The effect of globalization and legal environment on voluntary disclosure

We examine how interactions with foreign capital, product, and labor markets affect the disclosure practices of non-U.S. multinational firms. Drawing on literature related to multinationals, country-level legal institutions, and accounting disclosures, we expect that the relation between globalization and voluntary disclosure will be conditioned by the legal environment in a firm's home country. Specifically, while firms from countries with a strong legal environment (e.g., common-law countries) already face pressure for good disclosure, globalization can increase the benefits associated with good disclosure to firms from weak legal environments (e.g., civil-law countries). We use a self-constructed voluntary disclosure index and hand-collected disclosure and foreign activity data for 643 non-U.S. firms from 30 countries for 2003. We find a significant interaction between globalization and the legal environment. This indicates that for the same level of globalization, there is more voluntary disclosure for firms based in weak legal environments. Our results suggest that globalization is an important variable that has been overlooked in much of the previous cross-country research.     

Investor protection,cross-listing and accounting quality

Using 42,808 firm-year observations from 32 countries around the world, we investigate whether cross-listing in the US is associated with better accounting quality, and whether investor protection moderates the effect of cross-listing on accounting quality. Our main results show firms that are cross-listed in the US exhibit more timely reporting of losses, greater tendency to manage earnings downward, and more value relevance of accounting numbers as compared to their domestic counterparts. Cross-listed firms originating from high investor protection jurisdictions, particularly in high anti-director rights and common law countries, exhibit greater tendency to recognise a more timely reporting of losses and to manage earnings downward but exhibit lower value relevance of earnings as compared to cross-listed firms domiciled in low anti-director rights and non-common law countries. These results suggest that the strength of investor protection in home country plays an important role in determining the quality of accounting numbers of cross-listed firms.     

Discretionary compliance with mandatory environmental disclosures: Evidence from SEC filings

We examine the determinants of adherence to U.S. Securities and Exchange Commission (SEC) mandated disclosures of environmental sanctions. Our sample includes non-superfund U.S. Environmental Protection Agency (EPA) sanctions between 1996 and 2005. Our results suggest that firms are more likely to provide sanction disclosures if they operate in environmentally sensitive industries, are subject to larger penalties and are voluntarily participating in a supplemental environmental project. Our results also suggest that firms are less likely to disclose sanctions involving judicial proceedings. Overall, we find that voluntary disclosure incentives impact compliance with mandatory reporting requirements. Although incentives exist for firms to comply with mandatory disclosures, our results suggest that increases in mandatory environmental accounting disclosures may not be effective under the current regulatory system despite the use of bright-line materiality thresholds. Our study contributes to the current and ongoing debate about the role and effectiveness of environmental risk disclosure mandates in providing information to the marketplace, as well as “mandated disclosure” rules in general. The value attributed to current and potential environmental disclosure regulations cannot be thoroughly understood without examining disclosure compliance with existing regulations. From an environmental and sustainability disclosure perspective, our findings are particularly germane since these disclosures focus on risks, liabilities, or other reputational shortcomings of the firm.     

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

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

Global warming, commitment to the Kyoto protocol, and accounting disclosures by the largest global public firms from polluting industries

This study evaluates disclosures on pollution and greenhouse gases by firms domiciled in countries that have ratified the Kyoto Protocol compared to others. The study is based on disclosures made in the annual reports, environmental reports, and websites of 120 of the largest (in terms of revenues) public firms from the chemical, oil and gas, energy, and motor vehicles and casualty insurance industries. The study uses content analysis to construct weighted and unweighted disclosure indices.The results show that firms from countries that ratified the Protocol have higher disclosure indexes as compared to firms in other countries. Additionally, larger firms disclose more detailed pollution information. Multinational firms that operate in countries that ratified the Protocol but have their home offices in countries that did not are associated with lower disclosures. This lack of consistency in disclosure is not likely to be helpful in informing shareholders about the social responsibility of their investments.     

Board generational cohorts,gender diversity and corporate environmental and social disclosures: Evidence from China

We examine the association between board generational cohorts and corporate environmental and social disclosure. We find that older board members have a positive association with corporate environmental and social disclosures. In contrast, the moderately younger and youngest board members limit corporate environmental and social disclosures. Our results are robust to potential endogeneity with the use of alternative model specifications, with the youngest board members accounting for a lower level of corporate environmental and social disclosures. Furthermore, we find that the presence of gender diversity on the board moderates the relationship between board generational cohorts and corporate environmental and social disclosures and reporting incentives are important to oldest and youngest board members in their push for environmental and social disclosures. Finally, additional analysis indicates that firms with governmental shareholding are associated with a higher level of corporate environmental and social disclosures as compared to firms without governmental shareholding when board members are moderately young.     

To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.     

Differences in environmental reporting practices in the UK and the US: the legal and regulatory context

The paper examines current corporate environmental reporting practices within UK and US annual reports and suggests that elements of the legal and regulatory framework of each country which regulate environmental activity, and so influence environmental performance, determine the types of disclosures made. The environmental management context is examined to present an explanation of recent developments and to suggest what influences on reporting practice may be important. Theoretical considerations are examined to establish whether the types of disclosure arising from regulatory pressures demonstrate that accountability exists in the disclosure of environmental information, and to what extent the disclosure discharges the organisation's accountability to the users of such information.     

Corporate social responsibility,country-level predispositions,and the consequences of choosing a level of disclosure

We study the different levels of corporate social responsibility (CSR) disclosures of the largest European firms. We find that firms are more predisposed to disclose more CSR information in countries with better investor protection, higher levels of democracy, more effective government services, higher quality regulations, more press freedom, and a lower commitment to environmental policies. Our analysis of the association of different levels of CSR disclosure with share prices indicates that a high level of CSR disclosure is associated with higher share prices, whereas a low level of CSR disclosure in sensitive industries is associated with lower share prices (compared to no disclosure). These results are also present when we analyse changes in CSR disclosure and are robust to the inclusion of an accounting quality measure in our model. The overall effect of the association of higher levels of CSR disclosure with higher share prices is stronger in countries with more democracy, more government effectiveness, better regulatory quality, and more press freedom. Therefore, market participants find CSR disclosures more informative in countries where investors are in a better position to voice their concerns and where there is better regulation and more effective government implementation of regulations.     

Accounting for government grants: Standard-setting and accounting choice

This paper provides evidence on several matters relating to accounting for government grants under International Financial Reporting Standards (IFRS). Focusing on grants related to assets, we trace the development of International Accounting Standard (IAS) 20, outline some of the problems of current accounting practice, and suggest why these have not been addressed by the standard-setter. Then, by hand-collecting data relating to 559 firms from 15 countries, we empirically analyze several issues. We show that asset grants are economically important for some firms and that the frequency of grants is significantly different across the countries. For the non-financial firms in our sample, we identify the grant-related accounting policy choice: a firm can either show the grant as deferred income or net it against the asset. The options are roughly equally popular overall but the firm’s country of domicile is strongly associated with the choice. Further, as a key element of disclosure quality for this topic, we investigate whether or not the balance sheet-related numbers relating to grants are disclosed, finding that many firms do not disclose them. Disclosure quality is better for firms which use the ‘deferred income’ option, and it is also better in countries where a higher proportion of firms has received government grants. International differences and poor disclosure are detrimental to international comparisons, so we conclude that the policy choice should be removed from the accounting standard.     

Value relevance of earnings: Evidence from Middle Eastern and North African Countries

Researchers as well as regulators are increasingly more interested in enhancing their understanding of the factors that influence value relevance of reported earnings in financial statements. In the light of globalization and increased exposure to international accounting practices, a better comprehension of factors contributing to or reducing value relevance of earnings is essential. This paper investigates the value relevance of earnings and its components for a number of Middle Eastern and North African (MENA) countries. Additionally, the paper examines how differences in levels of mandated disclosures, source of accounting standards, and legal systems moderate the informativeness of earnings to investors. We find that mandated disclosure and source of accounting standard, (especially non-governmental source) are positively associated with earnings informativeness. Additionally, MENA countries with French civil law and systems have lower value relevance relative to countries in our sample with English and related legal codes. Further, the firms that have adopted international financial reporting standards have higher value relevance than firms in MENA countries which adhere to local standards.     

Convergence and harmonization of accounting standards in the South Pacific region

Over the last few years there has been a significant increase in the acceptance of International Financial Reporting Standards (IFRSs) which are issued by the International Accounting Standards Board (IASB). Although numerous countries are adopting IFRSs, the approaches used for convergence continue to differ significantly across countries. Using selected countries from the South Pacific region, this paper investigates the relationship between country-specific characteristics and the selection of the appropriate approach used for the adoption of IFRSs. The country-specific attributes that have been found to influence convergence are (1) the set of accounting standards that was prevailing in the country at the time when the selection was made, (2) the availability and experience of professional accountants, (3) the relevant education and professional training, (4) the presence of the Big 4 accounting firms and (5) the accounting regulatory framework. The results of this study suggest that complete comparability in financial reporting may be difficult to achieve across all countries even after adopting the IFRSs. These findings are important because they indicate that attention should be concentrated on theorizing and empirically testing the effects of the country-specific attributes on convergence efforts across various jurisdictions.     

The determinants of Internet financial reporting

Responding to the widespread adoption of the Internet and the rapidly growing demands for information from stakeholders, corporations around the world are using the Internet for business and financial disclosures. Internet reporting has the benefits of low cost, wider reach, frequency and speed. Despite these benefits Internet reporting varies across companies and across countries. We study Internet financial reporting (IFR), in particular the presentation and content of IFR, of 660 large companies in 22 countries to identify the firm, and environmental determinants of IFR. The study revealed that firm size, listing on US stock exchanges and technology were firm specific determinants of IFR. Given that IFR is not just about the content of disclosure, but also about employing new presentation methods, the environment of disclosure was included in the research. The overarching disclosure environment of a country was found to be an important environmental driver for IFR presentation and less strongly for IFR content. The presentation aspect of IFR was more associated with the identified determinants than the content of IFR, which suggests that Internet presentation technologies were more related to the determinants than the content of the reports on the company Web sites.     

The usefulness of firm risk disclosures under different firm riskiness,investor-interest,and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.     

Corporate Governance,Companies’ Disclosure Practices and Market Transparency: A Cross Country Study

We examine the link between corporate governance, companies’ disclosure practices and their equity market transparency in a study of more than 5,000 listed companies in 23 countries covering the period 1 January 2003 to 31 December 2008. Our results confirm the belief that better‐governed firms make more frequent disclosures to the market. We also find greater disclosure in common law relative to code law countries. However firms with better governance in both code and common law countries make more frequent disclosures. We measure market transparency by the timeliness of prices. In contrast to single country studies, results show, for the 23 countries collectively, better corporate governance is associated with less timely share prices. This would suggest that a firm substitutes better corporate governance for transparency. We are thus led to the conclusion that even if information is disclosed more frequently by better‐governed firms, it does not necessarily follow that information is reflected in share prices on a timelier basis.     

Peer R&D disclosure and corporate innovation: Evidence from American depositary receipt firms

In this paper, we examine the effect of peer research and development (R&D) disclosures on corporate innovation. R&D disclosures can generate externalities for related firms, enabling those firms to better infer a project's likely payoffs and thus prioritize projects with higher net present values. We use a sample of foreign firms cross-listed on U.S. exchanges to investigate whether U.S. peer firms experience externalities from the cross-listing firm's R&D disclosures. We find that R&D disclosures by cross-listing firms are associated with greater innovation for industry peers in the U.S. market, especially when product market competition is high. The effect also varies with the home country's legal protection systems, disclosure environments, and accounting reporting rules. Cross-sectional analyses indicate that the externalities are more pronounced in industries or firms that rely more on external financing and firms subject to higher financial constraints; disclosures of higher quality appear to promote innovation by ameliorating financing frictions. Overall, this study provides evidence of R&D disclosure as an industry-wide determinant of innovation, thereby contributing to literature on the real effects of peer disclosures.     

International operations and voluntary disclosures by U.S.-based multinational corporations

This study uses analysts' ratings of firms' disclosures to examine how the differences between U.S. and foreign disclosure environments affects the voluntary disclosures of U.S.-based multinational corporations. We hypothesize that these different disclosure environments discourage U.S-based multinationals from releasing costly information to competitors. Examining how these differences impact U.S. MNCs' reporting may further our understanding of the relationship between voluntary disclosures and differences among countries' accounting standards. Furthermore, it may explain how convergence of mandated accounting standards might impact voluntary disclosures. Controlling for industry membership, firm size, profitability, earnings-return relations, and capital market activity, we find that U.S. firms with more extensive foreign operations tend to provide fewer voluntary disclosures. These results are most robust for informal and flexible disclosures, such as investor relations, where the findings indicate a negative relation between foreign operations and disclosure.     

Does the market value greenhouse gas emissions? Evidence from multi-country firm data

Despite increasing global attention on corporate carbon emissions, few studies have examined the value relevance of carbon emission information in the international context. This paper examines whether carbon emission information voluntarily disclosed by a firm affects its market value. After controlling for a firm's likelihood to provide voluntary carbon disclosures, we find that the level of carbon emissions is negatively related to firm value. This negative impact is more prominent for firms in countries that have a national carbon emission trading scheme and stringent environmental regulations. Furthermore, corporate governance is found to reduce the negative value effect of carbon emissions, indicating that shareholders have favorable perceptions regarding the carbon management ability of firms with good corporate governance. Cultural contexts such as uncertainty avoidance and long-term orientation also affect the value effect of risks and future liabilities associated with carbon emissions. We find that the value-decreasing effect of carbon emissions is weaker in countries characterized by high uncertainty avoidance and long-term orientations.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.     

Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings

We investigate (1) whether the variation in accounting standards across national boundaries relative to International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast non-U.S. firms' earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict management's choices of measurement methods relative to the accounting standards of our sample firms' countries of domicile. We develop indexes of differences in countries' accounting disclosure and measurement policies relative to IAS, and document that greater differences in accounting standards relative to IAS are significantly and positively associated with the absolute value of analyst earnings forecast errors. Further, we show that analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for changes in the market value of equity, changes in analyst following, and changes in the number of news reports, we find that the convergence in firms' accounting policies brought about by adopting IAS is positively associated with the reduction in analyst forecast errors.