Transparency and disclosure make up one of the pillars of corporate governance. Lack of improper disclosures has led to the rise of several scandals worldwide. According to (Duska, Duska & Ragatz, 2011), disclosure is the act of informing the public through a firm’ s financial statements. Albrecht (2007), in his studies, adds that disclosure is the communication of financial or nonfinancial economic information, whether quantitative or otherwise, regarding the financial performance and position of a company. The two broad categories of corporate disclosures are mandatory and voluntary. Roy (2001)) defines voluntary disclosure as the free choice of management of a company to provide revenant information, whether accounting or not so that the users of its annual reports can use it in their decision making.
This essay discusses the concept of voluntary disclosure, aiming at its theoretical aspects and its role in the economy. The Concept of Voluntary Disclosure The provision of information by the management of a company, beyond the specifications of the required standards such as general accounting principles and rules of Securities and Exchange Commission, is known as voluntary disclosure (Roy, 2001).
The provided information, however, has to be relevant to the users of a company’ s annual report during decision making. The type and extent of voluntary disclosure a company can apply is determined by its size, industry, and region. The company ownership structure and corporate governance structure also affect the extent of voluntary disclosure. Many companies carry out voluntary disclosure and their respective managers have a unique influence on their disclosure styles. According to (Roy, 2001), the disclosure style a manager chooses to relate to their personal backgrounds, career paths, and military experience. Companies, investors, and the economy benefit from voluntary disclosure in various ways.
For example, investors are able to make better capital allocation decisions. In addition, the cost of capital for the firm is lowered and the general economy is benefited. For the widely-held firms, the conflicts of interest are reduced. The types of information included in voluntary disclosures can range from the strategy and characteristics of a company, financial information such as stock process, and nonfinancial information such as practices of social responsibilities. According to the Financial Accounting Standards Board, voluntary disclosure can be categorized into business data, analysis of business data, forward-looking information, information about shareholders and management, company background, and intangible assets information. Bebbington, Unerman & O’ Dwyer (2014), argue that managers are obliged to disclose information that will meet the needs of various stakeholders voluntarily.
The main aim of voluntary disclosure is to provide a clear view of the long term sustainability of business to stakeholders and reduce the asymmetry of information as well as conflicts between investors and senior leadership teams. Healy & palapa (2012), however, claims that voluntary disclosure will still remain biased because it is based on selective information by managers.
Various theories are used to explain the background of voluntary disclosure and its role in the economy. Voluntary Disclosures Theories The main theories of voluntary disclosure include legitimacy, stakeholder, and accountability theories. Legitimacy and stakeholder theories are system-oriented, and they focus on the roles information and disclosure play in relationships between groups, individuals, organizations, and government. According to Tafoya (2014), an entity influences and is influenced by the society in which it operates. Stakeholders and legitimacy theories and derived from the political economy theory.
Political economy, according to Tafoya (2014) is the political, social, and economic framework in which human life takes place. While investigating economic issues, the political, institutional, and social frameworks within which the economic activity takes place to have to be investigated. Corporate reports are the result of the interchange between the firm and the environment within which it operates. Legitimacy, stakeholder, and accountability theories are applied to explain the reasons why an entity might choose to make particular voluntary disclosures. The theories are discussed further below; Legitimacy Theory Legitimacy theory states that an organization seeks to make sure that they operate within the specified norms and bounds of their respective societies.
The activities that an organization undertakes have to be perceived to be legitimate; otherwise, the organization has no right to exist. The norms and bounds are not static, and therefore, an organization is required to be responsive. Organizations rely on the notion of social contracts between themselves and society. The social contract is based on the expectations that the society has of the organization and the ways in which it should conduct its operations.
According to Roy (2001), legitimacy is the condition or the status of an organization value system being harmonious to the society in which it operates. Calhoun, Oliverio & Wolitzer (2009) adds that legitimating is the process that causes the organization to be viewed as being legitimate. The process of legitimating includes voluntary disclosures. The main objective of accounting is to provide users with information that they can use in decision making to satisfy their social interests.
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