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Factors affecting the voluntary disclosure: a study by using smart PLS-SEM approach
Md. Abdur Rouf, M. Akhtaruddin,
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Md. Abdur Rouf, M. Akhtaruddin, "Factors affecting the voluntary disclosure: a study by using smart PLS-SEM approach",
International Journal of Law and Management, https://doi.org/10.1108/IJLMA-01-2018-0011
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M. Akhtaruddin
Professor, Institute of Business Administration
University of Rajshahi, Rajshahi
Bangladesh
ABSTRACT:
Purpose: This paper aims to examine the factors affecting the voluntary disclosure in the annual
reports of listed companies in Bangladesh.
Design/methodology/approach: The study is based on a sample of 96 listed non-financial
companies in Dhaka Stock Exchanges (DSE) over the period of 2011 to 2014. The study used
Partial Least Squares Structural Equation Modeling (PLS-SEM) tool to analyze data which
provides evidence of reliability and validity. It also used an un-weighted relative disclosure index
for measuring voluntary disclosure.
Findings: The empirical results show that corporate governance (board leadership structure and
ownership structures) and firms characteristics (total assets and total sales) are significantly
positive correlated with the voluntary disclosure.
Originality/value: The finding of the study will be a bench mark or the board for policy makers
and implementers in torching the avenues of improvement in raising the level of corporate
voluntary disclosure in annual reports of listed companies in Bangladesh.
Keywords: Corporate Governance, Voluntary Disclosure, Structural Equation Modeling, Dhaka
Stock Exchanges.
INTRODUCTION:
Accounting disclosure is very significant to all stakeholders; it delivers them with the necessary
information to reduce ambiguity and helps them to make suitable economic and financial
decisions. The annual financial reports published by companies are considered one of the most
important sources of information to outsiders (Botosan & Harris, 2000). The annual report is a
significant part on the whole disclosure process, because it is the most frequently distributed
source of information on publicly held corporations. Published annual reports are required to
provide various users viz. shareholders, financial analysts, employees, creditors, stockbrokers,
suppliers, management and government agencies–with timely and reliable information that is
useful for making prudent, real and efficient decisions. The extent and excellence of voluntary
disclosure contained by these published reports though vary from company to company and also
from country to country. Corporate voluntary disclosure refers to information made available at
the discretion of the corporation. The extent of voluntary disclosure is influenced by changes in
the attitudes in society, economic factors and
behavioral factors such as the particulars corporate culture (Rouf, 2016; Akhtaruddin & Rouf,
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2012). Voluntary disclosure items may be classified into historical, current and predictive items,
depending on the past, present or envisaged performance of the company (Rouf, 2010).
Voluntary disclosure encourages management discretion in deciding the content of information
to disclose. Voluntary disclosure decreases the information asymmetry (Lang & Lundholm,
1996) between insiders and outsiders, reduces the cost of capital (Botosan & Harris, 2000) and
increases transparency of the company (Cheng & Courtenay, 2006). Shehata (2014) shows that
voluntary disclosure is an effective way to disseminate corporate information to stakeholders
about the business to reduce information asymmetry and agency conflicts between managers and
investors. Similarly, Lan et al., (2013) argue that firms might benefit from giving investors
additional corporate information to exploit the disclosure benefits that exceed disclosure costs,
such as lower capital or debt cost. Given these benefits, the Financial Accounting Standard
Board (FASB, 2000) describes “voluntary disclosures” as “information primarily outside of the
financial statements that are not explicitly required by accounting rules or standards”.
In Bangladesh, both Company Act of 1994 and Bangladesh Securities and Exchange Rules of
1987 are two important legislations for corporate disclosure. The Companies Act 1994 provides
the basic requirements for disclosure and reporting applicable to all companies incorporated in
Bangladesh (Government of Bangladesh, 1993). The Act requires companies to prepare financial
statements in order to reflect a true and fair view of the state of affairs of the company.
Bangladesh Securities and Exchange Commission (BSEC), another regulatory body, requires all
listed companies to comply with accounting standards promulgated by the Institute of Chartered
Accountants of Bangladesh (ICAB), in addition to its own disclosure provision (Government of
Bangladesh, 1993).
This study is to examine the corporate governance, firm’s characteristics and profitability factors
that affecting on the voluntary disclosure in annual reports of listed companies in Bangladesh.
The factors examined are (i) corporate governance (board composition, board size, board
leadership structure, ownership structure and female director) (ii) firms’ characteristics (total
assets and total sales) and (iii) profitability (return on assets and return on sales).
The rest of the paper is structured as follows: Section 2 presents the objectives of the study. The
next section 3 provides a view on literature following with a description of underpinning
research hypotheses of this study. Research methods used for the research have been explained
in section 4. Section 5 shows fit the structural equation model and section 6 presents the results
and relevant analyses. Finally, section 7 concludes with the importance of the research and scope
for further research.
Profitability:
Managers are motivated to disclose more detailed information to support the continuance
of their positions and remuneration and to signal institutional confidence. Apostolos and
Konstantinos (2009), Karim (1996), Samir et al. (2003) and Meek et al., (1995) suggest
that profitability of the companies is expected to disclose more information about their
performance. Bujaki and McConomy (2002) show that firm facing a slowdown in
revenues tends to increase their disclosure of corporate governance practices. Moreover,
firms suffering serious corporate governance failures tend to provide extensive disclosure
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of governance guideline implemented in the period after such failures. Haniffa and Cooke
(2002) find a positive and significant association between the firm’s profitability and the
extent of voluntary disclosure, which is consistent with the early studies (Leventis &
Weetman, 2004; Kusumawati, 2006). In this study, profitability is measured by return on
assets (ROA) and return on Equity (ROE); that is, net income divided by total assets and
net income divided by total sales. The following specific hypotheses have been
developed regarding the profitability of the firm:
H3: Profitability (PA) of firm will have a significant influence on the level of voluntary
disclosures.
Firms’ Characteristics:
Most of the studies found that size of the firm does affect the level of disclosure of
companies. Rouf, 2017; Hossain and Hammami (2009), Jilnaught and Norman (2009), Aripin et
al.,2008; Watson et al.,2002, Ahmed and John (1999), Adams et al., (1998), Barako et al., (2006)
investigated that the larger the firm, the more likely they will make voluntary disclosures. Based
on the study done worldwide, for example (Watson et al., 2002; Wallace et al., 1994; Samir et al.,
2003); they suggested the underlying reasons why larger firms disclose more information. The
reasons are proposed that managers of larger companies are more likely to realize the possible
benefits of better disclosure and small companies are more likely to feel that full disclosure of
information could endanger their competitive position. Thus, the impact of the firm size is
expected to be positively associated with the extent of voluntary disclosures. In contrast, Barako
(2007) and Hossain et al., (2006) suggested that firms size does not affect the level of corporate
voluntary disclosure. In this study, total sales and total assets have been used as the measures of
company size. The following specific hypotheses have been developed regarding the size of the
firm:
H4: Firms’ Characteristics (FC) will have a significant influence on the level of voluntary
disclosures.
H5: Firms’ Characteristics (FC) will have a significant influence on the profitability of firm.
The above mentioned hypotheses have been portrayed in the study model in Figure-1, which
need to be examined and analyzed by employing PLS-SEM approach in this paper. The arrows
linking constructs connecting hypothesized causal relationships between endogenous and
exogenous constructs need to be examined and analyzed.
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METHODOLOGY
Sample Selection and Data Collection
The sample for the study is taken from annual reports of companies listed on Dhaka Stock Exchange
(DSE) and the companies are selected by judgmental sampling. Judgmental sampling is a form of
convenience sampling in which the population elements are selected based on the judgment of
the researcher. The criteria for selecting the sample firms are: (i) the company must be a firm (non-
financial company), (ii) annual reports must be available on the Dhaka Stock Exchange and (iii) the
firm must have been listed for the entire period of the study from 2011 to 2014. The total 96
companies fulfilled the above three criteria. The companies are mainly classified into two categories,
financial and non-financial. At the end of 2011, 270 companies were listed on the Dhaka Stock
Exchange. Out of 270 companies, 150 companies are non-financial and the others are financial.
Among the 150 non-financial companies, annual reports of 44 companies are not available on DSE
from the period of 2011 to 2014.
Statistical Analysis:
The collected data has been coded into SPSS 20 for statistical analyses and correlations prior to
the PLS-SEM analysis. In order to test the hypotheses SMART PLS 3.0 which is a complete
Structural Equation Modeling (SEM) tool, developed by Christian Ringle and his team at the
University of Hamburg in Germany was employed.
Cronbach's Alpha
Table shows the result of Reliability and Validity Analyses. Reliability analysis is conducted for
the scales using Cronbach's Alpha. Normally reliability coefficient of Cronbach's Alpha ranges
between 0 to1. According to Hair et al.,1998, greater or equal to 0.80 for a good scale, 0.70 for
an acceptable scale and 0.60 for a scale for exploratory purposes. Results of Cronbach's Alpha
indicate that CG (0.604), FC (0.868) and PA (0.715). Thus, these indicators satisfied the
required.
Composite Reliability
Composite reliability is a preferred alternative to Cronbach's alpha as a test of convergent
validity in a reflective model. It may be preferred as a measure of reliability because Cronbach's
alpha may over- or underestimate scale reliability. Composite reliability varies from 0 to 1, with
1 being perfect estimated reliability. In a model adequate for exploratory
purposes, composite reliabilities should be equal to or more than 0.6 (Chin, 1998; Hock et al
2010); equal to or more than 0.70 for an adequate model for confirmatory purposes (Henseler, et
al., 2015); and equal to or more than 0.80 is considered good for confirmatory research
(Daskalakis & Mantas, 2008).Result shows that the Composite reliability value of CG(0.613),
FC(0.932) and PA(0.792) prove that all reflective paradigms have more levels of internal
consistency reliability.
A. PLS Algorithm
B. Bootstrapping
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The structural models for this research are portrayed in figure 2 and figure 3 respectively, in
which R2 represents value for any endogenous and predicted latent variable. R2 is 0.475 for
dependent variable i.e., voluntary disclosure. It means that the three independent variables are
corporate governance (CG), Firms characteristics (FC) and Profitability (PA) fairly explain
47.5% of the variance in voluntary disclosure.
Bootstrapping Option has been used to determine the statistical significance of the path
coefficient and in order to calculate the t- values in this study. All calculated values are shown in
the Table-3.
The t-value of the hypothesized path of corporate governance (CG) and profitability (PA) is
0.825, which is below 2.57(α=0.01; two-sided test) and p-value is 0.410. So, the hypotheses path
of CG and PA of the inner model is not statistically significant.
The t-value of the hypothesized path of corporate governance (CG) and voluntary disclosure
(VD) is 9.131, which is above 2.57(α=0.01; two-sided test) and p-value is 0.000. Therefore, the
hypothesized path of CG and VD of the inner model is statistically significant.
Another t-value of the hypothesized path of Firms characteristics (FC) and profitability (PA) is
0.524, which is below 2.57(α=0.01; two-sided test) and p-value is 0.601. So, the hypothesized
path of FC and PA of the inner model is not statistically significant.
Another t-value of the hypothesized path of Firms characteristics (FC) and voluntary disclosure
(VD) is 3.516, which is above 2.57(α=0.01; two-sided test) and p-value is 0.000. So, the
hypothesized path of FC and VD of the inner model is statistically significant.
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The t-value of the hypothesized path of profitability (PA) and voluntary disclosure (VD) is
0.495, which is below 2.57(α=0.01; two-sided test) and p-value is 0.621. So, the hypothesized
path of PA and VD of the inner model is not statistically significant.
CONCLUSION
This study is to examine the corporate governance, firm’s characteristics and profitability factors
affecting the voluntary disclosure in annual reports of listed companies in Bangladesh. The result
shows that two factors of corporate governance; board leadership structure and ownership
structures are statistically significant with the voluntary disclosure. Also two factors of firm’s
characteristics, total assets and total sales are statistically significant with the voluntary
disclosure.
Overall, the findings of this study contribute to the existing literature by providing empirical
evidence on corporate voluntary disclosure in annual reports of listed companies in Bangladesh.
Therefore, the findings of this study have important implications for regulatory authority,
enforcement agencies such as Institute of Cost and Management Accounts of Bangladesh
(ICMAB), Institute of Chartered Accountants of Bangladesh (ICAB), Bangladesh Securities and
Exchange Commission (BSEC), Dhaka Stock Exchange (DSE), policy makers, shareholders and
others who have interest in corporate voluntary disclosure.
The major limitation of the study is that the sample has been taken only from the nonfinancial
listed companies excluding financial companies and only the level of corporate voluntary
disclosure is measured ignoring the level of mandatory disclosure. The following
recommendations can be developed:
Corporate entities can set up an independent corporate governance committee, which will
continuously monitor and oversee the corporate governance affairs inside the
organizations. The committee should include at least one member appointed by the
regulatory body. The board should be held responsible and accountable to the corporate
governance committee in case of corporate governance affairs. The committee can also
suggest any change or direct the board of directors regarding how the entities comply
with and implement the corporate governance guidelines. Finally, this will submit a
report on corporate governance on bi-annually or yearly basis to the regulatory body.
Companies Act, 1994 needs to be updated. Moreover, manpower and efficiency of the
office of the registrar of the joint stock companies and firms need to be enhanced for their
effective enforcement of Companies Act.
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