The paper "The Concept of Voluntary Disclosure " is a perfect example of a finance and accounting coursework. Voluntary disclosure refers to information disseminated in a company’ s financial statements beyond the legally required disclosures (Kumar, Wilder and Stocks 2008). Meek et al. (1995) define voluntary disclosure as information disseminated in a company’ s financial statements out of free choice by the management where it deems the information to be pertinent in meeting the decision-making requirements of the users of such statements. There are both benefits and drawbacks of voluntary information disclosures (Hossain and Hammami 2009).
As a result, some companies deliberate on whether to engage in voluntary disclosures or not. According to Ferguson (2002), where the benefits outweigh the direct and indirect costs of voluntary information disclosures, then a company should consider disclosing such information in its annual reports. The aim of making voluntary information disclosures in a company’ s financial statements is to afford the users of such statements additional insights regard the company’ s long-term sustainability. Besides, voluntary information disclosures help in addressing information asymmetries as well as conflicts that arise as a result of the agency relationship between the owners, investors and managers (Boesso and Kumar 2007).
Companies have greater discretion over what information to provide in voluntary disclosures as well as the extent and scope of such information (Van der Laan 2009). Such considerations are informed by managerial incentives that vary from company to company (Healy and Palepu 2001). The benefits of voluntary information disclosures include an enhanced awareness level regards a company’ s potentials to various classes of investors as well as greater economic efficiencies (Hossain and Hammami 2009) as well as enable better communication between the management of a company and its investors (Tian and Chen 20009). In an effort to understand some of the incentives and motivations for voluntary disclosures, a number of theories have been proffered.
These include the accountability theory, legitimacy theory and stakeholder theory (Van der Laan). The stakeholder theory is concerned with the incentive to disclose information because it is through the information that a company is able to woo and convince various stakeholders with the aim of gaining their backing and approval or to suppress any resistance and or discontentment that they may have (Van der Laan 2009).
The stakeholder theory recognizes the fact that some stakeholders are more important to a company than others due to their resource contributions that are vital for the survival of the company (Deegan and Rankin 2006). As such, it is important for the management to disclose information to them to ensure their continued resource contributions. The legitimacy theory holds that companies are persistently engaged in efforts aimed at ensuring that their operations are carried out within the societal norms and requirements.
As a result, companies aim at ensuring that their actions in line with socially constructed norms, values and beliefs in order to establish some congruence between their operations and the socially acceptable behaviour (Van der Laan 2009). The legitimacy theory is concerned with the entire society and holds that information disclosure is carried out in order to link a company’ s economic actions with society’ s values and norms. Moreover, the legitimacy theory is based on the concept of the existence of a social contract between a company and the society in which it operates (Deegan and Rankin 2006).
As Van Laan (2009) notes, the legitimacy of a company’ s operations is in unsteady-state such that if the company perceives its legitimacy to be below desirable levels, then voluntary disclosure is necessary to disseminate information needed to legitimize its operations and overall existence (Van der Laan 2009). According to Deegan and Rankin (2006), the legitimacy theory holds that the society will only allow a company to engage in actions that meet its values, norms and expectations. Failure to meet the society’ s values and expectations have the consequence that the society will withdraw its support for the company through actions such as product boycotts.
The theory is based on the idea that information disclosure helps to enhance its perceived public image (Deegan and Rankin 2006). This is particularly important where a company’ s performance and actions are perceived to be short of public expectations. Voluntary disclosure is aimed at altering the public perceptions about the company or altering the society’ s expectations in a manner that aligns them with its operations (Van der Laan 2009).
Legitimacy Theory aims at developing an association between voluntary disclosures and societal expectations (Deegan and Rankin 2006). Accountability theory holds that management has an obligation to account for those actions they have a responsibility to oversee (Deegan and Rankin 2006). Under social responsibility theory, voluntary disclosures are considered obligatory rather than as a response to social and market demands (Deegan and Rankin 2006).
Deegan, C and Rankin, M 2006. Australian financial accounting. Sydney: McGraw-Hill Education.
Ferguson, M. J., Lam, K. C., & Lee, M. G. (2002). Voluntary disclosure by state-owned enterprises listed on the stock exchange of Hong Kong. Journal of International Financial Management and Accounting, vol. 13, no. 2, pp. 125−152. http://www.researchgate.net/publication/227601251_Voluntary_Disclosure_by_Stateowned_Enterprises_Listed_on_the_Stock_Exchange_of_Hong_Kong/file/5046351e941c50d457.pdf
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, vol. 31, pp. 405−440. http://tippieweb.iowa.uiowa.edu/accounting/mcgladrey/winterpapers/kothari1.pdf
Hossain, M and Hammami, H 2009. “Voluntary disclosure in the annual reports of an emerging country: The case of Qatar.” Advances in Accounting, vol. 25, no. 2, pp. 255-265. http://qspace.qu.edu.qa/bitstream/handle/10576/10439/Voluntary%20disclosure%20in%20the%20annual%20reports%20of%20an%20emerging%20countryThe%20case%20of%20Qatar.pdf?sequence=1
Kumar, G, Wilder, WM and Stocks, MH 2008. “Voluntary accounting disclosures by US-listed Asian companies.” Journal of International Accounting Research, vol. 7, no. 1, pp. 25−50. http://aaajournals.org/doi/abs/10.2308/jiar.2008.7.1.25
Meek, GK, Roberts, CB and Gray, SJ 1995. “Factors influencing voluntary annual report disclosures by U.S., U.K. and continental European multinational corporations.” Journal of International Business Studies, vol. 26, no. 3, pp. 5−572. http://www.jstor.org/stable/155561
Shehata, NF 2014. “Theories and determinants of voluntary disclosure.” Accounting and Finance Research (AFR), Vol. 3, no. 1, pp. 18-26. http://www.sciedu.ca/journal/index.php/afr/article/download/3837/2319
Tian, Y., & Chen, J. (2009). Concept of voluntary information disclosure and a review of relevant studies. International Journal of Economics and Finance, Vol. 1, no. 2, pp. 55-59. http://www.ccsenet.org/journal/index.php/ijef/article/viewFile/3360/3059
Van der Laan, S 2009. “The role of theory in explaining motivation for corporate social disclosures: voluntary disclosures vs ‘solicited’ disclosures.” Australasian Accounting Business and Finance Journal, Vol. 3, no. 4, pp. 15-29. http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1062&context=aabfj