voluntary disclosure and information asymmetry in denmark

Journal of International Accounting, Auditing and Taxation15 (2006) 127–149

Voluntary disclosure and information asymmetry inDenmark

Christian Petersen ∗, Thomas PlenborgCopenhagen Business School, Department of Accounting and Auditing,

Solbjerg Plads 3, DK-2000 Frederiksberg, Denmark

Abstract

This paper examines if the level of voluntary disclosure affects information asymmetry for industrialcompanies listed on the Copenhagen Stock Exchange. Economic theory suggests that disclosing moreinformation should lower the information asymmetry component of a firm’s cost of capital [Leuz, C., &Verrecchia, R. E. (2000)]. The results indicate that voluntary disclosure is negatively associated with proxiesfor information asymmetry. The results are robust even after controlling for various firm characteristicsintroduced in related literature. Despite differences in institutional settings the findings in our paper aresimilar to the ones based on US data.© 2006 Published by Elsevier Inc.

Keywords: Disclosure; Information asymmetry; Cost of capital

1. Introduction and motivation

This paper examines if the level of voluntary disclosure affects various proxies for informationasymmetry for industrial companies listed on the Copenhagen Stock Exchange and contrast thefindings with similar US studies. Our study is motivated by the fact that the vast majority of researchin this area is based on American data. For instance, in a review of the empirical disclosure literatureHealy and Palepu (2000) find that nearly all studies examining the association between the levelof voluntary disclosure and either information asymmetry or cost of capital are based on US data.Leuz and Verrecchia (2000) and Hail (2002) are notable exceptions. Further, Verrecchia (2001,175) calls for empirical studies that examine the relation between disclosure and informationasymmetry. He argues that the link between disclosure and information asymmetry has provedelusive.

∗ Corresponding author. Tel.: +45 38152320; fax: +45 38152321.E-mail addresses: [email protected] (C. Petersen), [email protected] (T. Plenborg).

1061-9518/$ – see front matter © 2006 Published by Elsevier Inc.doi:10.1016/j.intaccaudtax.2006.08.004

mailto:[email protected]

mailto:[email protected]

dx.doi.org/10.1016/j.intaccaudtax.2006.08.004

128 C. Petersen, T. Plenborg / Journal of International Accounting, Auditing and Taxation 15 (2006) 127–149

We find a negative and statistical significant association between the level of disclosure andproxies for information asymmetry for the pooled data. This result is generally supported throughyear-by-year regressions. This coherence indicates that if firms focus on improving the levelof disclosure, they attract investors’ attention. As a result they may experience lower cost ofcapital and more efficient prices on shares. Our study also documents an increased level ofdisclosure across time. The level of voluntary disclosure, as measured in this study,1 increases byapproximately 40% during the period 1997–2000.

The Copenhagen Stock Exchange (CSE) is a fairly small exchange with only 185 listed com-panies in 2004.2 In 2004 the OMXC203 index comprising the 20 blue chip stocks accountedfor approximately 76% of total market value and 79% of total turnover (The Copenhagen StockExchange, 2005). As such the CSE has the features of a typical continental European market;the point is also made by, e.g., Thomsen (2005). Additional statistics on the Copenhagen StockExchange is reported in Appendix A. This supports that results from this study may be generalisedto other settings than the US.

As pointed out by Healy and Palepu (2000) there are several important issues that are not yetexplored in the disclosure literature. For instance, can the results from the US be generalisedto non-US countries characterised by a different institutional setting? More specifically, doesdisclosure have the same effect in reducing information asymmetry in the US as in countriescharacterised by a different institutional setting such as Denmark? While both the US and Den-mark are considered as developed countries there are several institutional differences that maycause a different relationship between the level of disclosure and various proxies for informationasymmetry.

Danish corporate ownership structure generally reflects an institutional setting that is similar tomost non-US countries, which are characterised by heavily concentrated shareholdings and con-trolling ownership (Shleifer & Vishny, 1997, 754–755). Pedersen and Thomsen (1996) documentthat the existence of dual stock classes in Denmark is related to a higher level of family ownershipand shareholder concentration than in the US. Warfield, Wild and Wild (1995) find that the meanpercentage of shares owned by US managers is 17%, while Gabrielsen, Gramlich and Plenborg(2002) find that the mean percentage of shares owned by Danish managers is as high as 59%. Theexistence of more heavily concentrated shareholdings and controlling ownership in Denmark mayimply different reporting practices. For example, firms with a high ownership concentration maybe reluctant to provide voluntary disclosure since shareholders have alternative ways (inside) ofgetting information. Consequently, the market for voluntary disclosure may not be as developedin Denmark as in the US. Further, it is likely that voluntary disclosure in Denmark may not be asinformative as in a setting with a diverse ownership structure such as the US. Thus, a lower levelof voluntary disclosure may lead to an association between the level of disclosure and informationasymmetry that is relatively less negative than in the US.

On the other hand, Warfield et al. (1995) argue that the association between (managerial)ownership concentration and the information content of accounting information is positive. Theyargue that because of greater ownership concentration, companies are more likely to disclose

1 To the extent that we miss pieces of voluntary disclosure in our disclosure index the increase may be either higher orlower than 40%.

2 In 1996, the Copenhagen Stock Exchange was converted from a semi-public institution into a limited company. Theshare capital was issued in a ratio of 60–20–20 to the members, the issuers of shares and the issuers of bonds.

3 OMXC20 (OMX Copenhagen 20) was formerly known as KFX. OMXC20 is an index that comprises the 20 largestshares based on turnover in terms of market value and liquidity on the Copenhagen Stock Exchange.

C. Petersen, T. Plenborg / Journal of International Accounting, Auditing and Taxation 15 (2006) 127–149 129

accounting information that reflects firm economics. Other research papers support this position.For example, Grossman and Hart (1980) and Shleifer and Vishny (1986) find that for firmswith a high number of shareholders, it is not worthwhile for an individual investor to monitormanagement’s performance. According to the monitoring hypothesis the association between thelevel of disclosure and information asymmetry is expected to be more negative in a setting witha high ownership concentration such as in Denmark. Large volume of shareholders will forcemanagement to produce value relevant information that reduces the information asymmetry.

The above considerations suggest that different ownership concentrations probable will have animpact on firms’ disclosure policy. However, it is not possible to predict a priori how a high level ofownership concentration affects the relationship between the level of disclosure and informationasymmetry. This study contributes to the literature by examining the association between the levelof disclosure and information asymmetry in a setting with high ownership concentration.

Expected litigation costs affect managers’ and auditors’ disclosure decisions (Kothari, Lys,Smith, & Watts, 1988). Expected costs is a function of lawsuit probability, award size and legalfees. Thus, it is likely that litigation cost affects a firm’s disclosure policy. In line with Ball, Kothariand Robin (2000) we expect that litigation costs in the US is relatively higher than in the UKand code-law countries. Litigation costs in Denmark are very similar to the UK. While litigationcost may affect a firm’s disclosure policy it is difficult to predict how it will affect the associationbetween level of disclosure and various proxies for information asymmetry.

There is also a higher level of investor protection in US than in Denmark. For example, the one-share, one vote rule is often cited as being good for investor protection (Grossman & Hart, 1988).As mentioned above, Pedersen and Thomsen (1996) document the existence of dual stock classesin Denmark, while the US is characterised by one share, one vote rules. Further, investors in US areentitled to a greater amount of information than most of their non-US counterparts. For instance,an American company must prepare a 10-K statement as requested by the Security and ExchangeCommission (SEC). This statement gives investors a broad insight into a firm’s operations. Danishfirms, on the other hand, are subject to a high degree of freedom when choosing how muchinformation to disclose in the annual accounts. The extent of detailed accounting regulation in USis considered to improve investor protection. Previous studies have found that investor protectionenhances firm value by improving the expected cash flow that can be distributed to shareholders(e.g., La Porta, 2002). However, as pointed out by Chen, Chen and Wei (2003) whether or notinvestor protection affects cost of equity capital is unknown. Our study contributes to the literatureby examining whether companies in a setting with a modest level of accounting regulation ‘fillout the information gap’ through voluntary disclosure and thereby improve investor protection.If companies succeed in reducing the information gap (asymmetry) there are reasons to believethat the association between level of disclosure and various proxies for information asymmetryis negative.

Foreign investors own approximately 28% of the shares listed on the Copenhagen StockExchange by mid 2002 (The Copenhagen Stock Exchange 2003). Further, 8 out of the 10 largestforeign investors in the Danish stock market are from the US. Thus, the dependent variables in ourstudy, the bid–ask spread and the turnover ratio,4 are affected by the way US investors value firms.Differences between our findings and similar US studies are therefore likely due to differences inthe usefulness of the disclosure score.

4 The turnover ratio is the average daily share turnover measured as the value of shares traded scaled by the firm’smarket value of equity.


Finally, with the implementation of the new Danish Financial Accounting Act as of January 1,2002 and the requirement that all listed companies in EU must comply with IAS/IFRS standardsfrom 2005, more information must be disclosed in the annual reports. Evidence from Danish listedcompanies may therefore shed new light on the association between information asymmetry andfirms disclosure policy.

If the level of voluntary disclosure and proxies for information asymmetry is negatively cor-related it may imply that Danish (and European) companies will experience lower cost of capitalby the implementation of IAS standards by 2005.

The remainder of this paper is organized as follows. Section 2 contains a literature review.The research design is outlined in Section 3. The sample selection and descriptive statistics areprovided in Section 4, followed by the empirical results in Section 5. Section 6 includes sensitivitychecks and Section 7 provides a comparison between the Danish results reported in this studyand the US results reported in previous studies. Finally, conclusions and suggestions for futureresearch appear in Section 8.

2. Literature review

It is often argued that firms might find it advantageous to provide additional pieces of informa-tion (i.e., voluntary disclosure) to investors and analysts through the annual report. This statementis based on the notion that information asymmetry between firms and (potential) investors, due toa low level of disclosure, increases cost of capital by introducing ‘adverse selection’ between buy-ers and sellers of the firm’s shares. In practice ‘adverse selection’ tends to reduce liquidity in firmsshares (Copeland & Galai, 1983; Glosten & Milgrom, 1985). In order to attract investors, firmswith limited liquidity must issue shares with a (substantial) discount. This discount reduces fundsfirms receive from the issue, and, thus, increases the cost of capital. By disclosing more infor-mation firms are likely to reduce information asymmetry and, hence, attract extended interests(liquidity) in the firms’ shares, which lead to lower cost of capital (Diamond & Verrecchia, 1991).

Higher liquidity is regarded as an indication that a firm’s shares has become a more popularinvestment object due to the higher level of information disclosed by firms (Leuz & Verrecchia,2000). In this respect it is desirable for a firm that its shares are liquid, so the firm is not constrainedin its use of the stock market (Bloomfield & Wilks, 2000; Healy, Hutton & Palepu, 1999; Lang& Lundholm, 1993). Furthermore, empirical research indicates that increased liquidity resultsin lower information asymmetry and cost of capital (Botosan, 1997; Botosan & Plumlee, 2002;Diamond & Verrecchia, 1991; Leuz & Verrecchia, 2000).

A number of studies document the relation between the level of disclosure and either proxiesfor information asymmetry or cost of capital. Lang and Lundholm (1996) provide evidence thatpotential benefits of increased disclosure include reduced estimation risk and reduced informationasymmetry.

Welker (1995) examines the association between the bid–ask spread and the average disclosurescore for an 8 year period. He finds that relative bid–ask spreads for firms with disclosure rankingsin the bottom 33% of the empirical distribution are about 50% higher than spreads for firms withdisclosure rankings in the top 33% of the empirical distribution. His findings are consistent with thebelief that a useful disclosure policy reduces information asymmetry, and, consequently, increasesliquidity in equity markets.

Schrand and Verrecchia (2004) find that greater disclosure frequency in the pre-IPO period isassociated with lower underpricing. Subsequent to the IPO, disclosure is also negatively associatedwith proxies for a firm’s information asymmetry, including the bid–ask spread.


Botosan (1997) examines the association between cost of capital and the level of disclo-sure for a 1 year period. For the pooled data, the association is not statistical significant.For firms with high analyst following she finds no evidence of a (statistical) associationbetween disclosure level and cost of capital. However, firms that are not closely followedby financial analysts experience lower cost of capital with increases in disclosure. In asimilar study Botosan and Plumlee (2002) create three disclosure indices based on infor-mation from the annual report, other publications and investor relations, respectively. Theyfind, contrary to expectations, that the overall disclosure level is not associated with a lowercost of equity capital. However, the coefficient on the annual report score is significantlynegative.

Sengupta (1998) measures the cost of debt over a 3 year period, averaging the score for 3consecutive years. He provides evidence that firms with high disclosure quality ratings fromfinancial analysts enjoy lower costs of issuing debt. Using a sample of 173 new private debt issuesMazumdar and Sengupta (2005) find that companies with consistently high ratings for voluntarydisclosures have lower cost of debt.

Healy et al. (1999) analyze whether firms benefit from expanded voluntary disclosure byexamining changes in capital market factors associated with increases in analysts’ disclosureratings for 97 firms. Their findings suggest that a higher disclosure rating is followed by increasesin stock liquidity, stock returns, institutional ownership, and analyst following.

In addition to the US studies, three non-US papers examine the association between proxiesfor information asymmetry or cost of capital and the level of disclosure for a single year. Leuz andVerrecchia (2000) study German firms that switched from German to an international accountingregime (IAS or US GAAP), thereby committing themselves to increased levels of disclosure.They find that firms that switch to an international accounting regime in general experience lowerbid–ask spreads and higher trading volume.

Hail (2002) replicates the study of Botosan (1997) based on Swiss data. He finds a significantnegative association between return on equity, his proxy for the cost of equity capital, and thedisclosure score.

Finally, Bailey, Karolyi and Salva (2005) evaluate the economic impact of the increased dis-closure faced by non-US firms when they list their shares on U.S. markets. They find increasedvolatility and volume reactions to earnings announcement after their U.S. listings. In addition,they find that individual firms’s disclosure environment, rather than changes in its market liquidity,ownership or trading venue, explains their findings.

In conclusion, relevant studies based on US data generally indicate a negative associationbetween the level of disclosure and estimates of the cost of capital. The studies on Europeandata indicate that the level of disclosure is negatively associated with proxies for informationasymmetry and cost of capital. Our study extends previous research by examining the associationbetween the level of disclosure and proxies for information asymmetry in a Danish setting for a 4year period. As identified above the institutional differences between the US and Denmark mayimply different findings on Danish data.

3. Research design

This section discusses the construction of the disclosure index and proxies for the informationasymmetry. Existing evidence from US studies indicate that firms coordinate their disclosurepolicies across different media (Botosan, 1997). Although no such studies are available on Danishdata, this study assumes that the findings from the US are applicable on Danish data. This suggests


that examining any one aspect of corporate reporting could proxy for the general level of disclosureprovided by a firm.

3.1. Construction of the disclosure index

Most prior studies on disclosure used data from the Association of Investment Management andResearch (AIMR) as a proxy for firms’ disclosure policy. Every year AIMR publish a disclosureindex for almost 500 firms comprising 22 different industries based on a number of financialanalysts assessment of the selected industries disclosure policy. Only a few studies (e.g., Botosan,1997) create their own disclosure index. As no disclosure index that resembles the one by AIMRis available for Danish firms, it has been necessary to construct a similar one on Danish firms.The design of the index is inspired by earlier studies and reports as, for example, Botosan (1997),Jenkins (1994), the Nørby (2001)5 committee’s recommendations6 and PwC Value Reporting(1999). Common to these studies is that they focus on investors’ need. As discussed below, thedisclosure index is based on the following five subcategories: (1) strategy, (2) competition andoutlook, (3) production, (4) marketing strategy, and (5) human capital.

The most important value drivers on PwC’s (1999) list is information regarding firms’ strategiccircumstances such as the future strategic direction and actions during the fiscal year, aimed atpromoting strategic and financial objectives. The Nørby (2001) committee also points out theneed for a clear statement on important strategic issues, including information that might promotethe understanding of the most important success factors of the firm.

Information about competitive issues and future prospects is generally perceived as importantby investors. PwC (1999) finds that information about market growth, market size, market shareand competitiveness in the industry are among the ten most important value drivers.

Botosan (1997) and Jenkins (1994) find that information about production is important forinvestors. PwC (1999), however, finds only limited interests in information about production.For instance, only information about ‘production lead time’ is considered among the ten mostimportant value drivers, which investors want to be disclosed. This fact has to be judged basedon PwCs (1999) sample that comprises banks and high-tech firms only. None of those industriesare characterized by production per se. The sample in this study includes traditional firms in theproduction industry.

Information about marketing strategy is only addressed to a limited extent in the reports bythe Nørby committee and PwC (1999). In PwCs (1999) report information about distributionchannels, sales costs and customer satisfaction is only looked at as being of limited importance.In a prior study, Botosan (1997) included some areas within marketing strategy. In the marketingstrategy literature efforts within this area is considered important for the future success of a firm(see for example Doyle (2000) and Porter (1996)), and consequently, this area is addressed.

Information about human capital has gained considerable interest in accounting for intellectualcapital and the debate about corporate governance. Thus, a category for addressing human capitalis also warranted.

A total of 62 indicators within the five groups have been identified (see Appendix B). TheFinancial Statement Act does not require disclosure of any of the indicators. Thus, disclosing any

5 The Nørby report contains recommendations about proper corporate governance. The Copenhagen Stock Exchangesuggests that firms implement the recommendations from the Nørby committee.

6 See Botosan (1997:327) for a discussion of advantages and disadvantages of using the AIRM disclosure index versusa self constructed disclosure index.


of the 62 indicators is entirely voluntary.7 Even though the ‘level of disclosure’ is measured bythe number of indicators (i.e., quantitative measure), they should also be qualitative in order tobe informative. As our index is based on prior research and reports, it provides some evidence,albeit indirectly, that the indicators are qualitative as well.

By assigning points for each of the 62 information indicators a firm disclose, each firm gets ascore on the disclosure index. Since one point is assigned for each piece of information in the annualreport the maximum score is 62. This disclosure index differs from the one that Botosan (1997)uses. First, she awards each quantitative measure a score of two and each qualitative measure ascore of one. She argues that quantitative measures are more precise than qualitative measures.Arguably, qualitative information may in some cases provide investors with a better understandingof firm characteristics that determine information asymmetry and cost of capital. Since thereis no documented research that examines the impact of individual measures of disclosures oninformation asymmetry, this study assigns an equal score to each of the two measures. Only onepoint is given for each piece of information even if this piece of information appears more thanonce in the annual report.

Second, Danish listed companies are required to provide a 5 year summary of historical resultsincluding the financial ratios listed by Botosan. Also, forward looking information, such as esti-mated net income, growth, etc., are mandatory (what Botosan labels ‘projected information’).Therefore, our disclosure index is based on a wider range of variables that are qualitative withan emphasis on voluntary information that explains levels of and developments in (quantitative)financial information.

3.2. Information asymmetry

In order to examine the association between disclosure and information asymmetry, a measureof information asymmetry must be provided. However, a firm’s information asymmetry cannotbe observed directly.

Extant literature offers a variety of ways to measure information asymmetry. Welker (1995)apply a bid–ask spread scaled by closing price as a proxy for market liquidity. Leuz and Verrecchia(2000) suggest a bid–ask spread and trading volume in a firm’s shares (liquidity) as proxies forthe information asymmetry component of a firm’s cost of capital.

This study is similar to Leuz and Verrecchia (2000) and Welker (1995) in that it applies thebid–ask spread and the turnover ratio as two complementary proxies for information asymmetry.The bid–ask spread is commonly thought to measure information asymmetry explicitly (Leuz& Verrecchia, 2000). The turnover ratio reflects the willingness of some investors to sell sharesand others to buy. This willingness to trade shares should be inversely related to the existence ofinformation asymmetry (Leuz & Verrecchia, 2000).

Both the bid–ask spread and turnover ratio seem to be appropriate measures for informationasymmetry. In a study comparing different information asymmetry metrics (proxies), Clarke andShastri (2001) find that market microstructure measures such as the bid–ask spread are superior toanalysts’ forecasts, firms growth opportunities, and stock return structures (volatility) as proxiesfor information asymmetry. They conclude that the bid–ask spread is related to firm characteristicsthat ex ante should be associated with information asymmetry. In our study, the bid–ask spreadand the turnover ratio, are therefore assumed to be proxies for information asymmetry.

7 Except in the rare case that the information is needed in order to give ‘a true and fair view’.


3.3. Regression model

Various proxies for information asymmetry are regressed on disclosure score and relevant firmcharacteristics in the light of existing literature (e.g., Botosan, 1997; Lang & Lundholm, 1993;Leuz & Verrecchia, 2000). That is,

INFt = α0 + α1DS + α2Betat + α3MVt + α4Solvencyt + α5ROICt + α6Ownert + εt

(1)

Using alternative specifications of regression Eq. (1) robustness checks are provided andreported in the section robustness check.

The dependent variable INF (information asymmetry) is measured as either the average bid–askspread, that is, the absolute spread scaled by the average of bid and ask (bid–ask) or the aver-age daily share turnover ratio, that is, the value of shares traded scaled by the firm’s marketvalue of equity (turnover). These proxies are averaged over a 12 month period. Thus, it cov-ers one reporting period (annual report). This is the same procedure as adopted by Leuz andVerrecchia (2000). The data are obtained from Datastream. DS is the firms’ individual disclo-sure score on the 62 indicators. Beta is estimated via a market model regression using at least24 of the 60 monthly return observations for the year in question (e.g., 1997) and the preced-ing 4 years. Monthly stock returns are obtained from the Copenhagen Stock Exchange andAccount Data.8 MV is the log of market value of a firm’s equity. Solvency is book value ofequity scaled by total liabilities. Ownership concentration (Owner) is measured as shares heldby blockholders including officers, directors (and their families), trusts, pension/benefit plans,and shares held by other firms or individuals that hold more than 5%. The data is obtained fromWorldscope International Database, Greens and annual reports.9 Since Danish ownership dataare both difficult and extremely time consuming to collect we use ownership data for 1998 asproxy for the entire period 1997–2000. A similar assumption is introduced in previous owner-ship studies such as Warfield et al. (1995) on US data and Gabrielsen et al. (2002) on Danishdata. ROIC is the firm’s return on invested capital, defined as operating profit scaled by totalassets.10

Beta is included in the model to control for systematic risk. Market beta is directly linkedto cost of capital through the Capital Asset Pricing Model and, hence, expected to be positivelyassociated with the bid–ask spread.

Ahmed and Courtis (1999) provide a meta analysis of 23 separate studies on the associationbetween the disclosure level in the annual reports and various firm characteristics. They findthat exchange listing status, audit firm size, firm size and leverage have a statistically significant

8 Account Data is a database maintained at the Copenhagen Business School. The database contains all financialstatement information (with the exception of the director’s report) relating to firms at the Copenhagen Stock Exchangesince 1983.

9 In Denmark, investors owning 5% or more of a corporation’s stock must report their holdings to the firm, and thisinformation is then published with the company’s annual report. In spite of this requirement, the exact voting power byan investor is not necessarily known because of the frequent occurrence of dual stock classes. Shares of different stockclasses normally have different voting rights, but shareholders are not required to report the number of votes attached totheir holdings. In eight cases it was necessary to approach the company for more detailed information about the votingpower.10 Data are gathered from Greens Online Database.


and positive association with disclosure level. Of these four factors firm size and leverage arecontrolled for in this study.11

Market value (firm size) is included in the analysis because prior research documents a sig-nificant association between market value and proxies for information asymmetry and disclosurelevel suggesting that market value could be a correlated omitted variable if excluded form theanalysis (Botosan, 1997). The findings in the literature suggest that firm size is negatively associ-ated with relative bid–ask spreads (e.g., Leuz & Verrecchia, 2000). As documented by Lang andLundholm (1993) disclosure levels are positively correlated with firm size.

On the one hand, the risks born by investors are lower for firms with high solvency. Thisimplies that the bid–ask spread should be negatively associated with solvency. On the other hand,low solvency increases the incentive for both debtholders and shareholders to closely monitormanagement in order to avoid bankruptcy. This implies that the bid–ask spread should be positivelyassociated with solvency.

ROIC is included as a control variable since firms may increase disclosure when they are per-forming well. For example, firms with high disclosure ratings tend to show high contemporaneousearnings performance (Lang & Lundholm, 1993). This may be caused by a self-selection biasfirms may increase disclosure when they are performing well. As a result the association betweencapital market variables and disclosure may be driven by firm performance rather than disclosureper se. More generally, disclosure changes are unlikely to be random events: they are likely tocoincide with changes in firm economics and governance (Healy & Palepu, 2000). At the sametime, an increased level of disclosure may induce the risk of litigation. Consequently, the sign ofthe association between ROIC and information asymmetry is undeterminable.

As mentioned in the introduction it is likely that a high level of ownership concentration isassociated with the average daily share turnover ratio and the bid–ask spread.

4. Sample selection and descriptive statistics

4.1. Sample selection

This study includes 36 industrial firms listed on the Copenhagen Stock Exchange. The annualreports for the period 1997–2000 were hand collected for each firm. The reports were carefullyexamined, and the relevant pieces of voluntary disclosure were extracted for each of the fivedisclosure indices. The final sample of 36 firms was selected as follows.

In order to obtain variety in disclosure level a large sample is preferable. However, only oneindustry is selected due to the presumption that different industries provide different patternsof disclosure. For example, firms in the High Tech and Biotech industries tend to provide moredisclosure about intangible assets (e.g., patents, research and development activities) than do firmsin other industries. The Copenhagen Stock Exchange industrial index consists of 58 firms, andwas chosen since it is the largest index (i.e., the one including the largest number of firms). Withinthis group the subgroup 2010 Industrial goods has been selected comprising 45 firms. Thus, 13firms in the subgroups ‘Commercial Service Suppliers’ and ‘Transportation’ were deselected asthose firms differ from the majority of other industrial firms as they do not have any physical

11 According to Danish legislation the accounts of public firms must be audited by two audit firms. All 36 firms in thesample are audited by at least one of the Big 4 audit firms. Further, none of the 36 firms are listed outside the CopenhagenStock Exchange. Consequently, there are no needs to control for audit firm size and listing status.


Table 1Descriptive statistics

Variablesa nb Mean Median 25% percentile 75% percentile Standard deviation

DS 140 12.8 12.5 7.0 18.0 6.9Bid–ask 118 0.04 0.03 0.02 0.05 0.03Turnover 135 0.64 0.30 0.15 0.61 1.16Beta 136 0.85 0.80 0.48 1.15 0.51MV 138 19.6 19.6 18.6 20.5 1.49Solvency 140 0.43 0.41 0.32 0.55 0.15Owner 140 0.56 0.60 0.45 0.70 0.20ROIC 140 0.07 0.07 0.04 0.10 0.06

a Bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask. DS is thefirms’ individual disclosure score on the 62 indicators. Turnover is the average daily share turnover (value of sharestraded scaled by the firm’s market value of equity). Beta is estimated via a market model regression using at least 24of the 60 monthly return observations. Monthly stock returns are obtained from the Copenhagen Stock Exchange andAccount Data. MV is the log of market value of firm’s equity. Solvency is book value of equity scaled by total liabilities.Owner (ownership concentration) is shares held by blockholders including officers, directors (and their families), trusts,pension/benefit plans, and shares held by another corporation or individuals that hold more than 5%. The data is obtainedfrom Worldscope International Database, Greens, annual reports and from the companies. ROIC is the firm’s return oninvested capital. It is defined as operating profit divided by total assets.

b n is number of observations.

production line. Finally, a total of nine firms were eliminated to avoid double counting, as thosenine firms are represented in the industrial index by two stock classes. The final sample consistsof 36 firms covering the period 1997–2000 totalling 140 firm-year observations.12 This selectionprocedure secures that firms are relatively alike, which is important since firms that are roughlyidentical in general reports the same pieces of information.

4.2. Descriptive statistics

Table 1 shows the descriptive statistics for the 36 sample firms.The average and the medium number of points for the disclosure score is slightly below 13,

which is approximately 21% of the maximum score of 62. The statistics imply a symmetricdistribution for DS with the first quartile (third quartile) falling exactly 4.5 points below (above)the mean. The mean of Beta is below 1.0 indicating that the sample has a market risk below theaverage for the entire stock market, that is, the Copenhagen Stock Exchange composite index.

The mean and median bid–ask spread is significantly higher than the one reported by, e.g.,Welker (1995) on US firms. A possible explanation might be that liquidity of firms listed on theCopenhagen Stock Exchange is low compared to US firms. This is accentuated by the fact thatthe OMXC20 index comprising only 20 stocks accounts for 79% of the trading volume on theCopenhagen Stock Exchange (The Copenhagen Stock Exchange 2002). Since only 4 firm-yearobservations out of the 140 observations in the sample are part of the OMXC20 index, the resultis a low liquidity, and consequently a higher bid–ask spread.

The mean (median) level of ownership concentration is 56% (60%) and similar to previousfindings on the level of Danish ownership concentration. The high level of ownership concentrationsupports that the Danish setting is clearly different from the US setting and, therefore, seems

12 Since a few firms in the sample were listed during 1998–2000 four observations were lost.


Table 2Five types of disclosure scores from 1997 to 2000

na DS STRAb COMP PROD MARK HR

Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median

1997 36 10.4 10.5 2.7 2.0 2.7 2.0 3.6 3.5 0.7 0.5 0.7 0.01998 35 12.8 13.0 3.7 4.0 3.1 2.0 3.7 3.0 0.9 1.0 1.4 1.01999 36 13.4 12.5 4.0 4.0 3.1 3.0 4.0 4.0 1.1 1.0 1.2 1.02000 33 14.6 14.0 4.5 5.0 3.4 3.0 4.2 4.0 1.2 1.0 1.2 1.0

a n is number of observations.b DS is the firms’ individual disclosure score on the 62 indicators. STRA is the firms’ individual disclosure score on

strategic issues (12 indicators). COMP is the firms’ disclosure score on competitive landscape and outlook (13 indicators).PROD is the firms’ individual disclosure score on production details (13 indicators). MARK is the firms’ disclosure scoreon marketing strategy (13 indicators). HR is the firms’ disclosure score on Human capital (11 indicators).

well-suited for an examination of the association between the level of voluntary disclosure andinformation asymmetry.

As evidenced by Table 2 the mean (median) disclosure score is increasing over time from 10.4(10.5) in 1997 to 14.6 (14.0) in 2000. This trend is the same for all five subcategories. The scorefor strategy, competition and production is significantly higher than for marketing strategy andhuman resource.

For 2000 the score on strategy was the highest score, suggesting that management find informa-tion about strategy an important issue. Even though the firms of today are increasingly dependentupon intangible resources at large, including know-how and skills of employees, disclosure onhuman capital (HR) is still fairly low.

As in Welker (1995) this study examines the association between the bid–ask spread and thedisclosure score divided into three groups of equal size, namely the bottom one third (low), themiddle one third (medium) and the top one third (high) of the distribution. The results are reportedin Table 3.

As expected, the bid–ask spread (turnover) decreases (increases) with the level of disclosurefor pooled data. For example, the bid–ask spread is more than twice as high for firms in the bottomone-third of the distribution as compared to firms in the top one-third of the distribution. Thisis generally also the case for individual years, even though 1997 is an exception as the bid–askspread (turnover) increases (decreases) moving from the medium to the high group. Further, itis worth noting that on average the bid–ask spread (turnover) increases (decreases) over timewhile the level of disclosure increases (see Table 2). This may be due to a tremendous increasein demand for shares in firms in the new economy at the expense of shares in traditional firms inthe old economy, including the industrial firms in this study.

The Pearson correlation coefficients between the regression variables are reported in Table 4.The correlation between the bid–ask spread (turnover ratio) and disclosure score is −0.44

(0.30) and statistical significant at the 0.01 level, which support the hypothesis that a higher levelof disclosure reduces the information asymmetry.

As expected the correlation between market value and disclosure score (the bid–ask spread)is statistically significant and positive (negative). This support the inclusion of market value as acontrol variable as discussed above. The statistical significant and negative association betweenthe bid–ask spread and market beta, however, is unexpected. Further, the association betweenthe turnover ratio and market beta is positive. This implies that beta is a poor measure of market


Table 3Development of bid–ask spread and turnover ratio (as percentage measure) for different levels of disclosure scores from1997 to 2000

Disclosure score na Lowb Medium High Allc

Mean Median Mean Median Mean Median Mean Median

1997Bid–ask spreadd 23 2.1e 2.1 1.7 1.5 2.0 1.7 1.9 1.7Turnoverf 63.4 55.6 48.9 33.0 244.3 86.8 121.3 47.7

1998Bid–ask spread 28 5.2 4.8 3.2 2.8 3.5 3.1 4.0 3.6Turnover 35.4 23.7 51.8 46.6 127.1 64.3 72.8 35.1



Allc

Bid–ask spread 118 6.0 4.7 3.3 2.9 2.7 1.9 4.0 3.1Turnover 32.7 18.6 46.8 32.0 132.7 50.3 70.7 33.2

a n is number of observations.b The sample is divided into three groups according to the level of disclosure score.c All is all observations.d Bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask spread.e Percentage measure of bid–ask spread and turnover ratio, respectively.f Turnover is the average daily share turnover (value of shares traded scaled by the firm’s market value of equity).

risk and hence information asymmetry. The irrelevance of beta as a measure of cost of capital isaccentuated by the lack of significance in the association between disclosure index and beta.

The correlation between the level of ownership concentration and disclosure score is positiveand highly significant. Further, the correlation between the level of ownership concentration andturnover ratio is statistically significant and negative. These results, therefore, stress the importanceof including ownership concentration as a control variable.

Overall, the descriptive statistics provide preliminary evidence in support of our hypothesis.

5. Empirical results

All tests reported are based on White’s (1980) adjusted t-statistics. The results of the mainhypothesis are reported in Table 5. In panel A the bid–ask spread is used as a proxy for informationasymmetry. The results are based on the median bid–ask spread.13 In the pooled regression thecoefficient on the disclosure index is negative and significant at the 0.01 level. Size takes onthe expected sign and is significant at the 0.01 level. The coefficient on solvency is negative butinsignificant. The coefficient on beta is negative and significant at the 0.01 level. This implies thatfirms with high betas experience a smaller bid–ask spread, which is contrary to expectations but

13 The coefficients and significance levels are similar to those reported in Tables 5 and 6 when the mean bid–ask spreadis applied.


Table 4Pearson correlation coefficients

Variablesa Bid–ask Turnover DS Beta MV Solvency Owner ROIC

Bid–ask 1.00 −0.24***,b,c −0.44*** −0.24*** −0.51*** 0.17** 0.12 0.09Turnover 1.00 0.30*** 0.09 −0.09 −0.13 −0.25*** −0.12DS 1.00 0.06 0.54*** −0.30*** −0.46*** −0.12Beta 1.00 0.09 −0.27*** 0.06 −0.09MV 1.00 −0.23*** −0.22*** −0.01Solvency 1.00 0.07 0.16*

Owner 1.00 −0.06ROIC 1.00

a Bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask. DS is thefirms’ individual disclosure score on the 62 indicators. Turnover is the average daily share turnover (value of sharestraded scaled by the firm’s market value of equity). Beta is estimated via a market model regression using at least 24of the 60 monthly return observations. Monthly stock returns are obtained from the Copenhagen Stock Exchange andAccount Data. MV is the log of market value of firm’s equity. Solvency is book value of equity scaled by total liabilities.Owner (ownership concentration) is shares held by blockholders including officers, directors (and their families), trusts,pension/benefit plans, and shares held by another corporation or individuals that hold more than 5%. The data is obtainedfrom Worldscope International Database, Greens, annual reports and from the companies themselves. ROIC is the firm’sreturn on invested capital. It is defined as operating profit divided by total assets.

b Significance levels quoted above are for a two-tail test of statistical significance.* Significant at 0.05 < α ≤ 0.10.

** Significant at 0.01 < α ≤ 0.05.*** Significant at α ≤ 0.01.

c The number of observations used in the correlation analysis is 115–140.

in line with preliminary evidence found in the correlation matrix. The coefficients on ROIC andownership concentration are insignificant. Thus, the results from the pooled regression seem tosupport the negative association between the disclosure index and bid–ask spread.

An examination of the year-by-year regressions support the results based on the pooled data.The coefficient on the disclosure index is negative in 1999 and 2000 and significant at the 0.1and 0.05 level, respectively. Except for beta values and ownership concentration, coefficients onthe other controlling variables have the expected signs for all years. The coefficients on beta andownership concentration are negative and statistically significant in 2000.

Similar but stronger results are found when the turnover ratio is used as a proxy for (the inverseof) information asymmetry. In the pooled regression the coefficient on the disclosure index ispositive and significant at the 0.01 level. Further, in a year-by-year regression the coefficient ondisclosure index is positive in all 4 years and is significant at the 0.1 level or better in 3 out of 4years. The coefficients on the control variables are in general close to zero. Only size is significantat the 0.05 level.

As shown in the descriptive statistics there is a tendency to increase the level of voluntarydisclosure over time. Based on the results reported above an improved reporting practice seemsto lower information asymmetry. In Table 5 panel A the coefficients on the disclosure index isnegative and significant in 1999 and 2000 while in panel B the coefficient on disclosure indexis positive and significant in 1998–2000. These findings, therefore, support the hypothesis that ahigher level of disclosure increases the negative association between information asymmetry andthe disclosure index.

In summary, the results in Table 5 indicate that the disclosure index is associated with thebid–ask spread and the turnover ratio, both proxies for the information asymmetry. The economic

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Table 5Regression of proxies for information asymmetry on disclosure score, beta, size, solvency, and return on invested capital

Year n Intercept DSa (−) Beta (+) MV (−) Solvency (+/−) ROIC (+/−) Owner (+/−) Adj. R2 F-statistic

Panel A: bid–ask spread modelBidaskt = α0 + α1DSt + α2Betat + α3MVt + α4Solvencyt + α5ROICt + α6Ownert + εt

1997 22 0.06246 (2.77)** 0.000334 (1.00) −0.00119 (−0.56) −0.00290 (−2.75)** 0.000214 (1.72)* −0.000492 (−0.97) 0.01092 (0.87) 0.0552 1.241998 26 0.12900 (2.04)* −0.000058 (−0.08) 0.01723 (2.29)**,b −0.00713 (−2.07)** 0.000289 (1.05) 0.002470 (2.03)* 0.01648 (0.81) 0.0646 1.291999 34 0.33452 (5.33)*** −0.00176 (−2.04)** −0.01708 (−1.58) −0.01078 (−4.26)*** −0.000654 (−2.05)** 0.000570 (1.30) −0.02332 (−1.07) 0.4653 5.79***

2000 32 0.27336 (4.06)*** −0.00249 (−2.57)** −0.02254 (−2.57)** −0.00736 (−2.14)** 0.000067 (0.16) 0.000312 (0.58) −0.05727 (−2.77)*** 0.4153 4.67***

Alld 114 0.24333 (5.74)*** −0.00144 (−2.79)*** −0.01100 (−1.77)* −0.00824 (4.60)*** −0.000206 (−1.04) 0.000311 (1.00) −0.00747 (−0.51) 0.2943 8.86***

Year n Intercept DSa (+) Beta (−) MV (+/−) Solvency (+/−) ROIC (+/−) Owner (+/−) Adj. R2 F-statistic

Panel B: turnover modelTurnovert = α0 + α1DSt + α2Betat + α3MVt + α4Solvencyt + α5ROICt + α6Ownert + εt

1997 31 0.80966 (0.71) 0.01688 (1.47) 0.14951 (1.34) −0.01090 (−0.17) 0.000132 (−0.02) −0.02957 (−1.03) −0.36709 (−0.82) −0.0472 0.771998 33 4.37850 (2.65)**,b 0.07082 (2.65)** 0.29693 (1.33) −0.23297 (−2.54)** −0.00030 (−0.03) −0.01888 (−0.44) −0.37738 (−0.41) 0.2653 2.93**

1999 35 1.54075 (1.43) 0.04020 (1.87)* −0.26196 (−1.11) −0.04513 (−0.84) 0.00121 (0.03) −0.02242 (−1.14) −0.53350 (−1.31) 0.1713 2.17*

2000 34 0.79108 (0.74) 0.03157 (1.82)* −0.06875 (−0.42) −0.03405 (−0.63) −0.00592 (−1.46) 0.01206 (1.17) −0.00003 (−0.00) 0.2054 2.42*

Alld 133 1.74703 (2.20)** 0.04263 (3.46)*** 0.13477 (1.17) −0.08804 (−2.00)** 0.000889 (0.29) −0.01106 (−0.96) −0.25413 (−1.05) 0.1856 6.01***

t-Statistics based on White’s (1980) procedure.a The dependent variable (panel A) bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask. Turnover, the dependent variable in

panel B, is the average daily share turnover (value of shares traded scaled by the firm’s market value of equity). DS is the firms’ individual disclosure score on the 62 indicators.Beta is estimated via a market model regression using at least 24 of the 60 monthly return observations. Monthly stock returns are obtained from the Copenhagen Stock Exchangeand Account Data. MV is the log of market value of firm’s equity. Solvency is book value of equity scaled by total liabilities. ROIC is the firm’s return on invested capital. Itis defined as operating profit divided by total assets. Owner (ownership concentration) is shares held by blockholders including officers, directors (and their families), trusts,pension/benefit plans, and shares held by another corporation or individuals that hold more than 5%. The data is obtained from Worldscope International Database, Greens,annual reports and from the companies.




interpretation of these results is that firms that increase their voluntary disclosure reduce theinformation asymmetry component of cost of capital.

In Table 6 the disclosure index is separated into five categories (described in Appendix B).While each disclosure index in general take on the expected sign only the disclosure index on mar-keting strategy is statistically significant and at the 0.05 level. This is surprising given the resultsreported in Table 5. One plausible explanation is that each piece of information is insufficient initself, however, if the information is combined it provides useful information for the investors informing their expectation about the future potential and risk of a firm. Thus, it is not possible toconclude that one category of information is more relevant than other categories of information.

6. Robustness check

Additional checks have been carried out to examine the robustness of the results reported inTables 5 and 6.14

First, to control for non-linearity in the data the basic regression model has been modified toexamine whether some of the relationships in the model are curvilinear. Results based on themodified model indicate that there is no evidence of a curvilinear relationship between size (dis-closure index) and proxies for information asymmetry. The coefficients on the squared disclosureindex and squared size variables are not significantly different from zero.15

In market microstructure studies where bid–ask spreads have been applied as proxies forinformation asymmetry, trading volume has been included as a control variable. Including tradingvolume as an independent variable does, however, not change the underlying findings in our study.The association between the bid–ask spread and the level of disclosure remains negative.

In samples with firms within the same industry it is necessary to control for potential cross-sectional dependence. Cross-sectional dependence in the data might yield biased estimates ofstandard errors and consequently increase the risk of incorrect statistical inferences. Though thegeneral results in this paper remain robust, applying the Fama and Macbeth (1973) methodologyreduced the level of significance.16

As pointed out by Dimson (1979) beta estimates are biased downwards, when shares are thinlytraded. Consequently, we have estimated beta according to the Dimson lead–lag method. TheDimsons betas are obtained by regressing stock returns on the contemporaneous market returnand two leads and two lags of the market return. The results remain robust even after applyingthe Dimson procedure.

The existence of block holdings reduces the actual free float. As a result the distribution ofthe turnover variable is skewed as can be seen in Table 1. Consequently, we adjusted the turnovervariable to take free float into account. More specifically, we replaced total market value withfree float defined as market value multiplied by (1—ownership concentration). Our results remainrobust after adjusting the turnover ratio.

A key concern is that the results might be explained by time alone. Time may represent a varietyof variables such as improved stock market maturity, increased capital mobility within the EU, or,of course, increased disclosure. Results based on a time fixed effects regression (not tabulated)

14 Sensitivity tests not reported are available upon request from the authors.15 The squared value of other control variables has also been examined. The results remain robust to these changes.16 One potential drawback of the Fama and Macbeth methodology is the restrictions in terms of sufficient time series.

In our study we only have a time series of 4 years. As a result the t-statistics is downward biased, which may explain thereduced level of significance.

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Table 6Regression of proxies for information asymmetry on the five disclosure categories, beta, size, solvency, and return on invested capitalYear n Intercept STRAa (−) COMP (−) PROD (−) MARK (−) HR (−) Bet (+) MV (−) Solvency (+/−) ROIC (+/−) Owner (+/−) Adj. R2 F-statistics

Panel A: bid–ask spread modelBidaskt = α0 + α1STRAt + α2COMPt + α3PRODt + α4MARKt + α5HRt + α6Betat + α7MVt + α8Solvencyt + α9ROICt + α10Ownert + εt

1997–2000 114 0.23101(4.98)***,b

−0.00153(−1.43)

−0.00294(−1.52)

−0.00177(−1.08)

−0.00209(−1.29)

0.00168 (0.85) −0.01101(−1.66)*

−0.00732(−3.85)***

−0.000244(−1.20)

0.000355(1.01)

−0.00931(−0.57)

0.2819 5.44***

Year n Intercept STRAa (+) COMP (+) PROD (+) MARK (+) HR (+) Beta (−) MV (+/−) Solvency (+) ROIC (+/−) Owner (+/−) Adj. R2 F-statistics

Panel B: turnover modelTurnovert = α0 + α1STRAt + α2COMPt + α3PRODt + α4MARKt + α5HRt + α6Betat + α7MVt + α8Solvencyt + α9ROICt + α10Ownert + εt

1997–2000 133 1.87340(2.21)**

0.05913(1.48)

0.02923(0.55)

−0.00350(−0.09)

0.11127(2.08)**

0.01330(0.23)

0.13569(1.14)

−0.08279(−2.00)**

−0.00000(0.00)

−0.01310(−1.26)

−0.35027(−1.01)

0.2048 4.40***

t-Statistics based on White’s (1980) procedure.a The dependent variable (panel A) bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask. Turnover, the dependent variable

in panel B, is the average daily share turnover (value of shares traded scaled by the firm’s market value of equity). STRA is the firms’ individual disclosure score on strategicissues (12 indicators). COMP is the firms’ disclosure score on competitive landscape and outlook (13 indicators). PROD is the firms’ individual disclosure score on productiondetails (13 indicators). MARK is the firms’ disclosure score on marketing strategy (13 indicators). HR is the firms’ disclosure score on Human capital (11 indicators).



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Table 72SLS: regression of bid–ask spread on disclosure, beta, solvency, and return on invested capital

na Intercept DSa (−) Beta (+) Solvency (+/−) ROIC (+/−) Owner (+/−) Adj. R2 F-statistics

Bidaskt = α0 + α1DSt + α2Betat + α3Solvencyt + α4ROICt + α5Ownert + εt

Pooled 114 0.18779 (5.32)*** −0.00568 (−5.30)*** −0.00995 (−1.65)* −0.000549 (−2.34)* 0.000069 (−0.21) −0.07064 (−3.23)*** 0.2498 8.53***

Significance levels quoted above are for a two-tail test of statistical significance. **Significant at 0.01 < α ≤ 0.05.a The dependent variable bid–ask is the average bid–ask spread, that is, the absolute spread divided by the average of bid and ask. DS is the firms’ individual disclosure

score on the 62 indicators. Beta is estimated via a market model regression using at least 24 of the 60 monthly return observations. Monthly stock returns are obtained fromthe Copenhagen Stock Exchange and Account Data. Solvency is book value of equity scaled by total liabilities. ROIC is the firm’s return on invested capital. It is defined asoperating profit divided by total assets. Owner (ownership concentration) is shares held by blockholders including officers, directors (and their families), trusts, pension/benefitplans, and shares held by another corporation or individuals that hold more than 5%. The data is obtained from Worldscope International Database, Greens, annual reports andfrom the companies.

* Significant at 0.05 < α ≤ 0.10.*** Significant at α ≤ 0.01.


Table 8A comparison of studies on the association between the level of disclosure and various proxies for information asymmetry

Dependent variable Coefficient ondisclosure

Explanatorypower (R2) (%)

Control variables

Welker (1995) Bid–ask spread −2.024*** 62.6 Standard deviation (return),price per share and tradingvolume

Botosan (1997) Expected cost of equity −0.812 13.5 Beta and sizeSengupta (1998) Credit rating −0.043** 66.0 D/E, Margin, size, asset,

maturity, yield, convertible,subordinated debt, interestcoverage ratio

Leuz and Verrecchia(2000)

Bid–ask spread −0.47** 81.6 Size, volume, volatility, freefloat, Investors Mills ratio

Trading volume 0.005** 37.5Volatility 0.004* 22.3

Hail (2002) Expected cost of equity −0.0188*** 37.8 Beta and sizeBotosan and Plumlee

(2002)Expected cost of equity 0.003 5.1 Beta and size

Results based onDanish data (thisstudy)

Bid–ask spread −0.0014*** 29.4 Beta, size, solvency,profitability, ownershipconcentration

Trading volume 0.0426*** 18.6

* Significant at 0.05 < α ≤ 0.10.** Significant at 0.01 < α ≤ 0.05.

*** Significant at α ≤ 0.01.

do not change the overall findings. In fact the significance (t-statistics) for the disclosure scoreimproves slightly in the time fixed effects regression compared to the OLS regression.

Finally, as pointed out in the literature on disclosure, a major problem in a study like this isself-selection bias (e.g., Hail, 2002; Healy & Palepu, 2000). For example, firms with the highestdisclosure ratings tend to report the highest contemporaneous earnings performance. More gen-erally, disclosure changes are unlikely to be random events: they are likely to coincide with thechanges in firm economics and governance (Healy & Palepu, 2000, 36).

In order to control for the impact of self-selection bias a two stage least square model (2SLS)has been applied. The results from this additional test – reported in Table 7 – support that theassociation between disclosure and information asymmetry is negative and highly significant(t-statistics −5.33).17

7. Comparison with US studies

Our study is based on a belief that differences in the institutional setting in Denmark and theUS, respectively, may lead to a different association between the level of disclosure and various

17 In order to avoid perfect multicollinearity, one variable must be removed from the independent variables in the secondstage regression. Since market value (size) is highly correlated with the predicted value of disclosure score (correlationcoefficient 0.94), it is a likely candidate for removal (the reported Table 7 excludes market value). Keeping market valuein the regression and removing the other independent variables (one at a time) returns some unexpected signs. This isoften the case for regressions that contain multicollinearity in the data.


proxies for information asymmetry. As opposed to the US,

• Danish firms have a high degree of freedom when choosing how much information to disclose.• Danish firms is characterised by a high level of ownership concentration.• Investors have a lower level of investor protection in Denmark.• Danish firms have a lower level of litigation cost.

In Table 8, the US results are reported and compared to our results. Despite the institutionaldifferences between the US and Denmark the findings reported in our study do not deviate fromthe main body of results reported based on US data. In both the US and Denmark the coefficienton the level of disclosure is negative and in general significantly different from zero. Further, theexplanatory power reported in our study is lower than the explanatory power found in the USstudies. Notably exceptions are Botosan (1997) and Botosan and Plumlee (2002). They reportmixed results with respect to the level of significance on disclosure. Further, they report anexplanatory power of 13.5 and 5.1%, respectively. The low level of explanatory power may bedriven by the fact that both studies only control for size and beta. In conclusion, the impactof disclosure on proxies for information asymmetry seems insensitive to different institutionalsettings such as accounting system, litigation costs, investor protection and ownership structures.

8. Conclusion and future research

This paper documents industrial firms’ level of disclosure on 62 voluntary issues which seemimportant to investors and financial analysts. On average less than 21% of the 62 disclosureissues are reported in the annual reports. However, across time there is an increase in the levelof voluntary disclosure. An examination of the relationship between voluntary disclosure anddifferent proxies for information asymmetry in a setting with high ownership concentration, lowlitigation costs, low investor protection and a flexible accounting regime, yields results similar tothe ones based on US data which is characterised by a different institutional setting. Clearly, theresults rest on the extent to which the bid–ask spread and turnover ratio are good proxies for thetrue information asymmetry. Further, voluntary disclosure may be a proxy for a firm’s disclosurepolicy in general. This implies that it may not be the level of voluntary disclosure per se that drivesthe results but rather a firm’s general disclosure policy.

Further, the regressions showed that the highest obtainable gains are connected to informationconcerning marketing strategy, competitive issues, and issues related to production. The indicationof a negative association between the level of voluntary disclosure and proxies for the informationasymmetry should draw firms’ attention to the possibilities that exist to improve communicationto investors and financial analysts.

The analyses and results reported in our paper are based on one industry for a 4 year period.Thus, the results may not be generalizable to other industries, time periods and/or capital markets.Our paper does not consider the disadvantages (costs) of providing additional disclosure such asloss of competitiveness and increased reporting expenses. These issues could be addressed infuture research.

Examining the relation between voluntary disclosure and the information asymmetry has manyother future avenues. For instance, further analysis on the impact of different voluntary informationon information asymmetry seems warranted. For example, it is unclear if the effect of providingfurther information about marketing and strategy is different from the effect of increasing voluntarydisclosure of, say, production.


Also, it would be relevant to examine if there is a difference between the impact of voluntaryfinancial information and non-financial information. From an international perspective differencesin legislation and institutional factors and its impact on disclosure quality could be addressed.

Finally, as of 2005 all listed companies within the EU must comply with IAS/IFRS standards.These standards require firms to disclose more information than previously. Thus, it could beconjectured that the implementation of IAS/IFRS standards would lower information asymmetry.

Appendix A

Statistics from the Copenhagen Stock Exchange

DKKbn 1997 1998 1999 2000

Turnover, market value 309.6 448.3 469.1 835.6Turnover per trading day 1.2 1.8 1.9 3.3Number of trades in thousands incl. investment certificates 1019 1102 1274 2842Number of trades per day incl. investment certificates 4092 4407 5056 11234Market cap at year-end 665.5 659.3 840.0 972.3Rate of turnover NA NA 33.2% 42.8%Number of new companies 5 11 6 8Number of delisted companies 5 8 18 15Number of companies at year-end 249 254 242 235Number of trading days 249 250 252 251

Source: Fact Book 2002 (The Copenhagen Stock Exchange, www.cse.dk).

Appendix B

StrategyA statement of corporate goals or objectives is provided?A general statement of corporate strategy is provided?Actions taken to achieve the corporate goal are discussed?A time frame for achieving corporate goals is provided?Attitude towards ethic questions is providedStrategy towards environmental issues is provided?Detailed segment performance is provided?*Changes in ROCE or EVA are provided?Commercial risk assessments are provided?Financial risk assessments are provided?Interest or exchange risks are discussed?Other risk assessments are discussed?

Competition and outlookThe principal markets are identified?Specific characteristics of these markets are described?The market sizes are estimated?Market share are provided?The competitive landscapes are discussed?Barriers to entry are discussed?The market growths are estimated?Change in market shares is discussed?Impact of barriers to entry on profits is discussed?The impact of competition on profits is discussed?A forecast of market share is estimated?Impact of barriers to entry on future profits is discussed?The impact of competition on future profits is discussed?

http://www.cse.dk/


ProductionA general description of the business is provided?The principal products/services are identified?Specific characteristics of these products/services are described?Speed to market is discussed?R&D expenditures are discussed?Investments in production are discussed?Product development cycle is discussed?Ratio of inputs to outputs is discussed?New products are discussed?Rejection/defect rates are discussed?Volume of materials consumed is discussed?Changes in production methods are discussed?Changes in product materials are discussed?

Marketing strategyMarketing strategy is provided?Sales strategy is described?Distribution channels are described?Sales and marketing costs are providedBrand equity/visibility ratings are discussed?Customer turnover rates are discussed?Customer satisfaction level is discussed?Customer mix is discussed?Revenues from new products/services are discussed?Order backlog is provided?Percent of order backlog to be shipped next year is provided?Amount of new orders placed this year is provided?Change in inventory is discussed?

Human capitalExperience of management team is discussed?Description of workforce is provided?Amount spent on education is provided?Employee retention rates are provided?Average revenue per employee is provided?Average age of key employees is provided?Age of key employees is provided?Other Measurement of intellectual capital is provided?Investment in ERP is provided?Strategy for measurement of human capital is discussed?Strategy regarding ERP system is discussed?

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