexicon, 2014).

The percentage of freefloat shares is usually seen as an indicator of ownership dispersion

(Demsetz, 1968). Therefore, it is applied as a substitute for ownership dispersion. A small

freefloat percentage implies that the percentage of shares publicly available for trading is low. A

large part of a firm’s share capital is namely concentrated in the hands of institutional and

strategic investors. This share capital is locked, meaning that it is not available for trading. A

high amount of locked, institutionally-owned shares normally implies that there is low ownership

dispersion. Therefore, it is safe to assume a positive relation between the percentage of freefloat

shares and ownership dispersion, as this variable was also used as a proxy for ownership

dispersion by Gamerschlag et al. (2011).

Two firms in the sample are not listed, so they do not have any shares outstanding. Again, with

the aim to diminish this problem, the average of the proportion of freefloat shares of the new

style audit report issuers is taken for these two firms.

The last independent variable, SECTORit, classifies all sampled firms into different industries.

This arrangement is based on the ICB system. Because of the limited amount of observations in

this study, firms are classified based on only the first digit of their ICB code. This means that the

111 firms in the sample of this study are classified into ten different industries. However, none of

the sampled firms is part of ICB7000 (Utilities). So actually, the firms are classified into nine

50

industries, namely Oil & Gas, Basic Materials, Industrials, Consumer Goods, Health Care,

Consumer Services, Telecommunications, Financial and Technology. Because of the low amount

of observations in ICB1 and ICB6000 (respectively Oil & Gas and Telecommunications), this

study merges the industries Oil & Gas and Basic Materials into one industry called ‘Materials’

and considers Telecommunications as part of Consumer Services. Health Care has also been

added to Materials. Because none of the four firms in the Health Care industry has issued a new

style audit report, this variable fails to provide a result when running a logistic regression. Since

the main activity of the majority of the sampled firms in the Health Care sector is biotechnology,

which is about creating new products by using raw (often chemical) materials and organisms,

these firms have been placed in the Materials sector. This leaves us with six different industries

the firms can be classified into. The frequency of firms per sector can be found in Table 5.

Of course, also the intercept (α0) and the error term (Ɛit) are included in the regression model.

All variables are summarized in Table 3. The data source for each variable is also provided in

this table.

Table 3: Description of variablesVariable Description Data sourceNEWit 1 if a firm has voluntarily issued a new

style audit report; 0 otherwisePwC (2014a); hand-collected

REVit Total revenue (€) Calculated based on the 2013 Annual reportsLEVit Leverage, calculated as the ratio of

total liabilities to total assetsCalculated based on the 2013 Annual reportsBIG_4it 1 if a firm is audited by a Big Four

auditor; 0 otherwisePwC (2014a); hand-collected

CROSSit 1 if a firm is listed on more than one stock exchange; 0 otherwise

Hand-collected

BOARD_SIZEit The size of the Board of Directors (two-tier firms); the amount of executive directors on the Board of Directors (one-tier firms)

Thomson One (2014); hand-collected; 2013 Annual reports

AGEit Listing age Hand-collectedMRKT_CONCit The total market share held by the four largest firms in an industry

United States Census Bureau (2007)FREEFLOATit The ratio of freefloat shares to total

shares outstandingThomson One (2014)

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SECTORit A firm’s sector (materials, industrials, consumer goods, consumer services, financials and technology)

Industry Classification Benchmark (ICB) system (Euronext, 2014)

5.3 Research model

This research is conducted by means of a regression analysis, applying the logistic regression

model. This model can only be applied in case of a binary dependent variable, which is a

variable that can just take two values, in this case 0 or 1. According to the Institute for Digital

Research and Education (2014a), an institute developed by UCLA, there are six assumptions that

have to be met when running a logistic regression: 1) the true conditional probabilities are a

logistic function of the independent variables, 2) no important variables are omitted, 3) no

extraneous variables are included, 4) the independent variables are measured without error, 5)

the observations are independent, and 6) the independent variables are not linear combinations of

each other.

There are some notable differences between a logistic regression and an OLS regression. Where

an OLS regression predicts a continuous outcome variable, meaning that the dependent variable

can take all possible values, a logistic regression predicts a dichotomous variable. It measures the

probability that the dependent variable is equal to 1 (i.e. Y=1), given the values of the

independent variables. Moreover, the coefficients in a logistic regression are interpreted

differently. In an OLS regression, the regression coefficient of the independent variable equals

the change in the dependent variable when there is a one unit change in the independent variable.

A logistic regression looks at odds ratios in order to interpret the regression results. Suppose that

the regression coefficient of an independent variable equals 0.25. In that case, the odds ratio is

1.28, which is calculated by taking the exponential function of 0.25 [= exp (0.25)]. This means

that the likelihood that the dependent variable equals 1 is 1.28 times more likely when the value

of the independent variable increases by 1 unit. A regression coefficient of zero equals an odds

ratio of 1, meaning that there is no difference. This shows that the relation between logistic

regression coefficients and odds ratios holds. Furthermore, the fit of the model is expressed

differently in a logistic regression. In an OLS regression, the R-squared is used to determine the

fit of the model. However, a logistic regression applies a chi-squared test to measure whether the

52

model is a good fit. Specifically, the chi-squared test measures “the fit of the observed values to

the expected values” (Crossman, 2014). When the probability of the chi-squared test is lower

than 0.05, it usually implies that the model is a good fit. Lastly, while OLS assumes that the

residuals are normally distributed, this does not hold for a logistic regression (Crossman, 2014).

The binary logistic regression model is chosen for this research as it is the only model that is

specifically constructed for regressions with a dummy dependent variable. Therefore, the binary

logistic regression model is most likely to provide unbiased regression results. This decision is

supported by empirical research. By applying Monte Carlo simulation, Beck (2011) examined

which of the two statistical models (i.e. logistic and OLS) is best to use in case of a binary

dependent variable. The author showed that in most scenarios, a logistic regression proved to be

a better fit. Hence, he concluded that it is safer to use a logistic regression instead of an OLS

regression in case the dependent variable is binary. Pohlmann & Leitner (2003) also compared

the OLS method with logistic regression by evaluating the differences of the results obtained on

common data sets. The authors conclude that both research models can be used in case the

dependent variable is binary. However, they found that the logistic model yields more accurate

predictions of dependent variable probabilities, making the logistic model superior to the OLS

model. As a result, the authors state that the logistic model should be favored over the OLS

method when the dependent variable is binary. Furthermore, Park (2009) is of opinion that in

case of a categorical dependent variable, which is a variable that can only take a limited number

of possible values, the OLS method can no longer produce the best results, as it makes the

research results biased and inefficient.

The regression model contains all variables discussed previously, plus the intercept and the error

term. NEWit is the dependent, explanatory variable. The logistic regression model is constructed

as follows:

NEWit = α0 + β1*REVit + β2*LEVit + β3*BIG_4it + β4*CROSSit + β5*BOARD_SIZEit + β6* AGEit + β7*MRKT_CONCit + β8*FREEFLOATit + ∑βk*SECTORit + Ɛit5.4 Descriptive statistics

53

Table 4: Descriptive statistics

Variable N Min Max Mean St. dev. Median Skewness Kurtosis*NEW 111 0 1 0.2703 0.4461 0 1.0346 -0.9296REV (x 1,000,000) 111 0.069 57,665 3,541 8,220 508.5 0.9150 18.2009LEV 111 0.01 1.27 0.5731 0.2430 0.56 -0.0583 -0.0459BIG_4 111 0 1 0.8739 0.3335 1 -2.2523 3.0729CROSS 111 0 1 0.6486 0.4796 1 -0.6228 -1.6122BOARD_SIZE 111 1 9 2.8108 1.5107 2 1.1821 1.7114AGE 111 1 131 25.559 21.509 18 2.1107 5.9381MRKT_CONC 111 0.075 0.94 0.3721 0.1836 0.358 0.9478 0.6545FREEFLOAT 111 0.01 1 0.6759 0.2830 0.75 -0.6987 -0.5466* Stata assumes a perfect normal distribution at a kurtosis of +3. Because the reference normal distribution often has a kurtosis of zero, the kurtosis is adjusted by -3 (DeCarlo, 1997).

The descriptive statistics of all variables, except the industry variables, are provided in Table 4.

For each variable, the number of observations (N), the minimum and maximum value, the mean,

standard deviation, median, skewness and kurtosis are given. Skewness is the degree to which

the different observations of a variable point into one direction, applying the perspective of a

normal distribution. Suppose that 80 out of 111 observations are on the left side of the null-point

of the normal distribution. In that case, the skewness of the variable is negative. However, when

80 out of 111 observations are on the right side of the null-line, the skewness is positive. Balanda

& MacGillivray (1988) define kurtosis as “the location- and scale-free movement of probability

mass from the shoulders of a distribution into its centre and tails.” A positive kurtosis means that

there is an even distribution of observations of a variable, which corresponds to a sharp peak.

The higher the value of the kurtosis, the sharper this peak. In case of a negative kurtosis, many

observations are concentrated toward the mean, which implies a flat top. A kurtosis of zero,

meaning that it is neither negative nor positive, corresponds to a perfect normal distribution. For

a graphical illustration of the different degrees of kurtosis, see Figure 1 on the next page.

Figure 1: Levels of kurtosis

54

(Source: Signal Trading Group, 2014)

As can be seen in Table 4, 27.0% of firms have issued a new style audit report. This percentage

corresponds to 30 out of 111 firms. Almost two-thirds of the sampled firms are cross-listed

(64.9%), and an even larger majority is audited by a Big Four firm (87.4%).

What is notable is the broad range of values for listing age (1 to 131), although the mean is quite

normal, with a listing age of 25.6 years. Another remarkability is that the maximum value of the

variable LEV is 1.27, meaning that there is a firm with more liabilities than assets, which is the

result of a negative equity.

Table 5: Frequency of sector variablesVariables Frequency

Absolute Relative (%)SECTOR_MATERIALS 13 11.71SECTOR_INDUSTRIALS 29 26.13SECTOR_CONSGOODS 11 9.91SECTOR_CONSSERVICES 14 12.61

SECTOR_FINANCIALS 28 25.23SECTOR_TECHNOLOGY 16 14.41

Total 111 100

As can be seen in Table 5, the distribution of firms to different sectors is quite diversified. No

sector contains more than firms or less than 10 firms. The sector INDUSTRIALS contains most

observations, while the least amount of firms are included in the sector CONSGOODS.

55

Table 6: Expected signs of the independent variablesIndependent

variablesExpected sign

REV (+)LEV (+)

BIG_4 (+)CROSS (-)

BOARD_SIZE (+)AGE (+)

MRKT_CONC (+)FREEFLOAT (+)

Table 6 provides the expected signs of all independent variables (except the sector variables), as

predicted by the hypotheses developed in Section 4. CROSS is the only variables for which a

negative relation with the dependent variable is expected. The remaining independent variables

are projected to signal a positive association with the dependent variable.

5.5 Statistical testing

Several statistical tests will be performed in the next section, in correspondence with the tests

performed by Zunker (2011) and André et al. (2012). The ‘usual suspects’ heteroskedasticity and

multicollinearity are tested, as well as the distribution of the residuals, the normality of the data

distribution, and the robustness of the regression. Also a chi-squared test will be performed, as

this study applies a logistic regression model.

Heteroskedasticity occurs “when the variance of the errors varies across observations” (Long &

Ervin, 2000). Researchers should try to avoid heteroskedasticity, as it leads to an overestimation

of standards errors, and hence, an underestimation of the t-statistics of regression parameters

(Studenmund, 2010). Smith (2011) states that the significance tests may therefore be inefficient.

However, the regression coefficients are still unbiased in case there is heteroskedasticity.

Heteroskedasticity will be tested by performing the Breusch-Pagan/Cook-Weisberg test. This is

one of the most well-known and applied methods when testing for heteroskedasticity.

56

Multicollinearity occurs when multiple independent variables are highly correlated. In case of

substantial multicollinearity, the regression coefficients may be “both biased and inconsistent”

(Smith, 2011). Multicollinearity causes considerable changes in the regression coefficients when

small adjustments are made to the data or the regression model. This distorts the reliability of the

results. Multicollinearity will be tested by measuring the mean Variance Inflation Factor (VIF) of

the independent variables. When the mean VIF is below the often applied threshold of 10, it

implies that there is no problematic multicollinearity (e.g. Hair Jr., Anderson, Tatham & Black,

1995; Kennedy, 2003).

The normality of the data distribution will be tested by performing the Shapiro-Wilk W test.

Specifically, it tests whether a sample comes from a normally distributed population.

A chi-squared test will also be performed. This test is part of the logistic regression model output

in Stata. It assesses the goodness of fit of the regression model. It will also be looked at whether

the residuals are normally distributed. However, since it is not necessary in a logistic regression

that the residuals are normally distributed, no severe conclusions can be attached to this statistic.

Lastly, there will be a robustness test. When the coefficients and p-values of the explanatory

variable do not change much in the robust regression compared to the initial regression, it is an

indication that the regression coefficients are robust. When this is the case, it is seen as evidence

that the significant coefficients exhibit a true causal relationship with the dependent variable (Lu

& White, 2014).

57

6. Results

This section provides all results. First of all, the correlation between the variables is shown and

discussed. In sub-section 6.2, the statistical tests are provided. These are the

Breusch-Pagan/Cook-Weisberg test for heteroskedasticity, the Variance Inflation Factor (VIF)

test for multicollinearity and the Shapiro-Wilk W test for the normality of the data distribution.

Also the Kernel density estimate of the distribution of the residuals will be provided. In sub-

section 6.3, the results of the logistic regression can be found. These results will be analyzed in

sub-section 6.4. Finally, sub-section 6.5 analyzes whether the results of the logistic regression

are robust.

The tables and figures in this section are subtracted from Stata 13, with the exception of the

correlation matrix, which was constructed using Microsoft Excel.

6.1 Correlation

Table 7: Correlation matrix

Variables NEW REV LEV BIG_4 CROSSBOARD_

SIZE AGEMRKT_C

ONCFREEFL

OAT

SECTOR_MATERI

ALS

SECTOR_INDUST

RIALS

SECTOR_CONSG

OODS

SECTOR_CONSSERVICES

SECTOR_FINANC

IALS

SECTOR_TECHNOLOGY

NEW 1REV -0.0175 1LEV 0.0116 0.1795 1BIG_4 0.1701 0.1591 0.0059 1CROSS -0.0620 0.2714 0.1037 0.4025 1BOARD_SIZE 0.0361 0.2891 0.1658 0.1868 0.2713 1AGE 0.1461 0.0793 -0.1243 0.0391 0.0201 -0.0404 1MRKT_CONC 0.1088 0.0405 0.0047 0.1020 0.1521 0.1085 -0.0920 1FREEFLOAT 0.2025 0.1744 0.0819 0.1776 0.3799 0.2721 0.0306 0.0498 1SECTOR_MATERIALS -0.0955 0.1611 -0.0150 0.1384 0.1507 0.0645 -0.1260 0.0503 0.1057 1SECTOR_INDUSTRIALS 0.1922 -0.0295 0.1476 0.1642 0.0081 -0.0070 0.0285 -0.0903 -0.0176 -0.2166 1SECTOR_CONSGOODS -0.0661 -0.0408 -0.1438 -0.0556 -0.0717 -0.2189 0.2702 0.0977 -0.0434 -0.1208 -0.1972 1SECTOR_CONSSERVICES 0.1354 0.0910 0.0322 -0.1009 -0.1183 0.0117 -0.0302 0.0196 -0.0061 -0.1384 -0.2259 -0.1260 1SECTOR_FINANCIALS -0.0265 -0.0148 0.0561 -0.0293 0.1233 0.1420 0.0236 -0.0551 0.0724 -0.2115 -0.3454 -0.1926 -0.2207 1SECTOR_TECHNOLOGY -0.1920 -0.1436 -0.1483 -0.1531 -0.1278 -0.0507 -0.1509 0.0334 -0.1216 -0.1495 -0.2441 -0.1361 -0.1559 -0.2384 1

58

One of the most notable positive correlations (0.2891) exists between REV and BOARD_SIZE. It can be theorized that larger firms have more resources available for the

appointment of a large board. Big firms might also be in need of a larger board, as there are

probably more issues to discuss and decisions to be made.

The variable REV also exhibits a high correlation coefficient with CROSS (0.2714), which

implies that large firms are more prone to list their shares on another stock exchange. Also this

correlation coefficient is perfectly understandable. When a firm grows larger, it might consider

issuing shares on the local stock exchange. The same procedure holds when a firm is already

listed. When a firm continues to grow, it starts thinking about expanding and attracting more

capital, by, for example, listing on a foreign stock exchange.

The most notable positive correlation (0.4025) can be found between the variables BIG_4 and CROSS. Firms with a Big Four auditor are generally larger than firms with a non-Big Four

auditor, which is also implied by the correlation coefficient between REV and BIG_4 (0.1591).

The theory behind this positive correlation is the same as for the correlation between CROSS and REV, which was discussed above. Larger firms, which have a higher probability of having a

Big Four auditor, are more likely to issue shares on a foreign stock exchange in order to attract

new capital.

Besides the industry-related correlations, the most negative correlation (-0.1243) could be found

between AGE and LEV. An explanation could be that start-up firms make large capital

investments. The returns on these investments are often earned years later. Therefore, these firms

might have a higher leverage ratio, as the start-up investments are recorded as liabilities on their

balance sheet.

6.2 Results of the statistical tests

In this sub-section, the results obtained from the statistical tests are explained and discussed.

Table 8 provides the results of the Breusch-Pagan/Cook-Weisberg test for heteroskedasticity.

59

When prob>chi2 is higher than 0.05, the variance of the error term is constant, implying that

there is homoscedasticity. However, when prob>chi2 is lower than 0.05, there is

heteroskedasticity. In this case, the probability equals 0.5282. There is no heteroskedasticity.

Table 8: Breusch-Pagan/Cook-Weisberg test for heteroskedasticity

Prob > chi2 = 0.5282 chi2(13) = 11.99

SECTOR_INDUSTRIALS SECTOR_CONSGOODS SECTOR_CONSSERVICES SECTOR_FINANCIALS Variables: REV LEV BIG_4 CROSS BOARD_SIZE AGE MRKT_CONC FREEFLOAT SECTOR_MATERIALS Ho: Constant varianceBreusch-Pagan / Cook-Weisberg test for heteroskedasticity

Table 9 provides the test for multicollinearity. Normally, a threshold of 10 is applied when

analyzing whether multicollinearity exists among the independent variables (e.g. Hair Jr. et al.,

1995; Kennedy, 2003). When the mean VIF is higher than 10, substantial multicollinearity

exists. As can be seen, the mean VIF of the independent variables is 4.01. Because the mean VIF

is lower than 10, it can be concluded that there is no multicollinearity among the independent

variables.

Table 9: Variance Inflation Factor (VIF) test for multicollinearity

Mean VIF 4.01 REV 1.40 0.712189SECTOR_CO~DS 1.81 0.552292SECTOR_CO~ES 1.83 0.547669SECTOR_MAT~S 1.88 0.531368 AGE 2.64 0.378148SECTOR_FIN~S 2.76 0.362764SECTOR_IND~S 2.98 0.335993 CROSS 4.14 0.241405 MRKT_CONC 4.84 0.206700 BOARD_SIZE 5.57 0.179503 LEV 6.12 0.163379 FREEFLOAT 7.49 0.133505 BIG_4 8.64 0.115755 Variable VIF 1/VIF

The Shapiro-Wilk W test, provided in Table 10, tests whether the sample population is normally

distributed. The sample population of the large majority of the variables is normally distributed,

60

as their value of prob>z is lower than 0.05. Only the sample populations of LEV and CROSS are non-normally distributed. Overall, it is safe to say that the sample population is normally

distributed, as almost none of the variables exhibits non-normality of the distribution of the

sample population.

Table 10: Shapiro-Wilk W test for the normality of the data distribution

SECTOR_FIN~S 111 0.96716 2.959 2.420 0.00775SECTOR_CO~ES 111 0.89872 9.126 4.933 0.00000SECTOR_CO~DS 111 0.86615 12.061 5.555 0.00000SECTOR_IND~S 111 0.96974 2.727 2.238 0.01261SECTOR_MAT~S 111 0.88925 9.979 5.133 0.00000 FREEFLOAT 111 0.94595 4.870 3.532 0.00021 MRKT_CONC 111 0.93066 6.248 4.088 0.00002 AGE 111 0.80236 17.808 6.425 0.00000 BOARD_SIZE 111 0.91911 7.289 4.431 0.00000 CROSS 111 0.99282 0.647 -0.972 0.83448 BIG_4 111 0.90249 8.786 4.848 0.00000 LEV 111 0.98096 1.716 1.205 0.11417 REV 111 0.47145 47.626 8.619 0.00000 NEW 111 0.97215 2.509 2.053 0.02005 Variable Obs W V z Prob>z

Shapiro-Wilk W test for normal data

In Figure 2, the distribution of the residuals can be found. The red line represents a normal

distribution, while the blue depicts the distribution of the residuals in this research. It can be seen

that the peak of the distribution is higher than under a normal distribution. The blue line

resembles a normal distribution. However, the density is still quite large when the Pearson

residuals are high. One of the assumptions of an OLS regression is that the residuals are

normally distributed. However, this is not the case when it concerns a logistic regression.

Therefore, no conclusions can be derived from this figure.

Figure 2: Kernel density estimate of the distribution of the residuals

61

0.2

.4.6

.8D

ensi

ty

-2 0 2 4Pearson residual

Kernel density estimateNormal density

kernel = epanechnikov, bandwidth = .24

Kernel density estimate

6.3 Discussion of the results

Table 11 provides the regression results. To get a good understanding of the table, the unknown

concepts at the top of the table, which are specific to a logistic regression, are explained first.

LR chi2(12) is the likelihood ratio chi-squared. The number between brackets corresponds to the

number of independent variables included into the model. LR chi2(12) is related to Prob > chi2,

as Prob > chi2 is the p-value associated with the likelihood ratio chi-squared. Prob > chi2 is a

chi-squared test. An LR chi2(12) of 29.16 in combination with a Prob > chi2 of 0.0037 means

that the model as a whole represents a significantly better fit than in case the same model would

not have any independent variables included. This usually implies that the independent variables

included into the regression model are appropriately chosen for this specific research (IDRE,

2014b).

The log likelihood represents the goodness of fit of a model. It is related to Pseudo R2, which is

an easier method to determine a model’s goodness of fit. Therefore, the log likelihood will not be

discussed in detail. Pseudo R2 represents McFadden's pseudo R-squared, also referred to as rho-

squared. Rho-squared is not the same as the R-squared in an OLS model, which is the proportion

of variance in the dependent variable that can be explained by the independent variables. Rho-

squared can be calculated as one minus the log likelihood of the fitted model divided by the log

likelihood of the null model. In mathematical terms:

Rho-squared = 1 – (log likelihood fitted model / log likelihood null model)

62

McFadden (1977) explains that the values of rho-squared “tend to be considerably lower than

those of the R2 index”. He states that values between 0.2 and 0.4 for rho-squared mean an

excellent fit of the model. In the paper by Domencich & McFadden (1975), it is argued that

values of rho-squared between 0.2 and 0.4 correspond to an R-squared of 0.7 to 0.9 in OLS

regressions. Since the value of rho-squared in this model is 0.2251, it could be concluded that

this regression represents a good fit. However, because rho-squared does not have the same

meaning as the R-squared in an OLS regression, the IDRE (2014c) warns that this statistic

should be interpreted with “great caution”.

Table 11: Regression results

_cons -7.074296 1.914304 -3.70 0.000 -10.82626 -3.32233 SECTOR_FINANCIALS 1.85595 1.222936 1.52 0.129 -.5409602 4.25286SECTOR_CONSSERVICES 2.586435 1.296886 1.99 0.046 .0445863 5.128284 SECTOR_CONSGOODS .5414863 1.459848 0.37 0.711 -2.319764 3.402736 SECTOR_INDUSTRIALS 2.542577 1.219023 2.09 0.037 .1533371 4.931818 SECTOR_MATERIALS 1.078152 1.380664 0.78 0.435 -1.627901 3.784204 FREEFLOAT 3.165748 1.186549 2.67 0.008 .8401552 5.491342 MRKT_CONC 2.501943 1.486169 1.68 0.092 -.4108943 5.41478 AGE .0207455 .0121089 1.71 0.087 -.0029876 .0444785 BOARD_SIZE -.0652838 .1921651 -0.34 0.734 -.4419204 .3113529 CROSS -1.514175 .6607983 -2.29 0.022 -2.809315 -.2190338 BIG_4 2.055591 1.171547 1.75 0.079 -.2405991 4.35178 LEV -.2371045 1.129845 -0.21 0.834 -2.45156 1.977351 REV -2.33e-11 3.95e-11 -0.59 0.555 -1.01e-10 5.42e-11 NEW Coef. Std. Err. z P>|z| [95% Conf. Interval]

Log likelihood = -50.191422 Pseudo R2 = 0.2251 Prob > chi2 = 0.0037 LR chi2(12) = 29.16Logistic regression Number of obs = 111

This thesis distinguishes between three significance levels: 1%, 5% and 10%. The 1% and 5%

significance levels are widely applied and recognized in academic research. Results with a 10%

significance level have to be taken with caution, as the 10% significance level is less commonly

used in academic studies. However, it has been decided also to recognize the results significant

at 10% as being significant, instead of labeling them as insignificant. First of all, quite some

results in this study are not significant at the 5% level but are significant at the 10% level.

63

Recognizing the 10% significance level gives the readers of this thesis more detailed information

about the strength of the relation between the dependent and the independent variables. Besides,

it seems inappropriate to label variables with a p-value of 0.06 the same as variables with a p-

value of 0.90, i.e. both insignificant.

H1: Firm size is positively associated with the voluntary disclosure of the new style audit report.

As can be seen in Table 11, firm size (REV) is not significantly related to the voluntary

disclosure of the new style audit report. In contrast to what was hypothesized, firm size even

exhibits a slightly negative relation with the dependent variable. This means that H1 is rejected.

There is no significant relation between the two variables.

H2: There is a positive association between leverage and the voluntary disclosure of the new

style audit report.

There is also no significant association between leverage (LEV) and NEW, the dependent

variable. On average, highly leveraged firms are slightly less likely to issue a new style audit

report than firms with a lower leverage ratio, although this relation is non-significant. As a result,

H2 is rejected.

H3: There is a positive association between Big Four-audited firms and the voluntary disclosure

of the new style audit report.

Conform H3, there is a significantly positive association between having a Big Four auditor

(BIG_4) and the issuance of the new style audit report. This relation holds at a significance level

of 10%. It is possible to interpret the regression parameter by computing the exponential function

of the parameter. That results in the odds ratio. The exponential function of the regression

coefficient of BIG_4 (2.056) is 7.81. So the odds ratio shows that firms with a Big Four auditor

are 7.81 times more likely to issue a new style audit report than firms with a non-Big Four

auditor.

H4: There is a negative association between cross-listed firms and the voluntary disclosure of

the new style audit report.

64

There is a significantly negative association between CROSS and the voluntary disclosure of

the new style audit report at a significance level of 5%. The probability that a cross-listed firm

issues a new style audit report is 4.55 times lower compared to a single-listed firm. This number

represents the odds ratio. In case of a negative regression coefficient, 1 has to be divided by the

exponential function of the regression coefficient of CROSS (-1.514), which is 0.22. This result

is conform H4, but in contrast to what theory says about the relation between being cross-listed

and voluntary reporting.

H5: Board size is positively associated with the voluntary disclosure of the new style audit

report.BOARD_SIZE does not exhibit a significant relationship with the dependent variable, which

means that H5 is rejected. Although a positive association was hypothesized, this result is not

that surprising, as previous studies were mostly inconclusive about the relation between board

size and voluntary disclosure. With an extra board member, it becomes only 1.04 times less

likely that a firm engages in issuing a new style audit report. As previously mentioned, this ratio

is calculated by dividing 1 by the exponential function of the parameter coefficient.

H6: Age is positively associated with the voluntary disclosure of the new style audit report.

At a significance level of 10%, there is a positive relation between the listing age of a firm

(AGE) and the voluntary disclosure of the new style audit report. This is in accordance with the

direction specified by H6, so H6 is confirmed.

H7: Competitive pressure is negatively associated with the voluntary disclosure of the new style

audit report.

Competitive pressure is significantly negatively associated with the voluntary disclosure of the

new style audit report, as there is a positive relation between MRKT_CONC and NEW at a

significance level of 10%. This is conform H7, so as a result, this hypothesis is confirmed. From

this result, it can be concluded that firms in markets with lower competitive pressure are more

likely to issue a new style audit report.

65

H8: Ownership dispersion is positively associated with the voluntary disclosure of the new style

audit report.

It is found that there is significantly positive association between ownership dispersion and the

voluntary disclosure of the new style audit report, as the proxy for ownership dispersion

(FREEFLOAT) exhibits a positive relation with NEW at a significance level of 1%.

Therefore, H8 can be confirmed.

H9: Associations exist between the voluntary disclosure of the new style audit and the industry of

firms.

There are six sector variables, of which five are included in the regression. SECTOR_TECHNOLOGY is excluded from the regression and therefore used as the

benchmark, which is common practice when examining industry effects. From the regression

results, it can be derived that firms in the industrials and consumer services sector (i.e. SECTOR_INDUSTRIALS and SECTOR_CONSSERVICES) issue significantly more

new style audit reports than firms in the technology sector. These results hold at a 5%

significance level. For the other sectors, no significant associations can be found. Therefore, H9

is confirmed, as two significant industry effects have been found.

Concluded, BIG_4, AGE and MRKT_CONC are significantly positively associated with the

dependent variable at a 10% level. FREEFLOAT is significantly positively related to the

issuance of the new style audit report at a 1% significance level. On the other hand, there is a

significantly negative association between CROSS and NEW at a significance level of 5%. At

a significance level of 10%, there is also a significantly negative relation between competitive

pressure and the voluntary disclosure of the new audit report. Furthermore, at a 5% level, it was

found that firms in the sectors ‘Industrials’ and ‘Consumer Services’ disclose significantly more

new style audit reports than firms in the sector ‘Technology’, which served as the benchmark.

Summarized, H1, H2 and H5 are rejected, meaning that the results show no significant

association in the expected direction for these hypotheses. However, H3, H4, H6, H7, H8 and H9

are confirmed, as for these hypotheses there is a significant relationship in the pre-specified

direction.

6.4 Analysis

66

Big Four auditor

There is a significantly positive relation between having a Big Four auditor and the voluntary

disclosure of the new style audit report. Previous empirical research provides overwhelming

evidence of a strong positive relation between voluntary disclosure and having a Big Four

auditor, but the relation between the disclosure of the new style audit report and having a Big

Four auditor is only significant at 10%. A reason for this could be that, although they consult

with and get advice from their auditor, the firms themselves still have the final word about

whether or not issuing a new style audit report. Still, although at 10%, there is a significantly

positive association between issuing the new style audit report and having a Big Four auditor. It

is an indication that Big Four audited firms, in cooperation with their auditor, spark innovative

reporting, as these firms and their auditors seem to be the driving force behind the new style

audit report.

Cross-listing

The significantly negative relation for cross-listed firms is the result of the inclusion of non-

Dutch firms in the sample, which are almost per definition cross-listed, engaging less in

voluntarily disclosing the new style audit report. As explained in Section 4, non-Dutch firms are

probably less aware of the new style audit report and its advantages. This result proves that this

thought is likely to be the explanation for the negative relation between CROSS and NEW. So

although the studies in Section 3 only found significantly positive associations between a cross-

listing and voluntary disclosure, this result is therefore not unexpected. An alternative

explanation can be given applying the theory of Graham et al. (2005). They stated that attaining

more analyst coverage is one of the main reasons for firms to engage in voluntary disclosure. It

seems safe to assume that cross-listed firms have more analyst coverage, as, because of their

cross-listing, they have more international exposure in a variety of countries. Non-cross-listed

firms are more likely than cross-listed firms to have a lack of analyst coverage. Therefore, non-

cross-listed firms might be more eager to voluntarily issue a new style audit report, in order to

attract more analyst coverage.

Firm age

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The significantly positive relation for the variable AGE strengthens the thought that the market

expects a higher level of voluntary disclosure from older firms, as theorized by Coebergh (2011).

As explained in Section 2, Graham et al. (2005) found that one of three main reasons managers

engage in voluntary disclosure is to increase or maintain the reputation of their firm. This result

implies that older firms take more responsibility in taking care of their reputation by responding

to the needs of society, which corresponds to the legitimacy theory. The positive association is in

line with previous empirical research, as the discussed studies in Section 3 found three

significantly positive associations against zero significantly negative associations between

voluntary disclosure and firm age.

Competitive pressure

There is a significantly negative relation between competitive pressure and voluntary issuing the

new style audit report, although only at a 10% significance level. Evidence of previous literature

on the relation between competitive pressure and voluntary disclosure was mixed, so it is not

unexpected that the significance level of this relation is only 10%. This result can be explained

by the proprietary cost theory, which theorizes that firms in industries with high entry barriers

are more affected when there is a newcomer, putting pressure on their profits. As a result, they

are more willing to satisfy their stakeholders, by, for example, providing the new style audit

report. An alternative theory explained in Section 4, arguing that firms in competitive markets

experience higher stakeholder pressure to disclose voluntary information in order to earn or keep

a competitive advantage, is not supported by this result.

Ownership dispersion

The most significantly positive relation exists between ownership dispersion and the voluntary

issuance of the new style audit report, at a significance level of 1%. Although a positive

association was hypothesized, it is quite surprising that this relationship is this strong, as

previous literature on the relation between ownership dispersion was quite mixed; three studies

found a significantly positive result, while two studies obtained a significantly negative result.

This association can be explained by the theory of Chau & Gray (2002), who state firms with a

dispersed ownership structure have more shareholders, therefore facing more public pressure to

issue voluntary information. Again, there are common grounds with the legitimacy theory.

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Another explanation for this positive relationship can be provided by the agency theory. A high

degree of ownership dispersion often implies that there is a low amount of institutional

ownership. Institutional owners have normally more inside information than the rest of

shareholders do, because they own a larger part of the firm’s share capital. So when ownership is

dispersed, there is likely to be more information asymmetry between shareholders and

management. Information asymmetry is one of the two main pillars of the agency theory.

Because of this higher degree of information asymmetry, management might feel more need to

voluntarily disclose the new style audit report when ownership is dispersed. This type of

innovative reporting might also make management win the trust of their shareholders, thereby

reducing monitoring costs, and subsequently agency costs, in the future.

Insignificant relations with the dependent variable were found for the independent variables REV, LEV and BOARD_SIZE. Firm size, the degree of leverage and the size of the board are

not associated with the voluntary disclosure of the new style audit report.

Firm size

It was theorized that large firms have more resources and feel more pressure to issue voluntary

information, because of their higher public visibility. Large firms are also more likely to issue

new shares by means of a Seasoned Equity Offering (SEO) in order to attract more capital.

Disclosing the new style audit report would lead to less uncertainty about firm performance by

capital providers. However, no evidence for these theories was found when it concerns the

relation between firm size and the issuance of the new style audit report. An explanation for this

result could be that large firms have many other channels to communicate with the public.

Instead of communicating information via the new style audit report, big firms might, more so

than small firms, provide useful voluntary information to their investors via communication

channels like conference calls and press meetings. Another reason for this insignificant relation

is provided by the positive accounting theory, and more specifically by the bonus plan

hypothesis. Recalling the information from Section 2, this hypothesis assumes that managers

engage in voluntary disclosure out of self-interest, because they want to increase their own

compensation. According to Schaefer (1998), CEOs of large firms have a lower proportion of

stock-based compensation relative to total salary than CEOs of smaller firms. Elaborating on this

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thought, it could be stated that it is more important for CEOs of small firms rather than large

firms that the share price of their firm’s stock increases. One way to do so is by pleasing their

shareholders by, for example, voluntarily disclosing the new style audit report. An innovative

reporting strategy might have a positive effect on the share price, which would increase

compensation especially for CEOs of small firms, who therefore might have more incentives to

issue the new style audit report. Relating the negative association between firm size and the

proportion of stock-based compensation with the bonus plan hypothesis might explain why there

is an insignificant relation between firm size and the voluntary disclosure of the new style audit

report. Still, the insignificant relation between firm size and the voluntary disclosure of the new

style audit report is unexpected. Namely, the discussed articles in Section 3 found sixteen

significantly positive associations against zero significantly negative associations between firm

size and voluntary disclosure.

Leverage

The positive direction of the hypothesis for the relation between leverage and the disclosure of

the new style audit report was mainly based on the agency theory. Higher leverage would lead to

more monitoring of management by the shareholders, hence resulting in more pressure for

management to show their good intentions, by for example disclosing the new style audit report.

An argument in favor a negative association between leverage and voluntary disclosure was

provided by the signaling theory. Firms with low leverage might be more willing to disclose

voluntary information in order to signal their superior performance. However, from the results, it

can be concluded that both theories were not able to explain the relation between leverage and

the disclosure of the new style audit report. This result is not that surprising, as the previous

studies discussed in Section 3 found mixed results on the relation between leverage and

voluntary disclosure; six found a significantly positive relationship, while four times a

significantly negative association was found.

Board size

The expected positive relation between board size and the issuance of the new style audit report

could be explained by the monitoring role of the Supervisory Board. A large Supervisory Board

is associated with a large Board of Directors. Hence, there are more resources to monitor the

70

board, and to evaluate individual directors on their performance. Most directors might have

incentive packages, meaning that they are rewarded for good performance and punished for bad

performance. Issuing an innovative reporting concept like the new style audit report in the

Annual Report, might lead to a better evaluation from Supervisory Board. However, from the

results it can be concluded this this is not the case. A reason for this insignificant relation might

be that the Supervisory Board normally is very close with the Board of Directors, as the

members of the Supervisory Board are appointed by the Board of Directors. This could be

detrimental for the monitoring function of the Supervisory Board. As with leverage, based on the

articles in Section 3, there was no overwhelming evidence of the hypothesized positive relation

between board size and voluntary disclosure. As three studies found a significantly positive

relation and two found a significantly negative relation, this insignificant association might not

come as a total surprise.

Industry

The fact that there are significant industry effects for the sectors Industrials and Consumer

Services supports the institutional theory, and more specifically the notice of mimetic

isomorphism. This theory relies on the notion that firms tend to mimic the practices of

comparable firms, for example firms in their own industry. Since certain industries display a

higher level of issuing the new style audit report than others, this theory seems applicable. Since

previous studies have mostly used other industry classification schemes to test for significant

industry effects, it is hard to compare the industry results of this study to previous studies.

However, it seems quite surprising that the sector Technology is least associated with the

voluntary disclosure of the new style audit report. Firms in the technology business are often

known to make their money by coming up with innovative concepts and products, so one would

think that these firms would embrace an innovative reporting concept like the new style audit

report. However, from the results it seems like the innovativeness of firms in the technology

sector does not hold for their reporting practices.

6.5 Robustness test

71

Table 12 represents the robust logistic regression. According to Shevlyakov & Vilchevski

(2001), robustness is the “stability of statistical inference under the variations of the accepted

distribution models.” That is, the robust logistic regression tests whether the results still hold

when there are small deviations from normality. The exact scenario under which this robust

logistic regression is ran is auto-generated by Stata.

As can be seen in Table 12, the coefficients have not changed severely. This indicates that there

is a true causal relationship between the significant independent variables and the dependent

variables. All except two variables are still significant at the level of the initial logistic

regression. In the robust logistic regression, MRKT_CONC is not significant at the 10% level

anymore, while the sector variable SECTOR_CONSSERVICES is now significant at the

10% level instead of the 5% level. However, because the changes in p-values are only very slight

and the regression coefficients have changed minimally, it can be concluded that the initial

logistic regression is representative for this research.

Table 12: Robust logistic regression

_cons -7.074296 1.972296 -3.59 0.000 -10.93993 -3.208666 SECTOR_FINANCIALS 1.85595 1.187867 1.56 0.118 -.4722268 4.184127SECTOR_CONSSERVICES 2.586435 1.361782 1.90 0.058 -.082609 5.255479 SECTOR_CONSGOODS .5414863 1.76844 0.31 0.759 -2.924593 4.007565 SECTOR_INDUSTRIALS 2.542577 1.164183 2.18 0.029 .26082 4.824335 SECTOR_MATERIALS 1.078152 1.319834 0.82 0.414 -1.508676 3.664979 FREEFLOAT 3.165748 1.104607 2.87 0.004 1.000759 5.330738 MRKT_CONC 2.501943 1.525741 1.64 0.101 -.4884554 5.492341 AGE .0207455 .0115199 1.80 0.072 -.001833 .043324 BOARD_SIZE -.0652838 .1869522 -0.35 0.727 -.4317034 .3011359 CROSS -1.514175 .7000787 -2.16 0.031 -2.886304 -.1420456 BIG_4 2.055591 1.171306 1.75 0.079 -.2401261 4.351307 LEV -.2371045 .9468835 -0.25 0.802 -2.092962 1.618753 REV -2.33e-11 3.05e-11 -0.77 0.444 -8.31e-11 3.64e-11 NEW Coef. Std. Err. z P>|z| [95% Conf. Interval] Robust

Log pseudolikelihood = -50.191422 Pseudo R2 = 0.2251 Prob > chi2 = . Wald chi2(12) = .Logistic regression Number of obs = 111

72

The next section presents the conclusions of this study. In this section, the results will be

summarized and the limitations of the research will be discussed. In addition, opportunities for

further research are brought forward.

7. Summary and conclusion

This section provides a summary of the thesis, the main results, and recommendations for further

research.

The objective of this thesis was to examine the firms characteristics associated with the voluntary

disclosure of the new style audit report. Therefore, in the introduction, the following main

research question was constructed:

What are the firm characteristics associated with the voluntary issuance of the new style audit

report in the Dutch stock market?

Based on the research performed in this thesis, the answer to the main research questions is as

follows: ownership dispersion, firm age and having a Big Four auditor are the firm

characteristics significantly positively associated with the voluntary issuance of the new style

audit report in the Dutch stock market, while competitive pressure and a cross-listing are

significantly negatively related to the voluntary disclosure of the new style audit report.

Furthermore, the sectors Industrials and Consumer Services display a significantly positive

relation with the disclosure of the new style audit report.

Summary

73

After introducing the subject of this thesis in Section 1, in Section 2, the attributes of the new

style audit report were explained. In contrast to the old format audit report, the new style audit

report usually includes paragraphs on 1) key audit matters/areas of focus, 2) materiality and an

overview of the scope of the audit, and 3) a firm’s going concern. When at least two out of three

paragraphs were included into a firm’s audit report, the firm was considered to be a new style

audit report adopter. Furthermore, Section 2 discussed theories that could be related to voluntary

disclosure practices. These included the agency theory, signaling theory, capital need theory,

legitimacy theory, positive accounting theory, institutional theory and litigation cost theory.

Section 3 provided a review of empirical studies focusing on the factors associated with

voluntary disclosure. Size, profitability, a Big Four Auditor and leverage were the characteristics

found to be most often significantly associated with voluntary disclosure. The former three

factors pointed towards a positive association, while evidence on the relation between leverage

and voluntary disclosure was mainly mixed. Out of these four ‘top variables’, only profitability

was not included in the regression model, because of the substantial yearly changes in

profitability ratio for many (small) firms in the research sample. The other variables included

into the research model yielded either positive or mixed results in previous research. The

evidence on the relation of voluntary disclosure with being cross-listing (4 positive, 0 negative)

and firm age (3 to 0) was convincingly positive, while the factors board size, ownership

dispersion (both 3 to 2) and competitive pressure (1 to 1) yielded mixed evidence in prior

research.

In Section 4, the hypotheses were constructed. In order to test the hypotheses, a logistic

regression model was constructed in Section 5, measuring the relation between the issuance of

the new style audit report and the hypothesized firm characteristics. Besides the research model,

also the research sample, variables, descriptive statistics and statistical tests were discussed in

Section 5.

Results

Section 6 provided the main results of this study. First of all, a correlation matrix was

constructed. No high correlation coefficients (-0.5 > r > 0.5) between the variables could be

74

detected, which is generally a good sign. After that, several statistical tests on the regression

model were performed. These included tests for multicollinearity, heteroskedasticity and the

normality of the data distribution, and a graph depicting estimates of the distribution of the

residuals. Again, no severe problems were detected, indicating that the regression model is well-

fitted. The results of the logistic regression showed that there are significantly positive

associations between the disclosure of the new style audit report and listing age, having a Big

Four auditor (both at a 10% significance level), and ownership dispersion (at 1%). Significantly

negative relations with the issuance of the new style audit report were found for competitive

pressure (10%) and being cross-listed (5%). Insignificant associations with the disclosure of the

new style firms in the sectors Consumer Services and Industrials are significantly positively

related to the disclosure of the new style audit report. As a result, three out of nine hypotheses

had to be rejected, while six out of nine hypotheses were confirmed by the regression results.

Analysis

In the analysis part of Section 6, it was attempted to link the results to existing theories, mostly

discussed in Section 2. Especially the legitimacy theory can be linked to the voluntary disclosure

of the new style audit report. The significantly positive associations found for the factors firm

age and ownership dispersion can be explained by this theory. According to the legitimacy

theory, the public expects rather from older than younger firms that they engage in voluntary

reporting. Older firms feel more pressure to comply with the public’s expectations, for example

by issuing the new style audit report. Also firms with a dispersed ownership structure are likely

to face more public pressure when it concerns voluntary disclosure, because they have a larger

amount of shareholders. The association with ownership dispersion, however, can also be

explained by the agency theory. High ownership dispersion implies little institutional ownership.

Institutional owners often have more inside information about the firm, as they normally own a

large part of the firm’s shares. When ownership is dispersed, it means that shareholders have less

inside information. This results in a higher information asymmetry between management and

shareholders, so there is more need for management to regularly inform their shareholders about

the firm. This can be done by voluntary disclosure, and more specifically by issuing the new

style audit report. The significantly negative association of competitive pressure with the

issuance of the new style audit report was substantiated by the proprietary cost theory. According

75

to this theory, the profits of firms in high entry barrier industries, which are associated with little

competitive pressure, are more hurt by the entrance of new firms into the industry. Therefore, for

these firms it is more important to please their stakeholders. One way to this is by providing

more voluntary disclosures. It was analyzed that the insignificant relation between firm size and

the voluntary disclosure of the new style audit report might have to do with the bonus plan

hypothesis of the positive accounting theory. Previous research has provided evidence that the

total compensation of CEOs of small firms is composed of a relatively higher proportion of

stock-based compensation compared to CEOs of large firms. CEOs of small firms might think

that they can satisfy their shareholders by disclosing the new style audit report, which, in turn,

might increase the price of their stock. Subsequently, this would increase the CEO’s

compensation. The significant industry effects are in line with the institutional theory of mimetic

isomorphism, which argues that similar firms tend to copy other firm’s practices.

Comparison with previous research

The majority of the significant results obtained in this thesis is conform previous empirical

studies examining the factors related to voluntary disclosure, discussed in Section 3. The

significantly positive associations for having a Big Four auditor and firm age were supported by

previous empirical evidence. For leverage and board size, previous empirical evidence was

mixed, although slightly leaning towards a positive relation, so it was not that surprising that

both variables were found to be insignificantly related to the issuance of the new style audit

report. However, previous literature on competitive pressure and ownership dispersion was also

mixed, but this time, a significant association was found for both variables. The significantly

negative association between being cross-listed and the issuance of the new style audit report

was in contrast to what previous research said. This result could be explained by the theory that

non-Dutch firms, which are almost by definition cross-listed in this study, are less aware of the

new style audit report. The insignificant association for firm size was surprising looking at

previous research, which found overwhelming evidence of a positive association with voluntary

disclosure.

Recommendations

76

This thesis examines whether there are significant associations between firm characteristics and

the disclosure of the new style audit report, but it does not tell whether there is causality between

the variables, as it was not the objective of this study to detect causal connections. However, it

cannot be ruled out that there might be causal relationships between some significant variables

and the voluntary disclosure of the new style audit report. Assuming there is causality, a few

recommendations to certain parties of interest are listed. First of all, it might be interesting for

standard-setters that this thesis provides evidence that Big Four audited firms are currently more

engaged with the new style audit report than firms audited by a non-Big Four firms. It is a sign

that Big Four auditors are already quite familiar with the new style audit report, while most non-

Big Four auditors are not. Before making the new style audit report obligatory, it might be wise

for the IAASB to provide training and guidance on the new style audit report to non-Big Four

audit firms. It is of highest importance to get non-Big Four auditors acquainted with the

regulations of the new style audit report, in order to preserve audit report quality in the future.

Moreover, as the new style audit report is an innovative concept, it is important for investors to

know which types of firms tend to engage in or restrain from groundbreaking initiatives like the

new style audit report. Innovativeness in reporting can be linked to innovativeness in business.

As innovative firms are often believed to have good growth prospects, these firms are attractive

targets for investors.

Limitations

There are some limitations to this research. For example, the size of the research sample is quite

small, as it only includes 111 observations. Normally, this reduces the power of the results and

makes it more difficult to obtain significant statistics. Luckily, this research has provided quite

some significant results, but it is a factor to consider when the sample size is small. Furthermore,

the data about firms’ competitive pressure were drawn from the U.S. market. Although the U.S.

data probably exhibit the reality on the European market, it might influence the results.

Further research

Because the new style audit report is still a brand new concept, there are plenty of opportunities

for further research on this topic. It would be interesting to examine the differences between the

future performances of voluntary new style audit report adopters compared to non-adopters.

77

Think about figures like revenue growth, cost of capital and profitability growth. Moreover, in

case the IAASB delays obliging the new style audit report beyond 2015, the firm characteristics

associated with the voluntary issuance of the new style audit report can be also researched for

other countries. Now that many Dutch firms have introduced the new style audit report in 2014,

it seems likely that non-Dutch firms will follow this example in the coming years.

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Appendix

Table 13: The number of significant associations (articles Section 3)Determinant of voluntary disclosure

Number of significantly positive associations

Number of significantly negative associations Total

Size 16 0 16Profitability 8 2 10Leverage 6 4 10Big 4 auditor 6 1 7State ownership 3 3 6Board size 3 2 5Managerial ownership 2 3 5Ownership dispersion 3 2 5Cross-listed 4 0 4CG strength 4 0 4Institutional ownership 3 1 4Firm age 3 0 3Assets-in-place 3 0 3Foreign ownership 3 0 3Economic performance 2 1 3Listing age 2 0 2Board compensation 2 0 2Competitive pressure 1 1 2Role duality 1 1 2Family-controlled 0 2 2

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Table 14: List of sampled firms per indexAEX AMX ASCX Other listed firms Non-listed firmsAegon Aalberts AMG Aareal ABN AMROAhold Accell Acomo Accsys PGGMAkzo Nobel Air France-KLM Ballast Nedam AjaxArcelorMittal Aperam BE Semiconductor AND InternationalASML Arcadis Beter Bed Atrium EUR Real

EstateBoskalis Arseus Brill Batenburg TechniekCorio ASM International Crown Van Gelder Bever HoldingDelta Lloyd BAM Cryo-Save Boussard & GavaudanDSM BinckBank Docdata Brookfield Asset

ManagementFugro Brunel DPA Core LaboratoriesGemalto Ten Cate Grontmij CtacHeineken Corbion Groothandelsgebouwen Dico InternationalING Eurocommercial Heijmans EurocastleKPN Exact HES Beheer GalapagosOCI Imtech ICT Automatisering HAL Trust UnitPhilips Nieuwe Steen

InvestmentsKasBank Holland Colours

Randstad Nutreco Kendrion Hunter DouglasSBM Offshore PostNL Nedap HydratecTNT Express Sligro Food Group Neways InverkoUnibail Rodamco TKH Group Oranjewoud KardanWolters Kluwer TomTom Ordina Lavide HoldingZiggo USG People Stern Group Leo Capital Growth

Vastned Telegraaf Media Group MacintoshVopak Value8 MTY HoldingsWereldhave Wessanen Nedsense

New Sources EnergyPharmingPorceleyne FlesRoodMicrotecRoto Smeets GroupSnowWorldSource Group

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TIE KinetixUNIT4Van LanschotVolta FinanceYatra Capital

Table 15: Classification of firms into sectors (based upon the ICB system*)Basic Materials

Industrials Consumer Goods

Consumer Services

Financials Technology

Akzo Nobal Boskalis Heineken Ahold Aegon ASMLArcelorMittal OCI Accell KPN Corio GemaltoDSM Philips Corbion Wolters Kluwer Delta Lloyd ASM

InternationalFugro Randstad Nutreco Ziggo ING ExactSBM Offshore TNT Express Acomo Air France-KLM Unibail Rodamco TomTomAperam Aalberts Docdata Sligro Food

GroupBinckBank BE

SemiconductorArseus Arcadis Wessanen Beter Bed Eurocommercial ICT

AutomatiseringCrown Van Gelder

BAM Dico International Brill Nieuwe Steen Investments Ordina

Cryo-Save Brunel Hunter Douglas Stern Group Vastned CtacCore Laboratories

Ten Cate MTY Holdings Telegraaf Media Group

Wereldhave Inverko

Galapagos Imtech Porceleyne Fles Ajax Groothandelsgebouwen Lavide HoldingHolland Colours PostNL AND

InternationalKasBank Nedsense

Pharming TKH Group Macintosh Value8 New Sources Energy

USG People SnowWorld Aareal RoodMicrotecVopak Atrium EUR Real Estate TIE KinetixAMG Bever Holding UNIT4Ballast Nedam Boussard & GavaudanDPA Brookfield Asset

ManagementGrontmij EurocastleHeijmans HAL Trust UnitHES Beheer KardanKendrion Leo Capital GrowthNedap Source GroupNeways Van LanschotOranjewoud Volta Finance

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Accsys Yatra CapitalBatenburg Techniek

ABN AMRO

Hydratec PGGMRoto Smeets Group

* Examples of the main activities of firms in each sector Basic Materials: Oil equipment and services, specialty chemicals, biotechnology. Industrials: Heavy construction, industrial transportation, industrial machinery, electronic equipment. Consumer goods: Leisure goods, food producers, furnishings. Consumer services: Telecommunications, media, airlines. Financials: Banks, asset management, investment services. Technology: Hardware and equipment, software and computer services, semiconductors.

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