The Impact of Corporate Attributes on the Extent of Mandatory Disclosure and Reporting by Listed...

The International Journal of Accounting

The Impact of Corporate Attributes on the Extent of Mandatory Disclosure and Reporting by Listed Companies in Zimbabwe

Stephen Owusu-Ansah King Fahd University of Petroleum & Minerals

Key Words: Zimbabwe, Mandatory disclosure, Financial reporting, Annual report, Corporate

attributes, Disclosure index

Abstract: This article reports the results of an empirical investigation of the degree of influence of

eight corporate attributes on the extent of mandatory disclosure and reporting of 49 listed compa-

nies in Zimbabwe. Using a disclosure index which consisted of 214 mandated information items,

the extent of mandatory disclosure by each sample company was quantified, and was used with

other data spec$c to each sample company to test the relational hypotheses. Although several

alternative specifications of multivariate regression models were developed and estimated, only

the results of a robust regression analysis which indicated that company size, ownership structure,

company age, multinational corporation ajjiliation, and projitability have statistically significant

positive effect on mandatory disclosure and reporting practices of the sample companies were

reported. The quality of external audit, industry-gpe and liquidity were statistically insignificant.

This article reports the results of an empirical investigation of the impact of some corpo-

rate-specific attributes on the extent of mandatory disclosure and reporting by Zimbabwe

Stock Exchange (ZSE) listed companies.’ The corporate attributes whose effects on man-

datory disclosure were investigated are company size, quality of external audit, ownership

structure of issued equity shares, type of industry, company age, multinational corporation

(MNC) affiliation, profitability, and liquidity. The importance of theorizing and testing

empirically for the effects of these corporate attributes on mandatory disclosure practices

of the listed companies in Zimbabwe is to suggest areas where efforts to improve the dis-

closure regulatory regime in that country should be concentrated. The results of a robust

regression analysis suggest that company size, ownership structure, company age, MNC

Direct all correspondence to: Stephen Owusu-Ansah, Department of Accounting & Mgt. Info. Systems, College of Industrial Management, King Fahd University of Petroleum & Minerals, P. 0. Box 809, Dhahran 3 1261, Saudi

Arabia; Tel: + 966 O(3) 860-4285/5208; Fax: + 966 O(3) 860-3489; E-Mail: [email protected].

The International Journal of Accounting, Vol. 33, No. 5, pp. 605-631 ISSN: 0020-7063. All rights of reproduction in any form reserved. Copyright 0 1998 University of Illinois

606 THEINTERNATIONALJOURNALOFACCOUNTING Vol.33,No.5,1998

affiliation, and profitability have positive statistically significant influence on the extent of mandatory disclosure and reporting by the sample companies.

Cerf (1961) pioneered the study of the corporate-specific attributes which determines the extent of disclosure. Measuring disclosure by an index of 3 1 information items considered to be important or desirable by financial analysts in their investment decision making, Cerf (196 1) concluded that financial reporting practices of many US companies need improvement. Cerf (1961) also observed that significant differences in disclosure appeared to be a function of a variety of corporate-specific attributes including asset size, number of shareholders, and profitability. Following Cerf’s (1961) path-paving study, several researchers have replicated his methodology with or without modification (e.g., Singhvi & Desai, 1971; Buzby, 1974; Firth, 1979; Wallace, 1988; Cooke, 1989a; Tai et al., 1990; Wallace et al., 1994; Patton & Zelenka, 1997). The present study extends this field of study to companies listed on the ZSE.

The remainder of the article is structured in the following manner. The first section :xamines the statutory and the institutional factors affecting financial accounting and reporting of the private sector companies in Zimbabwe. It also describes some characteris- ;ics and the role of the institutions involved in the regulatory process. The second describes how the extent of disclosure in annual report of each sample company was captured. The third section develops the relational hypotheses tested in this study. The fourth section is a description of the sampling method and the statistical tests employed on the data. This section also describes how the corporate attributes were operationally defined and measured. The fifth section reports and discusses the results of the statistical analyses undertaken. rhis section also evaluates the regression estimation procedures employed in this study. IYhe final section presents the conclusions, possible policy implications of the results, limitations of the research design, and suggestions for future research.

REGULATION OF FINANCIAL ACCOUNTING AND REPORTING IN ZIMBABWE

zorporate financial accounting and reporting by public companies in Zimbabwe is influ- :nced by the Companies Act, 1952 (Chapter 190), and the pronouncement of the professional accountancy body which are, essentially, International Accounting Standards (IASs) hat are adopted by the Institute of Chartered Accountants of Zimbabwe (ICAZ). Public listed companies are also required by the ZSE to comply with its listing rules on financial disclosure and reporting. Generally, the financial accounting and reporting requirements of these regulatory sources are similar to those in the UK. The similarity with the UK as explained below, arises from the close historical and economic links between the two coun- :ries, the close cultural links of the accounting profession in Zimbabwe to the profession in the UK, and the similarities between UK financial accounting standards and the IA% adopted by the ICAZ.

The Legal Framework

Like many Commonwealth countries, Zimbabwe modelled its companies law on that of the UK’s 1948 Companies Act. The Zimbabwean Companies Act, primarily concerned with the protection of existing and potential investors and creditors of companies with lim-

Impact of Corporate Attributes 607

ited liability status, sets out the general framework for financial accounting and reporting

by those companies. The Act, however, stipulates only the basic minimum requirements of

financial accounting and reporting. Since these financial accounting and reporting rules are

limited both in coverage and in detail, they are supplemented by the prouncencements of

the ICAZ, many of which are wholesale adoptions of IASs. The Act requires companies

registered under it to keep accounting records which sufficiently and accurately explain

their financial position and performance. Specifically, every company is required to keep

proper books of accounts regarding its assets and liabilities, sales and purchases, all sums

received and expended and the matters in respect of which the receipts and expenditures

took place. The financial statements which must be prepared on regular basis in accordance

with the disclosure requirements prescribed in the Seventh Schedule to the Act must also

give a true andfair view of the operations and the state of affairs of the reporting company.

Every company registered in Zimbabwe is legally required to appoint an independent

external auditor. The auditor is required to make a report to members of a company on the

accounts examined. The auditor’s report should be attached to a company’s accounts

signed by, at least, two directors and sent to all persons entitled to attend a company’s

AGM 14 days before the date of such meeting. The Act obliges directors of every company

registered in Zimbabwe to publish audited annual accounts within 6 months (i.e., 24

weeks) following its financial year-end. Private companies, under certain conditions are,

however, exempted from the requirement to have their accounts audited.

The Accountancy Profession in Zimbabwe

The accountancy profession in Zimbabwe is regulated by the Accountants Act (Chap-

ter 215) through the ICAZ. Under the Act, the ICAZ is a statutory b.ody run by a Coun-

cil of 15 members, two of whom are appointed by the Minister of Justice, Legal and

Parliamentary’ Affairs. Members of the Council are elected on the basis of geographical representation. The Council is primarily responsible for the establishment, adoption and

publication of financial accounting standards, and the supervision of their application

throughout the country. As of March 199.5, the ICAZ has 1,300 members and 500 stu-

dents. About half of the members are resident outside Zimbabwe, and about one-third

of those resident in Zimbabwe are working in public practice. There are several other

accountants in the country who have qualified with some of the UK’s professional

accountancy bodies. However, only members of the ICAZ may legally describe them-

selves as public accountants or auditors in Zimbabwe. Legislation is currently under-

way to recognize other accounting professional qualifications for audit purposes in the

country. The work of public accounting firms in Zimbabwe consists primarily of audit-

ing, accounting, tax, and management advisory services. All the international Big Five audit firms are represented in the country. The ICAZ is a member of some intema- tional accounting bodies including the International Federation of Accountants and the

International Accounting Standards Committee (IASC). It also has representation on

several other local bodies including the Consultative Committee of Accountancy and Secretarial Bodies of Zimbabwe, Public Accountants and Auditors Board of Zimbabwe,

and the Securities and Exchange Consultative Committee.

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The Zimbabwe Stock Exchange

The ZSE was first established in Bulawayo in 1896, but ceased operations in 1924 due to a slowdown in the country’s mining industry on which the stock market was so heavily dependent. A second stock exchange was established in Salisbury (now Harare) in 195 1, though dealings in securities started five years earlier. The present stock exchange was

established by the Rhodesia Stock Exchange Act (No. 27) of 1973. The stock exchange places a continuing periodic reporting obligation on public companies listed on the Exchange. Listed companies are obliged to report any relevant, material information nec- essary to enable present and potential investors to appraise their financial position and performance. The listing rules of the ZSE require that annual published accounts disclose certain information in addition to those required by the Companies Act and the pronounce- ments of the ICAZ. The stock exchange also has a general requirement of timely reporting. Listed companies are required to send to their shareholders audited accounts at least 21 days before their AGM (i.e., within 21 weeks after financial year-end). In addition, three copies of the said accounts should be submitted to the stock exchange 22 days before the AGM.

The ICAZ monitors corporate financial accounting and reporting compliance in Zimba- bwe. Like the US Securities and Exchange Commission (SEC), the ICAZ employs a review method in monitoring and enforcing compliance with statutory and regulatory dis-

closure requirements. However, while the US SEC uses a more rigid, prosecution-oriented approach to enforcement of disclosure regulations, the ICAZ uses a more flexible and co-operative approach (see Owusu-Ansah [ 19981 for the literature on regulatory enforcement models). The primary purposes of ICAZ’s monitoring of corporate annual reports include: (1) to ascertain the extent to which they comply with Zimbabwe’s financial accounting standards; and (2) to encourage compliance with those standards as far as prac- ticable. Unlike the UK’s Financial Reporting Review Panel, the ICAZ does not compel instant corrective action such as the publication of a revised set of accounts. It must be pointed out, however, that the primary concern of the ICAZ is to ensure compliance with

Zimbabwe financial accounting standards. Nevertheless, it has a secondary obligation to see to full compliance with all relevant disclosure provisions of the Companies Act, and the disclosure requirements of the ZSE.

MANDATORY DISCLOSURE AND ITS MEASUREMENT

Disclosure is the communication of economic information, whether financial or non-financial, quantitative or otherwise concerning a company’s financial position and performance. It is described as mandatory if companies are obliged under a disclosure regulatory regime to disclose insofar as they are applicable to them.

Disclosure implies the presentation of a minimum amount of information in corporate reports, sufficient to permit a reasonable evaluation of the relative merits and risks of listed securities (Griffin & Williams, 1960; Belkaoui, 1985). In this study, the disclosure of applicable mandated information items is the minimum standard of disclosure that regulatory bodies in Zimbabwe expect of the sample companies. Conceptually, disclosure of information in corporate financial reports is considered “adequate” if it is relevant to the


needs of users, capable of fulfilling those needs, and timely released (Buzby, 1974; Wal- lace, 1987). In other words, adequate disclosure in a corporate financial report is a function of the quantity and quality of information disclosed therein, the form in which they are presented, and how frequent and timely they are publicly reported. This study, however, focuses only on an aspect of adequate disclosure-the extent to which mandated applicable information items is presented in annual reports of the sampled companies. Adequate disclosure is, thus, operationalised as the number of mandated applicable information items that a listed company discloses, and the degree of intensity by which it discloses those items in its annual report.

To facilitate the quantification of the adequacy of mandatory disclosure practices of the sample companies, a disclosure measuring instrument (index) was developed and used. The measuring instrument consists of 32 disclosure items from the three regulatory sources in Zimbabwe (i.e., the adopted IA%, the Companies Act, and the listing rules of the ZSE). However, to capture the intensity of the disclosure of these items, they were disaggregated into 214 sub-items. Content validity of the instrument was tested with the help of two senior partners of two Big Five international audit firms operating in Zimbabwe. The vali- dated instrument was applied to the annual report of each sample company, and the applicable mandated items disclosed therein numerically scored on a dichotomous basis. That is, a mandated item is scored one, if disclosed, or zero if not disclosed. These scores were then aggregated to constitute the actual mandatory disclosure score for each sample company. To ensure reliability of the scoring instrument, a UK certified accountant was asked to score 12 of the sample companies (representing about 25 per cent of the total sample size). The results from the independent scores were compared with my own scores. The results suggest that I was in substantial agreement with the independent scorer; indicating minimal subjectivity in scoring the mandatory disclosures in the annual reports of the sample companies (Pearson product-moment correlation coefficient = 0.728, p-value = 0.004).

To avoid a situation where a sample company will be penalized for non-disclosure of certain mandated items in the index which, in fact, are inapplicable to it, a relative index was used (Babbie, 1994, p. 172). The relative index is the ratio of what the reporting company actually disclose to what the company is expected to disclose under a regulatory regime. The relative index approach has been used in prior studies (e.g., Wallace, 1988; Cooke, 1989a, Wallace et al., 1994; Inchausti, 1997).

The information items in the index were not weighted (i.e., equal weighting system was used) for two reasons. First, unweighted index obviates the necessity of making judge- ments as to the relative importance of each information item. Research shows that individuals (even experts) have poor insight into their own judgement process (see, e.g. Slavic, 1969; Ashton, 1974). Finally, it permits an independent analysis devoid of the perceptions of a particular annual report user group. This study does not focus on the interest of any particular annual report user group. In addition to the above reasons, the differential weighting system is beset by several problems which are well documented in the literature (see, e.g., Firer & Meth, 1986; Dhaliwal, 1980; Owusu-Ansah, 1998). Quite apart from that, in one earlier study it was demonstrated that the equal weighting system is superior to the differential weighting system (Einhom & Hogarth, 1975).

To determine whether or not the absence of a mandated information item from an annual report is a case of non-disclosure, I took several measures to minimize the subjectivity problem involved. First, because public companies are required by law to disclose compar-


ative figures for each information item, current figures of each item were compared with that of the previous year. For instance, a dash in front of an item under the column showing current year’s figures (i.e., 1994 in this study) suggests inapplicability of that item to a sample company in that reporting period. As in Buzby (1974) an item applicable to a specific sample company is defined as whether or not the item is disclosed in the annual reports of that company. Second, following a suggestion by Cooke (1989a), I read the entire annual report of each sample company twice. The first reading was just before each sampled annual report was scored to familiarize me with the circumstances of each company and to enable me to form opinion as to whether an undisclosed item was, in fact, inapplicable to that company. The second reading which was after an annual report has been scored ensured that the scoring has been consistent and any mistake rectified before the scores were totalled.

The corporate financial reporting literature suggests that several corporate attributes influence the extent to which listed companies comply with mandatory disclosure requirements of the stock exchange on which they are listed (see, e.g., Ahmed and Nichols, 1994; Wal- lace & Naser, 1995). However, attributes are selected for study if they meet all of the following five conditions. First, the attribute should be likely to associate with mandatory disclosure either on a priori assumption or on theoretical consideration. Second, it should be easily measured for the purpose of statistical analysis. Third, the attribute should be able to facilitate the classification of the sample companies into sub-samples without ambiguity, if it is categorical in nature. Fourth, data should be available on that corporate attribute. Finally, the attribute should be relevant to the socio-economic environment of Zimbabwe. The selected corporate attributes are: company size, quality of external audit, ownership structure of issued equity shares, type of industry, company age, MNC affiliation, profitability, and liquidity. The expected partial effect of each of the eight corporate attributes on mandatory disclosure is theorized below.

Company Size

Economic theory, intuition and empirical evidence suggest that size of a company is likely to positively influence its mandatory disclosure practices. Due to possible economies of scale in the production and storage of information, large companies tend to allocate relatively greater amount of resources to the production of information (Stigler, 1961; Alchian, 1969). Generally, large companies tend to be multi-product business entities; operating over wider geographical areas with several divisional units. Consequently, cen- tral managements of such companies will require internal information system which will enable them to make operational and strategic decisions concerning the divisions, and to ensure that the divisions are performing adequately in pursuit of overall corporate objec- tives. Since there is an information system already existing for mass production and circu- lation of data for internal purposes in large companies, the incremental cost of supplying non-proprietary data to the public is likely to be minimal (Dye, 1985, 1986, 1990). The general expectation that the costs of production tend to decrease as company size increases


underlie much consideration regarding the extent to which small companies are expected

to comply with disclosure rules.

Second, as Buzby (1975) argues disclosure in great detail puts small companies in competitive disadvantage with their large counterparts in the industry.* This suggests that the opportunity cost of mandatory disclosure may be higher for small companies than for large companies. They may, therefore, disclose less information than large companies.

The third factor which relates to the above is the direct cost of complying with disclosure requirements. Since gathering, generating, and disseminating of data are costly activities, small companies may not be able to afford such costs from their resource base. Salamon & Dhaliwal(l980) present evidence suggesting that the direct cost of complying with the US SEC’s 10-K filing requirements is relatively higher for small companies than for large companies. Hence, smaller companies may disclose less than their larger counterparts. Fourth, it has been established that increased disclosure by a company reduces its cost of capital3 (Choi, 1973; Elliott & Jacobson, 1994), and since large companies rely more heavily on the securities market for external financing of their operations than smaller companies (Shapiro & Wolf, 1972; cited in Salamon & Dhaliwal, 1980, p. 559), it follows that large companies are more likely to have extensive disclosure than small companies.

Indeed, using experience survey and focused interview approaches, Gibbins et al. (1990) found that the frequency with which companies issue securities influences their disclosure policies. Finally, empirical evidence confirms the hypothesized positive relationship between company size and disclosure (Cerf, 1961; Singhvi & Desai, 1971; Firth, 1979; Wallace, 1988; Cooke, 1989a, 1989b; Wallace et al., 1994; Inchausti, 1997).

Company size is measured by both total assets and market values of equity shares of sample company. The two size variables were logarithmically (base 10) transformed as their distributions were positively skewed.

Quality of External Audit

It is suggested that external auditors play a major role in the disclosure policies and practices of their clients. Specifically, the analyses by Benston (1980) and DeAngelo (198 la) indicate that audit quality is influenced by the size of the external auditing firm. DeAngelo (198 1 a), for instance, argues that the value of an external audit depends on how users per- ceive auditors’ report in corporate annual report. The perception is formed on the basis of users’ understanding of both the auditor’s ability to discover a material error (auditors’ technical capabilities), and the auditor’s willingness to properly report the error (auditors’ independence). She contends further that holding technical capabilities for all independent audit firms constant, large independent audit firms are more likely to lose when not reporting a mis-statement or an error. DeAngelo (198 1 b) and Fama & Jensen (1983b) suggest two reasons why large independent audit firms have a competitive advantage over small independent audit firms in reporting misstatement and non-compliance with mandatory reporting rules. First, since large independent audit firms have many clients, their economic dependency on a particular client is minimal. Thus, large independent audit firms have greater incentives to maintain independence from their clients. Hence, they are more likely to report any mis-statement and errors, and to ensure compliance by their clients with statutory and regulatory reporting rules than small independent audit firms. The results of

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the statistical tests of a recent study by Raghunathan et al. (1994) confirm this hypothesized relationship.

In addition, large independent audit firms have more to lose than small audit firms in terms of damages to their reputation. Consider the following example: if an independent auditor succumbs to the pressures of a particular client and it is discovered later, the value of that auditor’s services to other existing clients would be reduced. This may lead to

demands by the existing (and prospective) clients for lower fees or change of auditors. This is because users of corporate annual reports would heavily discount annual reports certified

by that auditor to reflect the reduced value of its services. It follows that the more clients an auditor has, the greater the losses from damages to its reputation. Consequently, large independent audit firms have greater incentives to resist client pressures for lax application of auditing and accounting standards. Another plausible factor may be that large audit firms have greater potential exposure to legal liability. This is because external auditors are liable for losses arising out of fraudulent or misleading certified annual reports. In addition, large audit firms tend to have more collective wealth among their partners. Since investors are more likely to rely on annual reports certified by large audit firms, and to sue for neg- ligence or misconduct on the part of the audit firm, large audit firms have greater incentives to conduct their audit with due diligence.

Furthermore, the findings from Wright’s (1983) study also corroborate this hypothesis. Wright presents evidence on auditors’ differential preference to disclosure. He studied the disclosure attitudes of various-sized independent audit firms and found significant differences in preferences. While large independent audit firms favor adjustment, small firms favor footnote disclosure. This implies that large audit firms are more inclined to adhere to statutory and regulatory rules than small audit firms as an adjustment is more likely to affect prior, current or the next financial year’s transaction, while footnote disclosure affects only the current year. Finally, positive relationship between disclosure and the quality of external audit has been reported by several studies (Cerf, 1961; Singhvi & Desai, 197 1; Patton & Zelenka, 1997).

Because audit quality is not directly observable and difficult to measure empirically, like several other researchers, I used size of audit firm as a proxy (Cerf, 1961; Singhvi, 1968; Singhvi & Desai, 1971; Tai et al., 1990; Wallace et al., 1994; Patton & Zelovka, 1997). However, I derived a Big Two (large) and non-Big Two (small) audit firm classification

using concentration ratios derived from the market for audit services in Zimbabwe as the original derivation of Big Six audit firms in the UK and the US is not relevant in the case of Zimbabwe. A concentration ratio is defined as the extent to which a market is dominated by a few large suppliers. Although the dichotomization of audit firms used in this study dif- fers from the prevailing practice in the literature, it is not without precedent. Singhvi (1968) and Lee ( 1994) derived and used concentration ratios arising from a study of the audit services market in India and Hong Kong respectively. A sample company audited by a Big Two audit firm is represented by a dummy of one and zero if otherwise.

Ownership Structure

It is assumed that a wider dispersion of share ownership of a company is associated with it’s compliance with mandatory disclosure rules. This proposition is explained in terms of


positive (agency) theory of accounting because modern companies are characterized by a separation of ownership and control. This arrangement for corporate control generates agency costs resulting from conflicting interests between management and owners and across classes of owners (Jensen & Meckling, 1976; Fama &Jensen, 1983a). Agency costs tend to be higher for companies with a widespread public ownership of securities, therefore, shareholders of such companies press for more adequate information for monitoring

purposes (Watts, 1977).

The complementary view asserts that professional managers of such companies have greater incentives to engage in bonding activities to reassure shareholders that they will be acting in their (shareholders’) interest. The provision of adequate information to sharehold-

ers through the annual report is one element of bonding activities (Jensen & Meckling, 1976; Watts, 1977). Since management probably already produces much of the desired information for internal decision making purposes, the marginal cost of making this information available to outside users is likely to be lower than for other alternatives. Hence, the tendency for a company with greater number of public individuals on its share register (high agency costs) to adequately disclose information in its annual report is likely to be high.

In contrast, however, in countries where the state (e.g., China), banks (e.g., Germany and Japan) or certain families (e.g., Hong Kong) have substantial equity holdings or where equity ownership is highly concentrated, there is generally little or no physical separation between those who own, and those who manage the capital (Wallace, 1987, 1993; Wallace & Nasar, 1995; Cooke, 1992, 1993; Kaplan, 1990). In such cases, capital owners have greater access to internal information of the company, and may not have to rely, to a greater extent, on public disclosure to monitor their investments. Thus, demand for adequate disclosure and reporting is generally low in such situations.

There does exist, however, a contrary view to the explanations offered by agency theo- rists outlined above. Zeckhauser & Pound (1990) argue that dispersed individual shareholders are not a formidable influence on corporate outcomes including disclosure policies and practices, even if the net benefits are great enough to provide significant incentives to become informed. Their argument implies that where share ownership is more widely-dispersed, individual public shareholders do not have the same bargaining power vis-b-vis the company to access internal information of the company. It follows that the claim and the presumed empirical observation that companies with dispersed ownership have superior disclosure is suspect.

The share ownership structure is defined as the proportion of the voting shares of a sample company owned directly and/or indirectly by corporate insiders. Proportion of outstanding equity share capital held by relatives of management and/or board members is described by the Zimbabwean Companies Act as indirectly (non-beneficial) held by them, and is required to be disclosed in the audit annual report of the company concerned.

Industry-type

Following Sprouse’s (1967) suggestion that accounting policies and techniques may vary by industry, I speculate that mandatory disclosure practices of companies are not likely to be the same across different industries. There are several reasons for this specula-


tion. First, certain industries are highly regulated due to their overall contribution toward a country’s export earnings or national income. They may, therefore, be subject to more rig- orous controls. It is possible that the regulation may affect the disclosure and reporting

practices of the companies in this industry. Second, companies in certain industries may have difficulties in reporting adequately due to the nature of work involved. For instance, companies in the oil industry are known to have serious problems in accounting for and reporting depreciation, depletion and exploration of oil wells. Finally, disclosure differential may also be associated with the type of product line or the diversity of products of the companies in an economy. These specific industrial characteristics (or patterns) may man- ifest themselves in different ways. A consumer-product company may be particularly concerned with its public image and, as such, may tend to comply with all mandatory rules. Similarly, a company that deals in multi-products may have more information to share than one with a small line of products.

The association between industry-type and mandatory disclosure is partially supported by empirical evidence. Stanga (1976) and Fekrat et al. (1996) found industry-type to be a significant factor accounting for the differences in the disclosure levels of the companies in

their sample.

A sample company’s industry is defined as the main economic activity in which it derives its revenue. The annual reports of the sampled companies were examined for the detailed information about their principal economic activities. Four broad industries were identified, namely, conglomerate, mining, manufacturing and others. The “others” category consists of companies engaged in agricultural, transport, communication, retailing and hoteling businesses. A sample company, for instance, is classified as conglomerate if it derives its revenue from more than one economic activity irre- spective of the proportional contribution of one principal economic activity to its

annual total revenue. The industry variable is coded as follows: Indusl = one for “others” and zero otherwise; Indus2 = one for mining and zero otherwise; Indus3 = one for manufacturing and zero otherwise; and Indus4 = one for conglomerates and zero

otherwise.

Company Age

The extent of a company’s mandatory disclosure may be influenced by its age (stage of development and growth). Older, well-established companies are likely to disclose much more information in their annual reports than younger companies. There are three factors that may contribute to this phenomenon. First, younger companies may suffer competitive disadvantage if they disclose certain items such as information on research expenditure, capital expenditure, and product development. The competitive disadvantage would arise when the information disclosed by the newly-established companies are used to their detriment by the other competitors. On the other hand, older companies may naturally be motivated to disclose such information as their presentation may not hurt their competitive position. Second, the cost and the ease of gathering, processing, and disseminating the required information may be a contributory factor. These costs are likely to be more onerous for younger companies than for their older counterparts. Finally, younger companies may lack a “track record’ to rely on for pub-


lit disclosure. This is explained by the fact that some companies are formed through

acquisition or merger of existing companies, while others are formed from scratch.

Companies formed from scratch would not have any past operating histories of their

own. Such new companies may have less incentive to disclose more information. The

company age variable is measured on six monthly basis since flotation date to the finan-

cial year ending in 1994.

MNC Affiliation

It is assumed that the extent of a company’s mandatory disclosure is influenced by its

affiliation with a recognized MNC. First, because of MNCs’ direct financial investment in

their affiliates (subsidiaries and associates) in emerging economies, the former tend to

demand a greater amount of information than is required by local regulations from the lat-

ter to evaluate their performance, and prospects.

Second, the political costs of affiliates of MNCs are relatively high. The perfor-

mance, behavior, and consequences of the operations of MNCs and their local affiliates

are frequently monitored, evaluated, and analyzed by international governmental agen-

cies such as the United Nations and host governments to serve as a basis for policy for-

mulation. This is partly explained by the important economic role MNCs play in the

development of their host countries and in the world trade. The relatively high level of

local economic activities under the control of foreign MNCs has led to political pres-

sure for the social control of these entities, and their local affiliates in emerging econo-

mies. In fact, some regard MNCs as sources of exploitation and agents of western

imperialism (Kobrin, 1978, p. 240). The control of the local activities of these MNCs is

partly also due to the alleged frequent abuse of corporate power by a few MNCs. Sev-

eral MNCs have been accused, by their host countries, of tax avoidance (through trans-

fer pricing), tax evasion, circumventing exchange controls, and discriminatory

practices. To improve their bargaining powers with their host countries, MNCs tend to

require detailed information on the operations of their affiliates. Also, because of high

political costs, MNCs are more likely to insist on full compliance with all statutory and

regulatory requirements of the host countries by their affiliates.

Finally, foreign direct investments by MNCs are often accompanied by technology

transfer, including the accounting and disclosure practices at home, to their affiliates in

emerging economies. This transplantation of foreign technology has enabled local affili-

ates to adopt more advanced systems relative to other local companies that are not so

affiliated. As a consequence, these affiliates are likely to have more sophisticated finan-

cial reporting systems that facilitate greater disclosure in their annual reports than other

local non-affiliated companies.

A sample company is considered to be affiliated to a recognized MNC if one of the following criteria is satisfied: (1) more than 50 per cent of its outstanding equity shares

is owned by a recognized MNC, or (2) a MNC has a significant influence on its finan-

cial and operating policies (see IASC [19951 for several ways by which significance influence is exercised). A sample company is assigned a numeric value of one if any of the above criteria applies and zero if otherwise.

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Profitability

Profitability has been identified, in prior studies, as capable of influencing the extent to which companies disclose mandatory information items in their annual reports (Cerf, 196 1; Singhvi, 1968; Singhvi & Desai, 1971; Wallace & Naser, 1995; Inchausti, 1997). Several arguments have been advanced to support this proposition. For example, Cerf (1961) suggested that profitability is a measure of management performance, and as such the management of a profitable company is likely more to disclose information to support the continuance of their positions and the performance-related compensatory schemes that may be due to them. Inchausti (1997) employing signalling theory, states that management when in possession of “good news” due to better performance are more likely to disclose more detailed information to the stock market than that provided by “bad news” companies to avoid undervaluation of their shares. It can also be argued that unprofitable companies will also be inclined to release more information in defence of poor performance. Indeed, Lang & Lundholm (1993, p. 250) note that the influence of a company’s profitability level on disclosure can be positive, neutral or negative depending on its performance.

Profitability is measured in two ways to capture different dimensions of profitability-operational efficiency (by return on turnover) and overall performance (by return on capital employed) of the reporting company.

Liquidity

It is hypothesized that a company’s liquidity level impacts on its mandatory disclosure practices. According to Wallace & Naser (1995), regulatory bodies as well as investors and lenders are particularly concerned with the going-concern status of companies. In view of this, companies that are able to meet their short-term financial obligations without a

recourse to the liquidation of their assets-in-place may desire to make this known through disclosure in their annual reports (Belkaoui & Kahl, 1978).

A sample company’s liquidity position is measured by quick (acid test) ratio as it is a more stringent measure of corporate liquidity. It is defined as the ratio of current assets less stock to current liabilities. Using the conventional benchmark for acid-test ratio of one, companies in the sample whose computed acid-test ratio is at least one are assigned a numeric value of one and zero if otherwise.

METHODOLOGYANDRESEARCHDESIGN

Sampling Method

Due to the relatively small number of companies on the Official List of the ZSE, I con- tacted the entire population by post for a copy of their audited annual reports for the financial year ending in 1994.4 The request for the 1994 corporate annual reports was influenced by two factors. First, they were the most recent data available on the listed companies at the start of the study. Second, 1994 was more stable than the previous two years. Zimbabwe experienced a severe drought in 1992 which adversely affected its entire micro- and macro-economic structures. The Zimbabwe economy showed signs of recovery during the


Table 1. Summary of Sample Selection Criteria

Description

No. of Percentage of

listed companies the total population

Companies with equity shares on Official List

of the market as at 31 December 1994

Companies on the Official List that responded to my

request for their 1994 annual reports

Deduct:

64.0 1oo.00

56.0 87.50

Companies that listed in the last quarter of 1994

Companies in the banking, insurance, and other

financial services industry

Companies with usable data (that is, the sample size)

2.0 3.10

5&!I ZIsL

49.0 76.56 -

latter half of 1993. Since compliance with legal and regulatory requirements entails costs, it was assumed that the listed companies may adopt selective disclosure strategy during 1992 and 1993. The use of a selective disclosure strategy would arise when compliance with reporting requirements will expose corporate reporters to adverse consequences. In such a situation, any attempt to capture disclosure adequacy in corporate annual reports will not be representative of the normal practice.

After a follow-up letter,5 56 of the 64 listed companies responded to the request for their annual reports. Some of the responding 56 companies were de-selected on the following basis. First, companies which were listed on the ZSE less than a year were eliminated. This was based on an assumption that the full impact of the disclosure requirements of the stock exchange on the financial reporting practices of listed companies can only be assessed real- istically if they had been listed on the market for more than a year. On the basis of this assumption, two companies which listed on the ZSE in 1994 were eliminated. The second criterion was the elimination of companies registered under the Banking Act (Chapter 188) because such companies are exempt from complying with certain accounting requirements of Part I of the Companies Act. Hence, to ensure uniformity in financial reporting, five of these companies were de-selected. The resulting final sample consists of 49 companies, 43 (86 percent) of which are from the industrial sector of the ZSE, while the remaining six (14 percent) are from the mining sector. Although the sample is drawn entirely from ZSE listed companies, it is a true representation of the population of non-financial companies in Zim- babwe. Table 1 reports the sample design.

Model Development

A linear regression model which is assumed to hold for each sample company is speci- fied below:

MDSj = cx + plSizej + P2Auditj + p3Holdj + p41ndusj

+ p,Agej + P,Mult$ + p7Profi$ + &Liquidj + lJj (1)

See Table 2 for summary definition of variables.

618 THElNTERNATlONALJOURNALOFACCOUNTlNG Vol.33,No.5,1998

Table 2. Summary Statistics of Variables, Proxies and Notations in the Regression Model

Variable Proxy of investigated variable

Nofafion in

model Mean Standard deviation

Mandatory disclosure Relative disclosure score

Company size Log of capitalised equity values

Log of total assets Audit quality Concentration ratio

Ownership structure Proportion of outstanding equity

shares held by corporate insiders

Industry type Principal economic activity(ies)

Company age Half-yearly since flotation date

to December 1994

MNC affiliation Either ownership of more than

half of the share capital or the

presence of significant influence

Profitability Returns on turnover

Return on capital employed Liquidity Acid-test ratio

MDsi 74.43 4.96 Sizejl 5.463 0.466

Sizei, 5.419 0.443 Audit/ 0.53 1 0.504

Hold, 6.699 15.388 Indusj 1.918 1.038

Agej 51.143 28.827

Multi, 0.306 0.466

Profitjt 16.584 9.336 Prot$ 9.380 7.401

Liquidj 0.388 0.492

EMPIRICAL RESULTS AND DISCUSSION

Table 3 summarizes the cross-sectional regression parameters of the four alternative specifications of equation (1) referred to hereafter as Models A, B, C, and D.

Since this study is concerned with the partial effect of each of the corporate attributes on the extent of mandatory disclosure and reporting, I tested for the presence and the nature of collinearity, if any, before any formal estimation of equation (1) was done by computing pair-wise correlation, tolerances (Panel B of Table 4) and variance (Panel C of Table 4) inflation factors (VIFs) for each corporate attribute.6 The pair-wise correlations are reported in Panel A of Table 4. Only the correlation coefficient of the two empirical indicants of company size (i.e., log market values of equity and log total assets) is greater than the threshold level of 0.80.7 Consequently, these indicants were not simultaneously included in any of the models. Though the sign of the coefficient and the associated observed significant level of the company size variable were the same, no matter which empirical indicant was used, it was measured by log total assets in all the regression models in Table 3.

Only one of the empirical indicants of the profitability variable (i.e., return on capital employed) was also included in the models reported in Table 3 for three reasons. First, the correlation coefficient of the two measures of profitability was significant, though it was below the threshold level of 0.80. Second, the inclusion of the two measures in any model renders the sign of the coefficient of the profitability variable negative, but not when included individually. Finally, the profitability variable becomes a significant predictor of mandatory disclosure whenever it is measured by return on capital employed.

Model A

Model A is a simple ordinary least squares (OLS) regression equation run with all the corporate attributes included. As was also indicated by the results of a univariate


Table 3. The Partial Effects of Corporate Attributes on Mandatory Disclosure (tvalues in parentheses)

Variable investigated

Expected effect on mandatory

disclosure

Model

A B C D

Intercept

Company size

Audit quality

Ownership structure

Industry-type’

Company age

MNC affiliation

Profitability

Liquidity

Adjusted R-squared

F statistic

Sum squares of error Number of observations

Degrees of freedom

7 60.755*** 4.672 55.130*** 54.227***

(6.205) (I ,236) (6.784) (5.296)

+ 1.340 0.040 3.404** 3.059*

(0.792) (0.875) (2.298) (I ,720)

+ -0. I I9 0.163 0.33 I 0.096

(-0.082) (0.128) (0.287) (0.063)

_ 0.073 0.08 I 0.0x2** 0.093%

(I .4X4) (I .546) (2.143) (1.814)

? -0.567 -0.472 -1.416”* -I ,039

(-0.787) (-0.760) (-2.352) (-1.371)

+ 0.056** 0.133** 0.06 I ** 0.057**

(2.281) (2.361) (3.016) (2.235)

+ 2.452 2.870** 3.569* 3.424**

(1.541) (1.983) (2.767) (2.047)

‘I 0.843 0.009 0.067 0.259**

(0.825) (0.196) (0.625) (2.412)

+ I.311 1.250 0.447 0.633

(0.875) (0.970) (0.362) (0.402)

0.052 0.045 0.345 n/r 1.326 1.284 3x30*** 2.420**

933.77 681.32 482.00 n/r

49.00 49.00 44.00 49.00

48.00 48.00 43.00 n/r

Nom: * Significant at the 0.1 level.

** Significant at the 0.05 level.

*+* Significant at the 0.01 level.

? indicates that the nature of the effect of the corporate attribute on the extent of mandatory disclosure, as far as

Zimbabwe is concerned, 1s not known.

n/r indicates that the statistic is not reported by the estimation procedure.

*Using the “others” industry category (Indusl) as a reference, in all the models, a hypothesis that the industry

dummies are jointly zero was rejected by a Wald test. However, there appears co be is no ewdence that mandatory

disclosure is industry-related. Also, except for between the coefficients for Indus.7 (manufacturing) and Indus4

(conglomerate) which was significant (F-statistic = 5.42, p-value = 0.0253): the differences between the

coefficients for the rest of the industry-type dummies were not significant.

analysis not reported here, mandatory disclosure is an increasing function of only one corporate attribute, company age. Although the impact of company age on mandatory disclosure measured by its regression coefficient is not strong, it is significant at the 0.05 level. The t-statistics of the remaining corporate attributes are insignificant, indicating that they have negligible effect on mandatory disclosure practices of the sample companies.

I subject Model A to several diagnostic tests. A hypothesis that the model has no omitted variables was rejected by a Ramsey RESET test (F = 0.68, p-value = 0.572). Also, a Cook-Weisberg test for heteroscedasticity rejected a hypothesis that the regression residuals have constant variance (X2 = 1.61, p-value = 0.205). Further, a Cook’s distance test revealed that five companies (observations) in the sample exert disproportionate influence on the model’s coefficients.

Tab

le 4

. M

easu

res

of c

ollin

earit

y of

the

em

piric

al

indi

cant

s of

the

cor

pora

te

attr

ibut

es

Var

iabl

e A

cid

test

A

ge

Aud

it

Ret

urn

Log

Log

Ret

urn

on

insi

der

mar

ket

tota

l on

ca

pita

l M

NC

in

dust

ry

hold

ing

valu

e as

sets

tu

rnov

er

empl

oyed

af

filia

tion

Pan

el

A:

Pea

rson

pr

oduc

t-m

omen

t co

rrel

atio

n m

atri

x

Aci

d T

est

Age

A

udit

Indu

stry

Insi

der

hold

ing

Log

m

arke

t va

lues

Log

to

tal

asse

ts

Ret

urn

on t

urno

ver

Ret

urn

on c

apita

1 em

ploy

ed

MN

C

affi

liatio

n

Pan

el

B:

Tol

eran

ce’

I .oo

oo

-0.0

539

-0.0

069

-0.0

539

1 .oo

oo

0.06

06

-0.0

069

0.06

06

1 .oo

oo

-0.2

672

* 0.

02 1

9 -0

.124

3

-0.0

359

-0.0

762

-0.1

005

-0.0

222

-0.0

728

0.06

95

-0.0

534

-0.0

434

0.17

96

0.04

98

-0.1

164

-0.0

264

0.11

00

0.03

83

-0.0

808

-0.0

742

-0.0

359

-0.0

85

1

Tes

t st

atis

tic

0.87

38

Pan

el

C:

Var

ianc

e in

flat

ion

fact

or

(VIF

jtt

Tes

t st

atis

tic

1.14

0.95

4 1

1.05

0.85

87

0.71

56

0.83

51

0.17

87

0.18

19

0.58

12

0.55

27

0.82

62

1.16

1.

40

I .20

5.

59

5.50

1.

72

1.81

1.

21

-0.2

672*

-0

.035

9 -0

.022

2 -0

.053

4 0.

0498

0.

1100

-0

.074

2 0.

0219

” -0

.076

2 -0

.072

8 -0

.043

4 -0

.116

4 0.

0383

-0

.035

9 -0

. I2

43

-0.1

005

0.06

95

0.17

96

-0.0

264

-0.0

808

-0.0

85

1

I .oo

OO

0.

0908

P

O.0

397

0.02

48

-0.2

703*

0.

0379

-0

.139

0 0.

0908

1 .

oOQ

o -0

.151

9 -0

.122

9 -0

.113

6 -0

.219

3 -0

.235

2 -0

.039

7 -0

.151

9 1 .

oooo

0.

X88

9***

0.

1267

-0

.31x

3**

0.13

73

0.02

48

-0.1

229

0.88

89**

* 1 .

oooo

0.

1686

-0

.251

1*

0.09

49

-0.2

703

* -0

.113

6 0.

1267

0.

1686

1 .

oOO

o 0.

427

I ***

-0

.062

7 0.

0379

-0

.2

193

-0.3

183*

* -0

.25

1 1 *

0.42

71**

1 .

oooo

0.

0779

-0

.139

0 -0

.235

2 0.

1373

0.

0949

-0

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7 0.

0779

1 .

oooo

Not

es:

* T

wo-

taile

d si

gnif

ican

t at

the

0.1

lev

el.

** T

wo-

taile

d si

gntf

ican

t at

the

0.0

5 le

vel.

***

Tw

o-ta

iled

sign

ific

ant

at t

he 0

.01

leve

l.

iCol

linea

rity

is

a p

robl

em

if th

e m

easu

re o

f to

lera

nce

of a

var

iabl

e is

zer

o (G

ujar

ati,

1995

, p.

339

).

“The

ge

nera

l ru

le s

ugge

sts

that

col

linea

nty

is a

pro

blem

if

the

VIF

of

an i

ndep

ende

nt

vari

able

ex

ceed

s 10

(G

ujar

an.

1995

, p.

339

)


Two ways have been suggested in the econometrics literature (see, e.g., Bollen & Jack-

man, 1990; Kassab, 1990) to mitigate the effects of influential observations on regression statistics. The first is to estimate a rank regression which assigns “equal weight to all

points” in a data set whether it is influential or not (Iman & Conover, 1979, p. 502). The

second is to remove the influential observations from the data set. To address the problem of outliers, the next two models were estimated based on the above suggested procedures.

Model B

Model B is a rank (OLS) regression which treats all observations equally in the data set whether it is influential or not. Rank regression has been estimated in several prior studies

(see, e.g., Lang & Lundholm, 1993; Wallace et al., 1994; Wallace & Naser, 1995). Model

B was estimated with rank transformation of the MDSs of the sample companies and four

corporate attributes measured on continuous scale (i.e., company size, ownership structure, company age, and profitability). The raw (untransformed) data on the empirical indicants

of these corporate attributes and the MDSs were assigned ranks; ordered from smallest to largest. The regression was run with these ranks* plus those corporate attributes measured

on interval scale (i.e., external audit quality, industry-type, MNC affiliation and liquidity).

While the F statistic of Model B which tests the hypothesis that none of the corporate

attributes helps to explain the variation in mandatory disclosure indexes is not significant at the conventional levels (p-value = 0.279), an examination of the regression statistics for

the individual corporate attributes suggests otherwise. For instance, company age emerges again as the most significant predictor of the extent of mandatory disclosure at the 0.05

level. The MNC affiliation variable, for the first, also became significant at the 0.10 level.

The consequence of the variable, MNC affiliation, becoming a significant predictor of mandatory disclosure is the intercept losing its significance. The intercept also experienced

a drastic change in the numerical value of its coefficient (now having only a moderate effect), though, it is still positive. While rank regression is considered “robust” in mitigat-

ing many of the methodological problems associated with skewed distribution and nega-

tive values (Kane & Meade, 1997), Wallace et al. (1994) noted, however, that rank

transformation compromises the significance of the resulting model. Indeed, this is evident in Table 3. The explanatory power of Model B is relatively weaker than those of Models A and C.

Model C

As noted earlier, another means of overcoming the effect of influential observations is to remove those observations from the data set. Model C which is also an OLS was estimated after those influential observations have been removed from the data set. The results of this model suggest that five of the corporate attributes have statistically significant effect on

mandatory disclosure. While company age and MNC affiliation have a positive significant effect on mandatory disclosure at the 0.01 level, company size and ownership structure of

issued equity shares have a positive significant effect at the 0.05 level. Also, the industry-type variable, for the first time, became significant at 0.05 level but still have a negative


effect on mandatory disclosure. Further, like the other models the intercept of Model C is

also positively significant at the 0.01 level.

In spite of the relatively good performance of Model C, the data-removal procedure has been criticized in the econometrics literature (see Dietz et al., 1987; Bollen & Jackman, 1990; Kassab, 1990). For instance, Bollen & Jackman (1990) argued that the data-removal procedure is misleading and a severe remedy because an observation that is an outlier in one setting may not be an outlier in another. Kassab (1990) also added that deleting outliers identified by univariate diagnostic tests such as stem-and-leaf plot is not effective as they do not detect multivariate outliers (i.e., those observations appearing as outliers when two or more variables are viewed in combination).

Another problem of the data-removal procedure is that it reduces sample size which may not be advisable if the sample size is small, as in this study. Quite apart from these, identi- fying the outliers is not enough. The presence of outliers in a distribution merely suggests that the sample is not from a normal distribution; it does not tell whether the distribution is skewed or long-tailed symmetric. In view of this problem and the fact that theoretical advantages of OLS estimates can not be claimed for the estimates of Models A, B and C as my data is outlier-prone, I employed an estimator which is more “robust” than the OLS to

departures from normality. This estimation procedure is now discussed.

Model D

Model D is a r&~st regression. Estimates of robust regression are substantially better than those of OLS in non-ideal (e.g., if residuals are not normally distributed) situations (Kassab, 1990). Several robust estimators have been suggested in the econometrics literature including least absolute deviations, bounded influence estimator, least median of squares, biweight least squares (BLS) and Huber estimator (the procedures are described in Dietz et al., 1991, pp. 464-466 and 474). Both the Huber and the BLS robust estimators were employed in analyzing the data of this study. The rationale is that the Huber estimator improves the behavior of the BLS estimates (Stata Corporation, 1997). Huber estimator is limited in dealing with effects of severe outliers which BLS is able to resist fairly, but sometimes fail to converge to zero or have multiple solutions (Li, 1985; Dietz et al., 1987; Dietz et al., 1991; Stata Corporation, 1997).

The Huber and the BLS estimators are iterative techniques which assign weights to observations. The weights are based on absolute residuals associated with each observation on a previous iteration (Stata Corporation, 1997). The Huber estimator assigns observations with small residuals with weights of one, and those with larger residuals receive smaller weights. In the case of BLS, however, observations with non-zero residuals are down-weighted, but those with larger residuals are assigned zero weights and thus effec- tively dropped. The regression is run iteratively until the maximum changes in weights converge to zero (Li, 198.5). The results of this estimation procedure (Model D), also reported in Table 3, suggest that company size, ownership structure, company age, MNC affiliation, profitability, and the intercept have statistically significant effect on the extent of mandatory disclosure, but at different levels. However, while the intercept is very significant at the 0.01 level, company age, MNC affiliation and profitability are significant at the 0.05; and company size and ownership structure are significant at 0.10 level.


Because sampling properties of robust estimators are not known in small samples (Dietz et al, 1987; Dietz et al., 1991; Stata Corporation, 1997), and the sample size of this study is small I employed a non-parametric bootstrap procedure, as suggested in the econometric literature, to assess the sampling variability of robust estimators of Model D (i.e., to re-estimate the standard errors of the coefficients of Model D).9 Bootstrapping provides a means of estimating standard errors and obtaining confidence intervals for true parameter values when distributional assumptions of the population are untenable. Mechanically, the bootstrap procedure works as follows: For a sample of II size, a bootstrap sample of k size is ran- domly drawn from the original sample with replacement. The regression coefficients are estimated using this bootstrap sample. A second bootstrap sample of k size is then drawn from the original sample, and the process is repeated (called a replication) until enough bootstrap samples have been drawn to provide estimates of the standard error of the parameters of interest. Some observations may not be selected at all in the process, while others

may appear more than once (Efron, 1982; Rasmussen, 1987).

Complementing the robust regression with the bootstrap procedure provides efficient and unbiased parameter estimates and unbiased estimates of standard errors (Dietz et al., 1987). Thus, robust and bootstrap estimation procedures, when used together, resolve the problem of non-normal residuals. The regression estimates of Model D reported in Table 5 are based on 100 bootstrap replications. lo The bias in sample estimates of the regression coefficients because of the outliers are also reported in Table 5. Efron (1982, p. 8) suggests that the estimated bias should not be of concern if it is less than 25 per cent of the associated standard error. He suggests further that the bias-corrected confidence interval should be reported instead, if the estimated bias is more the 25 per cent threshold. All the estimated bias shown in Table 5 except those for MNC affiliation and profitability are below 25 per cent of the associated standard errors. Hence, the reported confidence intervals for these two corporate attributes are bias-corrected. The confidence intervals for the other six corporate attributes are based on the assumption of approximate normality of the sampling (and hence bootstrap) distribution.

The assumption of normal distribution of regression residuals makes it possible to evaluate the statistical significance of the effect of each of the corporate attributes on the extent of mandatory disclosure as reflected by Model D. Consequently, a normality test was done

Table 5. Bootstrapped estimates of Model D

Corporate attribute invesfiaa ted

Observed Percentage Confidence BLS Standard bias of interval

coefficient error Bias standard error (5 oercent level)

Company Size 3.059

Audit quality 0.096 Ownership structure 0.093 Industry-type -1.039 Company age 0.057 MNC affiliation 3.424 Profitabilty 0.259 Liquidity 0.633

3.206 -0.337 IO.51

2.017 0.067 3.32

0.061 -0.002 3.28 I.325 0.003 0.23

0.034 -0.005 14.71 2.662 -0.716 26.90

0.255 -0.146 57.25 2.257 0. I33 5.89

-3.303 -9.421

-3.907 -4.098

-0.028 -0.2 I4 -3.670 -1.591

-0.009 -0. I 24 -2.617 -8.603’

-0.282 -0.492+

-3.846 -5.112

Note: ‘Suggests a bias-corrected confidence interval, as the estimated bias IS mire than 25 percent of the standard ermr (Efron. 1982).

624 THElNTERNATlONALJOLlRNALOFACCOUNTlNG Vol.33,No.5,1998

I 1. I I .J_ 1.00 -

0.75 -

F

z 3 5 b z 0.50 -

ii

E z

0.00 I I

0.00 0.25 0.50 0.75 1.00 Empirical P[i] = i/(N+l)

Figure 1. Normal probability plot of regression studentised residuals of Model D

on the studentized residuals of Model D. A visual inspection of the normal probability plot

of studentized residuals of Model D in Figure 1 suggests that its error term is fairly nor-

mally distributed as the data points cluster around the straight line.

The result of the positive effect of company size on mandatory disclosure, though signif-

icant at the 0.10 level, suggests that large companies are better in disclosing mandated

information as their competitive advantage will not be weakened by such disclosure as it

might be for small companies. In addition, large Zimbabwean companies that are affiliated

with MNCs tend to have access to modern technology and are more capable of producing

information that are less costly than non-MNC affiliated Zimbabwean companies. Hence,

the tendency for such companies to disclose more information in their annual reports is

more likely in Zimbabwe. The positive relationship between company size and mandatory

disclosure is consistent with the results of similar studies conducted on some emerging

economies such as in Hong Kong (Wallace & Naser, 1995); and in Bangladesh (Ahmed & Nicholls, 1994).

The positive effect of MNC affiliation on mandatory disclosure can be attributed to the

insistence of head offices of MNCs for high quality information from their local affiliates

in Zimbabwe. Apart from the use of this information for internal purposes, the headquar-

ters of MNCs use such information to strengthen their bargaining power in negotiations

with trade unions and host governments. Of particular relevance here is the fact that the

President of the Republic of Zimbabwe is well noted for his position on the ill-effects of

imperialism and activities of MNCs on developing countries’ economies and other issues

in international politics. In view of this, MNCs with affiliates in Zimbabwe insist on full


compliance with that country’s statutory and regulatory requirements as a means of avoid-

ing or reducing political costs.

The finding that ownership structure is positively related to mandatory disclosure is

inconsistent with agency theory. In the context of disclosure studies, this theory suggests that companies whose equity shares are predominately held by insiders tend to disclose less information in their annual reports. The positive relationship between ownership structure and mandatory disclosure, reported in this study, questions the general assumption that in countries where either the state (e.g., China), banks (e.g., Germany and Japan) or certain families (e.g., Hong Kong) hold greater proportion of corporate voting shares, there is a tendency for companies to disclose less information in their annual reports and accounts (Wallace, 1987, 1993; Wallace & Naser, 1995; Cooke, 1992, 1993; Kaplan, 1997). Per- haps, the implications of the agency theory for disclosure relate more to voluntary disclo-

sure than to mandatory disclosure.

Although the impact of company age on mandatory disclosure is not strong, it is significant at the 0.05 level. The positive impact of company age on mandatory disclosure can be explained in terms of the principles of learning curve. It takes newly-listed companies longer time to become used to the demands of being public companies including their external financial accounting and reporting responsibilities. In other words, a company’s disclosure score increases over time as it becomes used to being a public listed company. The superiority of the older listed companies on the ZSE in disclosure practices can also be attributed to their long association with corporate managers of some UK companies. Indeed, most of these older companies in Zimbabwe were once managed by UK expatriates in that country before the country’s independence in 1980. In spite of the above reasons, the hypothesised relationship was, however, not supported in Henderson (1969).

Similarly, the positive effect of profitability on mandatory disclosure is consistent with signalling theory which, when applied in the present context, suggests that managers of profitable companies are more likely to disclose more information in their annual reports to justify their salaries (Singhvi & Desai, 1971), and to signal their superior performance to the market (Wallace et al., 1994). The significant positive relationship between profitability and mandatory disclosure is consistent with the results reported in Wallace et al. (1994).

The finding that audit quality is not a significant predictor of the extent of mandatory disclosure in Zimbabwe agrees with those of Singhvi (1968) for India; Tai et al. (1990) for Hong Kong; Cooke (1992) for Japan; and Wallace et al. (1994) for Spain. Similarly, the finding that industry-type is not a significant discriminator agrees with those of Patton & Zelenka (1997) in the Czech Republic. Finally, the irrelevance of liquidity as an explanatory variable in Zimbabwe agrees with the finding of Wallace & Naser’s (1995) in Hong Kong.

CONCLUSIONS, LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH

This article reports the results of an empirical study in which the impact of eight corporate attributes on mandatory disclosure was investigated by employing alternative specifications of a multiple linear regression. The results of the robust regression analysis indicate that each corporate attribute has a differing impact on mandatory disclosure.


While company age, profitability, and MNC affiliation were positively significant at

the 0.05 level, company size and ownership structure were also positively significant at

the level of 0.10. On the extreme, whereas the intercept is significant at 0.01 level,

audit quality, industry-type and liquidity were not significant at any of the three crite-

rion levels. In sum, company age, MNC affiliation, company size, MNC affiliation,

profitability, company size, and ownership structure have significant positive impact on

mandatory disclosure practices of the sampled ZSE listed companies. The results sug-

gest that the regulators of financial accounting and reporting in Zimbabwe should focus

more on newly-listed, small, loss-making, non-affiliated and closely-held companies in

their effort to ensure adequate supply of mandated information in corporate annual

reports in Zimbabwe,

There are several limitations of this study. First, the subjectivity problem inherent in

scoring the annual reports of the sample companies may not be completely eradicated.

There are unavoidable subjectivity in the scoring process. Second, each disclosure item

was assumed to have the same information content. Thus, a disclosed mandated infor-

mation item was awarded one mark and zero for a non-disclosure. In the real life, some

information items may have higher value to users of corporate annual reports than oth-

ers, and as such the items should have been weighted to reflect their relative impor-

tance. Third, regression analysis does not resolve issues of causality. Consequently, the

coefficients of the significant corporate attributes in the Model D should not be taken

as elasticities that predict how much mandatory disclosure will change following a

change in any of those attributes. The estimated coefficients of these attributes and

their associated t statistics rather evaluate the strengths of their partial effects on manda-

tory disclosure. Finally, while statistical analysis helps to determine the nature and the

magnitude of the impact of the significant corporate attributes on mandatory disclosure,

it tells nothing of the reason for such relationship.

Notwithstanding the above limitations, the results are sufficiently interesting to war-

rant an extension to a larger sample size, and of course, to other emerging economies.

Another approach that could be adopted in any future research is to model the relation-

ships between corporate attributes and mandatory disclosure as non-linear. The relation-

ship between specific corporate attributes and mandatory disclosure may not always be

linear as generally assumed in the literature. Ramanathan (1995, p. 253) has stated that

the linear relationship usually assumed to subsist between dependent and independent

variables in regression models is “a severe and often unrealistic constraint on a model.”

Finally, a number of potential independent variables were not considered in this study.

A potentially important variable that could possibly be included in the model is the eth-

nicity of corporate managers of the sampled companies. This is because Zimbabwe con-

sists of three main ethnic groups-the native blacks, the immigrant Europeans and

Asians. The support for investigating the effect of ethnicity of corporate managers on

mandatory disclosure is provided by Singhvi (1968) and Wallace & Naser (1995). For instance, Wallace & Naser (1995) found significant differences in disclosure compre-

hensiveness between Chinese and non-Chinese managed companies in Hong Kong.

Future research studies may also investigate the effects of, say, the establishment (or

otherwise) of corporate audit committees and gearing on mandatory disclosure.


NOTES

I.

2.

3.

4.

5.

6.

7.

8.

9.

10.

The literature is comprehensively reviewed elsewhere (see Owusu-Ansah, 1998).

Stevenson (1980, pp. 9-11) provides categories and examples of information, which if disclosed, might create competitive disadvantages. They include information about technological

and managerial innovation (for example, production processes, quality-improvement techniques); strategies (planned product development); and about operations (for example, segment

sales and production cost figures).

Priebjvirant (1991) presents a contrary evidence in Thailand. His findings do not support the hypothesized relationship between levels of disclosure and costs of capital as measured by both

beta and total risk.

Unlike the US, the UK and several other countries, data on companies listed on the ZSE including their annual reports are not available in magnetic format and databases. Therefore, request-

ing copies of annual reports from the ZSE listed companies was the best and the quickest means of accessing these important data.

A cut-off period of six months, commencing from the month in which the initial request was made, was imposed after which it was considered that a listed company was not interested in providing its annual report.

Although the correlation procedure is commonly used in empirical studies, it is incapable of detecting linear relationships among more than two variables. Because of this problem, 1 also

computed tolerances and variance inflation factors for each of the corporate attributes. The results (reported in Panels B and C of Table 4) suggest no evidence of serious collinearity.

As suggested by Gujarati (I 995, p. 335), collinearity becomes a serious problem if its coefficient is greater than 0.80. In addition, the correlation between the two indicants of company size is also significant at the 0.05 level.

Unlike Lang & Lundholm (1993) and Wallace & Naser (l995), the ranks in this study were not converted to percentiles. Because a regression run by the present investigator with ranks and another with ranks converted to percentiles (not reported here) yielded similar results.

The bootstrap procedure offers two advantages over parametric technique in estimating regression coefficients. First, it does not depend on the distributional assumptions required by parametric tests. Second, the bootstrap procedure retains distributional information about the original sample (Rasmussen, 1987). Unlike other non-parametric techniques which convert raw data to ranks (see Conover & Iman, I98 I), the bootstrap procedure does not throw away the distributional information about the original sample from which the bootstrap sample was drawn. In spite of these advantages, the bootstrap procedure has several limitations. First, its assumption that “the empirically generated sampling distribution of the bootstrap provides an accurate estimate of the sampling distribution of the statistic” has not been made clear by its advocates (Rasmussen, 1987, p. 137). Second, it yields excessively liberal Type I error rates and excessively restricted confidence intervals. Rasmussen (I 987) compared the bootstrap and parametric approaches to estimating confidence intervals and Type I error rates of correlation coefficients of several samples ranging from 5 to 60. He found that the bootstrap procedure results in overly liberal Type I error rates and overly confidence intervals than the parametric technique. Rasmussen (I 987) observed further that the bootstrap procedure performs poorly on both normally-and non normally-distributed data. Third, it is more appropriate for large sample size due to its asymptotic attribute (see Bickel & Freedman, 1981 for further discussion). Finally, it requires a highly powered computer to carry out the large number of computation involved.

The choice of the 100 bootstrap replications was influenced by the suggestion of Mooney and Duval (I 993, p. I I) that SO to 200 replications are generally adequate for estimates of standard

626 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5,1998

error and thus adequate for normal approximation confidence interval, which are based on the

standard error estimates.

Acknowledgments: This article draws on the analyses in the doctoral thesis I submitted to Middle-

sex University, England. I acknowledge the continual support and suggestions of my thesis adviser,

Professor R. S. Olusegun Wallace. I also appreciate the helpful comments of Professor Donal McK-

illop and Mr. Peter Oyelere on the earlier drafts of the thesis. I am also grateful to Dr. Titus Oshag-

bemi for helpful comments on an earlier draft of this article. I acknowledge the travel grant awarded

by the Wincott Foundation, England for data collection in Harare, Zimbabwe and the logistic support

provided by King Fahd University of Petroleum and Minerals, Dhahron, Saudi Arabia.

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