affiliate marketing ابحاث فى المحاسبة والمراجعة ( مدونة وليد الجبلى ): Future-Oriented Narrative Reporting: Determinants and Use

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الاثنين، 3 ديسمبر، 2012

Future-Oriented Narrative Reporting: Determinants and Use


Future-Oriented Narrative Reporting: Determinants and Use




Khaled Hussainey[1]
Stirling University

and
Basil Al-Najjar
Middlesex University






Forthcoming
Journal of Applied Accounting Research
2010






Abstract
Purpose: This paper examines the determinants of future-oriented information in UK annual report narrative sections. It also investigates the association between corporate dividend policy and levels of future-oriented information, as a proxy for information asymmetry.
Design/methodology/approach: A computer-based-content analysis is used to measure levels of future-oriented information. Tobit and Logit regressions are then applied in order to examine the impact of firm characteristics, and corporate governance characteristics on future-oriented disclosure. In further tests, Tobit and Logit regression models are used to investigate the association between corporate dividend policy and levels of future-oriented information. 
Findings: We found that the size of a firm is the main factor affecting the firms’ levels of future-oriented information. This variable was statistically significant in five regression models. In addition, profitability, outsider directorships, and insider ownerships also affect the determinants of future-oriented information. However, the significance of these variables was dependent on whether we used fixed-effects or random-effects models and whether we included or excluded year dummies in the analyses. A positive association was found between corporate dividend policy and levels of corporate narrative reporting, as a proxy for information asymmetry.
Originality/value: This paper contributes to the existing disclosure studies in two crucial ways. To begin with, it offers the first evidence that levels of future-oriented information are driven by some firm characteristics, and some corporate governance mechanisms. Secondly, it offers the first UK evidence of the association between corporate dividend policy and asymmetric information (measured by levels of future-oriented disclosure). The results show that dividends and information asymmetry are negatively associated.

Keywords: Narrative reporting; Future-oriented information; Content analysis; Dividend policy; United Kingdom.

Classifications: Research paper






1. Introduction
Narrative reporting (for example Operating and Financial Review (OFR)) is an essential section of the annual reports and accounts that are prepared by corporate directors. These reports are then addressed to stakeholders to help them in assessing the firm’s future performance and prospects. Corporate narrative reporting has received major attention from regulators in recent years. For instance, in May 2004, there was a call for mandating all UK listed firms to prepare an OFR statement in their annual report and accounts. However, in November 2005, the Chancellor of the Exchequer announced the government’s intention to remove the statutory requirement to publish OFR’s (ASB, 2008). This had implications on the ASB's Reporting Standard (RS) 1 'The Operating and Financial Review', which has now been formally withdrawn. Consequently, the Board has converted RS 1 into a Reporting Statement of best practice on the OFR, which will have persuasive, rather than mandatory force (ASB, 2008).
Prior research provided evidence on the usefulness of corporate narrative reporting in the UK (see for example Hussainey et al., 2003). Hussainey et al. (2003) invested heavily in developing a new automated method for scoring a large sample of corporate narrative reports. Their paper contributed to the existing literature by using a computer-intensive technique ‘Nudist software’ to create disclosure scores. These disclosure scores were then linked with the investors’ ability to predict future earnings. They revealed evidence that future-oriented information in annual report narratives provides value-relevant information to investors, and this information improves investors’ ability to better anticipate future earning variations.  In addition, Hussainey and Walker (2009) offered evidence that future-oriented information, and dividend propensity, are substitute forms of financial communication channels that high-growth UK firms use to signal value-relevant information to investors.
For the sake of robustness, the present paper extends the recent research by examining determinants and use of future-oriented information. In particular, it investigates a fundamental question that has not been addressed in prior research: “What drives the future-oriented content of UK annual report narrative sections?” In further tests, investigation has centred on another fundamental question: “Is there any relationship between corporate dividend policy and information asymmetry in the UK?”
The work of Hussainey et al. (2003) and Hussainey and Walker (2009) have been considered in the present paper for the following reasons. Whilst future-oriented information has always been found to be useful for investors in the UK stock market, the main drivers for voluntarily reporting this information in annual report narratives are still unknown. Therefore, this paper seeks to investigate the degree to which firm characteristics and corporate governance mechanisms affect the decision of UK firms to include future-oriented information in their annual report narrative sections. Furthermore, Hussainey and Walker (2009) provided evidence that future-oriented information, and dividend propensity, are substitute forms for communicating value relevant information to investors. These results are consistent with signalling theory, but not consistent with pecking order theory (Deshmukh, 2005). In addition, the relationship between asymmetric information and dividends is inconclusive. US empirical evidence on this association is mixed (e.g., Deshmukh, 2003; 2005 and Li and Zhao, 2008). Prior studies used the number of analysts following a firm as an indirect proxy for levels of information asymmetry. In this study a direct measure is employed for information asymmetry. We used the total number of future-oriented earnings related statements in the annual report narrative sections as a proxy for information asymmetry. This proxy is then linked with dividend payout ratio to examine the relationship between dividend policy and asymmetric information in a UK context.  
Accordingly, this research contributes to the existing literature. Initially we provide empirical evidence as to whether firm characteristics and/or corporate governance mechanisms affect levels of future-oriented statements in UK annual report narratives.  We then provide direct evidence on how corporate dividend policy is associated with corporate information asymmetry in a UK setting. To the best of our knowledge, this paper represents a significant contribution to corporate reporting literature, as our research questions have not been answered in prior empirical research.
The current paper is organised as follows. In Section 2, a review is conducted of the prior research and the study’s hypotheses are developed. In section 3, the sample selection is discussed, and descriptive statistics presented together with an outline of the empirical design. In Section 4, the correlation analysis and empirical results are reported. Section 5 concludes the study and suggests opportunities for future research.

2. Prior research and hypotheses Development
The hypotheses are developed from two streams of prior research: (1) research on determinants of corporate disclosure, (2) research on the link between dividend policy and asymmetric information. Subsection 2.1 discusses the development of hypotheses related to the first line of research, while Subsection 2.2 discusses the development of hypotheses related to the second line of research.

2.1 Determinants of future- oriented information
Firm Characteristics
In a series of papers, Hussainey et al. (2003), Schleicher et al.(2007), and Hussainey and Walker (2009) provided evidence that future-oriented information in the annual report narratives contains value relevant information to investors to better forecast future earnings changes. Their findings are consistent with signalling theory. However, the authors did not explain in their papers what drives UK firms to voluntarily disclose this class of information in their reports. To examine this issue, a set of firm-specific characteristics and corporate governance mechanisms should be used.
Ahmed and Courtis (1999) performed a meta-analysis of the results of 23 separate published papers, examining the association between the levels of disclosure in the annual report and firm characteristics since 1961. They found that only four variables have a significant positive association with disclosure levels. These variables were: firm size, exchange listing status, audit firm size and leverage. In the present study the focus is on firm size and leverage.  This is partly due to the fact that audit firm size is not electronically available for a large sample of firms at the time of undertaking the analyses, and our sample is based on all UK listed companies. Therefore, listing status in the stock market is not used in the current study. In addition to firm size and leverage, we also include profitability and risk as potential drivers of corporate voluntary disclosure. These variables have been included because empirical studies provide evidence that they affect corporate levels of future-oriented information in the annual report narrative sections (see for example, Scheicher et al, 2007 and Mouselli and Hussainey, 2010).
Firm size
A positive association between corporate disclosure and firm size is expected by signalling theory. This theory proposes that large firms tend to attract financial analysts. Analysts normally demand greater levels of value-relevant information to advise their clients in making investment decisions. In addition, large firms are more likely to have enough resources to cover the cost of producing additional information in corporate annual reports. However, small firms are more likely to suffer from competitive disadvantages if they increase their levels of voluntary disclosure. Accordingly we formed the following hypothesis:
H1: There is a positive relationship between the size of the firm and the level of future- oriented information in the annual report narrative sections.
Leverage
Signalling theory is also used to explain the positive association between leverage and the levels of corporate disclosure. For example, prior finance research suggests that highly leveraged firms have more monitoring costs (Jensen and Meckling, 1976). One possible response for highly leveraged firms to reduce their costs is to report more voluntary information in their annual report narrative sections in order to convey value relevant information to satisfy the creditors’ needs. Thus, we formed the following hypothesis:
H2: There is a positive relationship between firm's leverage and the level of future-oriented information in the annual report narrative sections.
Profitability
Ahmed and Courtis (1999) in their Meta analysis also found that there is empirical evidence on the association between disclosure and profitability. However, the results of these studies are mixed. In particular, signalling theory suggests that profitable firms have an incentive to disclose more information to signal their favourable results to the stock market participants. Therefore, one can anticipate that profitable firms are more likely to disclose more future-oriented information in their annual report narratives. On the other hand, Schleicher et al. (2007) reported evidence that the publication of future-oriented information in the annual report narrative sections is considered a key source of information for unprofitable firms, but not for profitable firms. Consequently, they expected a negative association between levels of future-oriented information in annual report narratives and a firm’s profitability. Based on these arguments, we formed the following hypothesis:
H3: There is a relationship between a firm's profitability and the level of future-oriented information in the annual report narrative sections.
risk
Finally, prior accounting research argued that increasing levels of corporate disclosure should reduce a firm's risk (see for example, Espinosa and Trombetta, 2007). This is because a rich disclosure environment should enhance the stock liquidity and decrease its risk, either by reducing transaction costs, or increasing the demand on the stock, and hence reducing the expected returns on the stock (Mouselli and Hussainey, 2010). In this context, Kothari et al (2009) provided empirical evidence that firms who disclose more good news are more likely to decline their risks, whereas, high levels of risk are significantly influenced by bad news disclosure. As a result, a negative association between levels of future-oriented information and a firm's risk is expected. Based on these arguments, we formed the following hypothesis:
H4: There is a negative relationship between a firm's risk and the level of future-oriented information in its annual narratives.
Corporate Governance Characteristics
The second set of hypotheses is based on certain corporate governance mechanisms, including board composition and insider ownership.

board composition

The association between corporate voluntary disclosure and board composition is not clear; in spite of extensive empirical research on this relationship the results are mixed.  For example, Beasley (1996), Chen and Jaggi (2000), Patelli and Prencipe (2007) and Li et al. (2008) found a positive association between board composition and corporate voluntary disclosure. However, other empirical studies find a negative association between the two variables (see for example Eng and Mak, 2003; Haniffa and Cooke, 2005). Ho and Wong (2001), Lakhal (2007) and Brammer and Pavelin (2006) found no statistically significant association between the two variables. It must be noted that from the above-mentioned studies only Lakhal (2007) implicitly examined the association between future-oriented information and board composition in France. The findings of Lakhal’s study were in line with her expectation. This is particularly true when taking into account the fact that ‘French-listed firms are most controlled’. As a result, the ‘proposition of outside directors on the board is likely to be relatively weak’, (Lakhal, 2007:  68). Therefore, it is important to revisit this evidence by including board composition in our models.  Based on these arguments, we formed the following hypothesis:
H5: There is a relationship between the number of outside directors on the board and the level of future-oriented information in its annual narratives.
Insider Ownership

In a recent paper, Li et al. (2008) examined the association between voluntary disclosure and insider ownership; they found a negative association between the two variables. Their finding suggests that UK companies with closely-held ownership have less information asymmetry between management and shareholders.  This result is consistent with the findings of Cormier et al. (2005) and Brammer and Pavelin (2006). However, it is inconsistent with Patelli and Prencipe (2007) who found a positive association between the two variables. It is also worth noting that Eng and Mak (2003) found no significant relationship between voluntary disclosure and insider ownership. Based on these mixed empirical findings, we formed the following hypothesis:
H6: There is a negative relationship between closely-held ownership and the level of future-oriented information in its annual narratives.
2.2 The LINK BETWEEN dividend policy and future-oriented information
The link between dividend policy and future-oriented information has received significant attention in recent years. For example, Hussainey and Walker (2009) examined whether future-oriented information in the annual report narratives and dividend propensity are substitute or complement forms, for communicating value relevant information to investors; the authors found that the two variables are substitutes.
Signalling theory suggests that firms with higher levels of asymmetric information (for example, lower levels of future-oriented information) are more likely to pay higher levels of dividends to signal their future prospects to current and potential investors (Bhattacharya, 1979; John and Williams, 1985; Miller and Rock, 1985). Therefore, a positive association between dividend payment levels and levels of information asymmetry is hypothesised.
Alternatively, pecking order theory suggests that firms with higher level asymmetric information (for example, lower levels of future-oriented information) are more likely to pay lower levels of dividends.  The reason for this is because these firms are more likely to be underinvested in certain areas (Myers and Majluf, 1984). Deshmukh (2005:1) argued that “the underinvestment arises when the firm has inadequate funds for investment purposes and does not want to bear the lemons-premium association with new capital issues”. To control the underinvestment situation, these firms are more likely to lower their dividend levels. Therefore, a negative association between dividend payment levels and levels of information asymmetry is hypothesised.
Prior empirical studies in the US, on the association between asymmetric information and dividends, such as Deshmukh (2003; 2005) and Li and Zhao (2008), offered mixed results. Consequently, the association between dividend and levels of future-oriented information (as a measure of information asymmetry) remains a challenge and the source of much debate. Therefore, this association is one of the main issues to be empirically examined in this study, and we formed the following hypothesis:
H7: There is a relationship between dividend policy and the level of future-oriented information in its annual narratives.
It is worth noting that, in this study, the authors control for other determinants of dividend policy, namely, firm size: borrowing ratio: profitability: risk: liquidity: growth opportunities: insider ownership: non-executive directors. (For more discussion about these variables, see Al-Najjar and Hussainey, 2009).

3. data, descriptive statistics and research design
sample selection and description
The sample selection is designed to identify future-oriented information in the annual reports narratives, their determinants, and the link between this information and dividend policy for UK companies listed at the London Stock Exchange for financial year-ends between January 1996 and December 2002. The sample period goes from 1996 to 2002. We have limited our analysis to UK companies that have at least one annual report in an electronic format on the Dialog database. Dialog only covers large cross-sectional annual reports for this period of time. We have excluded financial companies because of their substantially different financial reporting environment. The total number of annual reports on Dialog for non-financial firms for this period of time is 8,098 firm-years. We then matched this sample with an updated version of the ICCSR UK Environmental & Financial Dataset, which contained some corporate governance information for UK firms from 1996 till 2002.[2]  It is worth noting that the period of time investigated correlates to that used by Hussainey and Walker (2009). The ICCSR database was used because it contains information regarding board size and board composition for a large number of UK firms.  Firms with missing data on Datastream or Worldscope have been excluded. The final sample consists of 357 non-financial firms (1860 firm-year) for the period from 1996 to 2002 inclusive.
Table 1 provides an overview of the sample statistics. The table reports that the average future-oriented information in the annual report narrative sections is around 7 statements with a maximum of 31 statements. This indicates that UK firms in the sample provide users of annual reports with significant voluntary information and, in turn, reduce the information asymmetry to help these users in their decision-making process. Table 1 also shows a low average ROA ratio of 7%. There is also a low average payout ratio of 0.70 and a high an average beta of 0.88. Finally, firms tend to employ outside directors on the board, with the average being 49% of the entire board size, and a maximum of 88.88%. 
Insert Table 1 here

specification of empirical models
Determinants of future-oriented information

To empirically test hypotheses H1 – H6 we employed three types of model, starting with the fixed effects Tobit model to capture the firms’ specific effects on the disclosure decision, then the random effects of the Tobit model, and finally the random effects of the Logit model. The reason for using the Tobit model was the fact that the disclosure index has either a positive or zero value which justified using it. Accordingly, the sample can be considered as a censored sample, and thus Ordinary Least Squares estimates will be biased and inconsistent. Furthermore, the Logit model was applied to investigate the factors that affect a firm’s decision to disclose or conceal future-oriented information in the annual report narrative sections. The following model represents our fixed effects Tobit model:
= + +
Where
 is the future-oriented disclosure measure.
  is the  Intercept coefficient of firm i.
is the slope coefficients of regressors.
= is vector of financial variables for firm i at time t, this vector is made up of the following variables: crossholding share, firm size, profitability of the firm (return on assets), non-executive directors, and firm’s beta.
 is the residual error for firm i at year t.
The random Tobit model can be expressed as:

In the Tobit models, we used the same variables as those used in the fixed effects model. Finally, we used the Logit model, which has a dependent variable of 1, if the level of future-oriented information was greater than zero and 0 otherwise. Again, the independent variables were the same as those used for random and fixed effect Tobit models.

The link between future-oriented informaiton and dividend policy

In further analyses, to empirically test hypothesis H7 we used the random and fixed effect Tobit regression as well as the Logit models in order to examine the association between corporate dividends and future-oriented information in annual report narratives. In the analyses, we used dividend payout ratio as the dependent variable and levels of future-oriented information in annual report narratives, as the main independent variable. A set of firm characteristics and corporate governance variables were used as control variables. These control variables were chosen because they were more likely to affect corporate dividend policy as indicated in prior research. Following Al-Najjar and Hussainey (2009), the control variables include firm risk: liquidity: growth opportunity: gearing: profitability: firm size: insider ownership, and outside directorship on the board.

future-oriented information Measure
The same measure of disclosure quality developed in Hussainey et al. (2003) was adopted. They automatically generated their disclosure scores for a large number of UK companies by using QSR N6 software to content analyse narrative sections of annual reports. Their measure of disclosure quality was the number of future-oriented statements, in corporate annual report narrative sections, that contain at least one future earnings-related topic. The same measure of disclosure was used in this research. We also focussed on future-oriented earnings information because Hussainey et al. (2003), Schleicher et al. (2007), and Hussainey and Walker (2009) found that this information increased the stock market’s ability to anticipate future earnings change.
Similar to Hussainey et al. (2003), the disclosure score for the investigated sample was calculated using three steps. In the first step we aimed to identify the future-oriented statements in the annual report narratives. We employed a list of future-oriented keywords to content analyse the narrative sections of annual reports. We used the same list of keywords created by Hussainey et al. (2003, p. 277). The list consists of thirty-five keywords as follows: accelerate, anticipate, await, coming (financial) year(s), coming months, confidence (or confident), convince, (current) financial year, envisage, estimate, eventual, expect, forecast, forthcoming, hope, intend (or intention), likely (or unlikely), look forward (or look ahead), next, novel, optimistic, outlook, planned (or planning), predict, prospect, remain, renew, scope for (or scope to), shall, shortly, should, soon, will, well placed (or well positioned), year(s) ahead. Consistent with Hussainey et al. (2003), we also took into account the future year numbers in the list of future- oriented keywords. In the second step we aimed to identify the relevant information to the stock market in assessing the firm’s future earnings. For the purpose of the current paper, the same list created by Hussainey et al. (2003, p. 280) was used. Hussainey et al. (2003) content analysed a sample of sixty sell-side analyst reports to identify relevant earnings related keywords. These include: benefit, breakeven, budget, contribution, earnings, EPS, loss, margin, profit, profitability, return and trading. In the third and final step we used the QSR N6 software to count the number of sentences that include at least one future-oriented keyword and at least one earnings related keyword.
Other Variables definations
Our measure of firm size is the natural logarithm of total assets. This measure includes tangible fixed assets, intangible assets investment, other assets, total stocks and work in process, total debtors and equivalent and cash and cash equivalents (Datastream item 392). We collect return on assets from Datastream as a measure of a firm’s profitability. Datastream defines return on assets as net income plus interest on debt after tax, divided by the last year’s total assets.  Borrowing ratio is the total loans divided by equity capital and reserves, minus total intangibles (Datastream item no. 733). The business risk is beta which is collected from Datastream. Liquidity is the current assets to current ratio ratio (Worldscope item no. 08106). The measure of growth opportunity used is Datastream item PTBV, defined as the price divided by the book value, or net tangible assets per share for the appropriate financial year end, adjusted for capital changes. The index for non-executive directors (ND) is the percentage of board directors employed in non executive roles (Datastream item 243). Closely holding shares is defined as the percentage of a firm's common stock held by insiders which acted as a proxy for insider power (Worldscope item no. 08021).

4. correlation analysis and empirical results
Table 2 presents the correlation analysis. It shows that there is a positive correlation between disclosure and firm size, beta, and outside directors, with the highest correlation being with firm size. Thus, large firms are more able to provide future-oriented voluntary information in their annual report narratives. In addition, the table shows that there is a negative correlation between future-oriented disclosure levels and borrowing ratio, profitability, and cross holder shares. Furthermore, dividend payout ratio has a positive correlation with size, beta, outside directors, cross holder shares, and disclosure. Additionally, dividend payout ratio is negatively correlated to leverage and profitability. It is worth noting that these correlations give an indication about the bivariate relationships only. However, the regression analysis should provide more insight into the significance of the investigated relationships. Finally, the table shows that the independent variables are not highly correlated and thus there is no significant multi-colinearity problem in the regression models.
Insert Table 2 here
Table 3 presents the empirical findings involving random effects and fixed effects panel-data regression analyses. It reports one version of the model with year dummies and a second version without year dummies. The table also reports the empirical findings of the Logistic regression analysis. Given that the results on the determinants of voluntary disclosure in prior research are mixed, Table 3 might explain the reasons for the mixed results, and provide a better explanation for the association between corporate disclosure, firm characteristics, and corporate governance structure.
Hypothesis H1 predicts that there is a positive relationship between firm size and the levels of future-oriented information. Table 3 shows that firm size was significant in fixed and random effect models (with and without year dummies) as well as the Logistic model. The coefficient estimates of firm size in the five modes reported in Table 3 are positive and statistically significant. These findings suggest that large UK firms are more likely to increase the level of future-oriented information in the annual report narratives than small firms. The results suggest that the economic motivation for large firms to increase their levels of future-oriented information is to attract more financial analysts. Therefore, these firms are more likely to be subjected to greater demand by financial analysts (and other users) for more value relevant information. In addition, large firms are more likely to have enough funds to cover the cost of this disclosure. Given these factors, one could expect that the costs of this additional information may be generally lower for larger firms than for smaller firms. Finally, the evidence suggests that larger firms would be aware of the potential benefits of increasing their disclosure levels (e.g. assisting investors in anticipating future earnings; reducing cost of capital, improving analyst forecasts’ accuracy). Therefore, we accept H1.
Hypothesis H2 expects that there is a positive association between leverage and the levels of future-oriented information. The results in Table 3 indicate that the coefficient estimate on BORR is negative and statistically insignificant in the five regression models reported in Table 3. These results suggest that the corporate level of leverage is not associated with the level of future-oriented information. This is due to the fact that the annual report is published three months after the financial year end. The findings suggest that creditors are more likely to use other sources of information (for example, press release) to constantly monitor the affairs of UK firms and help them assess the ability of these firms to pay their obligations on time. Thus, H2 is rejected.
Hypothesis H3 anticipates that profitability will have an effect on the levels of future-oriented information. The findings reported in Table 3 indicate that the coefficient estimates on ROA are negative and statistically significant in two of the five regression models reported in Table 3. The negative sign suggests that firms with low profitability are more likely to have an incentive to increase their levels of future-oriented information, in order to signal their expected performance to current and potential investors. However, this suggestion should be taken with care as different empirical models lead to different conclusions. Therefore, it is not safe to conclude that less profitable firms are more likely to produce higher levels of future-oriented information than profitable firms. Consequently, there is limited support for H3.
Hypothesis H4 expects that reporting future-oriented information in annual report narratives sections is associated with corporate risk. However, the coefficients on beta are positive and negative (none is statistically significant) in the five regression models reported in Table 3. These results indicated that risk does not affect levels of future-oriented information. Our findings are consistent with prior research (i.e., Linslely and Shrive, 2006; Hassan et al., 2009). However, it is important to note that beta only captures a firm’s systematic market risk. There are many other types of risk which can be used as a proxy for a firm’s total risk in future research. Therefore, we suggest that using other measures of risk (for example, earnings volatility) might produce a statistically significant association with levels of disclosure. The results suggest that regardless of systematic market risk levels, UK firms do provide future-oriented information in their annual report narrative sections; as this information is considered as value relevant for users’ decision making (see for example Hussainey and Walker, 2009). Based on these findings, we reject H4.
Hypothesis H5 expects an association between board composition and levels of future-oriented information. However, we found that the coefficient estimates on NEXDR are positive and negative, and statistically significant in two out of the five regression models, as presented in Table 3. The negative sign indicates that the large number of non-executive directors on the board might reduce the conflict of interest between managers and shareholders and therefore there is no need for managers to provide more information in their annual reports. However, this explanation should be treated with caution, as different empirical model specifications result in statistically significant/insignificant associations. For this reason there is limited support for H5.
Hypothesis H6 predicts that insider ownership has an effect on levels of future-oriented information in annual report narratives. However, we find that the coefficient estimates on the CHS variables are positive and statistically significant at the 5 per cent level. This was noted when we employ the fixed effect Tobit regression analyses (with or without year dummies). However, other models yielded statistically insignificant results. These findings suggest that UK companies with closely-held ownership have less information asymmetry between management and shareholders. This lower level of asymmetric information is supported by higher levels of future-oriented information in annual report narrative sections. However, this interpretation should be taken with caution as only fixed Tobit regression models yield this positive association. Therefore, there is limited support for H6.
Insert Table 3 here
Finally, hypothesis H7 expects that there is an association between levels of future-oriented information and corporate dividend policy. Table 4 reports the results of the panel-data with fixed, random effects, regression analyses, as well as the logistic regression analysis. It shows one version of the model with year dummies and another version without year dummies. Table 4 shows that there is a positive association between levels of future-oriented information in the annual report narrative sections and corporate dividend policy in all regression models. This finding is consistent with pecking order theory. In particular, the theory suggests that firms with lower asymmetric information levels (i.e. higher levels of future-oriented information) are more likely to pay higher dividends. This finding is consistent with prior empirical research reported by Deshmukh (2005) on a sample of US companies. The result suggests that firms that pay dividends are more likely to increase the level of future-oriented information in their annual report narrative section. In this case firms can use either dividends, or disclosure, to signal value-relevant information for stock market participants.
Previous literature shows that dividend policy is considered as one of the effective corporate governance mechanisms to be used by managers in order to mitigate agency conflicts of interest within the firm (Bathala and Rao, 1995). In addition, increasing levels of future-oriented information in the annual report narratives is considered as a mean to reduce information asymmetry between managers and current and potential investors. Reducing asymmetric information should also help to reduce conflict of interest between managers and shareholders and hence reduce agency costs. To summarise, dividends and future-oriented disclosure can be considered as substitute mechanisms used by UK listed companies to reduce agency costs. Based on these results, hypothesis H7 is accepted.
The signs of the coefficient estimates on the control variables are in line with prior dividend policy literature (i.e. Al-Najjar and Hussainey, 2009). In particular, Table 4 shows mixed results for firm size and profitability (with positive and negative significant results). Risk is negatively related to dividend policy, suggesting that risky firms are less likely to pay dividends. Corporate governance factors (for example, insider ownership and non-executive directors) produce the expected negative sign. Therefore, a higher percentage of non-executive directors on the board, and more insider owners are associated with lower dividends levels.
Insert Table 4 here
To conclude, the findings suggest that a firm’s size is the main driver for reporting future-oriented information in annual report narratives. This variable is statistically significant in five regression models the authors undertook. Profitability, outsider directorships, and insider ownerships are also determinants of future-oriented disclosure. However, the significance of these variables is dependent on whether we used fixed-effects or random-effects models, and whether we included or excluded year dummies in the analyses. A positive association between corporate dividend policy, and levels of corporate narrative reporting (as a proxy for information asymmetry ), is found. This finding indicated that levels of future-oriented information in the annual report narratives can be used as a mechanism for reducing agency problems. Table 5 summarises the outcomes of testing our research hypotheses.  
Insert Table 5 here
5. conclusions
In this study, we used Panel-Tobit and Logit regression models to examine the determinants of corporate future-oriented information in the annual report narrative sections for a sample of UK listed companies. We found that firm size is the main determinant of future-oriented information for UK firms listed at the London Stock Exchange.  We also noted that corporate profitability; the number of non-executive directors on the board, and insider ownerships are also determinants of future-oriented disclosure. However, the significance of these variables was dependent on whether we used fixed-effects or random-effects models and whether we included or excluded year dummies in the analyses.
We examined the association between dividend policy and asymmetric information (measured as levels of future-oriented information in annual report narratives). As expected, we found a positive association between the two variables. The findings indicated that firms with higher levels of future-oriented information exhibit lower levels of information asymmetry and thus are more willing to pay dividends. This result is in line with pecking order theory, but inconsistent with signalling theory.
Our research has potential implications. It helps to inform regulators about the characteristics of firms that voluntarily report future-oriented information in their annual reports narratives, and the expected benefits of such information to users of the annual reports and the disclosing firm. 
We provided evidence that different firm characteristics and corporate governance mechanisms affected levels of future-oriented earnings information published in annual report narratives. As a result, we suggested that users of annual reports should consider these variables when deciding to use the annual report as the main source of information for decision-making process. For example, if future-oriented information in the annual report narratives is driven by a company’s size, users of accounting information should consider other sources of information (for example company websites) to find relevant information for making their decision.
Accounting regulators should advise all companies (large, medium and small) to provide value relevant information in the narrative sections of their annual reports. One of the main requirements of the Operating and Financial Review (OFR) statement is to produce information about the future. Prior research provides evidence that this information offers value relevant information to investors.  Therefore, the present study indicates that only large UK companies comply with the new OFR requirement. Consequently, investors (and other users) might find it difficult to use information in the annual reports of small and medium sized-companies in order to make investment decisions.
The findings of our paper reveal managerial implications. We found that dividends policy is positively associated with levels of future-oriented information. Therefore, for effective corporate governance systems, managers can either increase dividends levels and/or increase levels of future-oriented information in their annual report narratives. This should assist in reducing the conflict of interest between managers and investors and reduce agency costs. 
Our research also suggests implications for academic accounting researchers who examine the determinants of corporate disclosure. The results of the study imply that different results could be attributable to the use of different regression models. Therefore, researchers should consider carefully the suitability of the chosen regression model before analysing their data and interpreting their results.
However, it is worth noting that the findings of our research should be interpreted in light of limiting our sample to the year 2002. It should be noted that new reporting rules for narrative disclosure (for example, operating and finance review) have been issued. Therefore, future studies are needed to examine the same research issues for years beyond 2002. In addition, further studies may address the effect of other corporate governance variables (such as audit committee characteristics) on levels of future-oriented information. Finally, the current study uses data from UK non-financial firms. Further studies are needed to examine the extent to which the current results are applicable for financial companies or other countries.

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Table (1): Descriptive Analysis
Variables
Observation
Mean
Std. Dev.
Min
Max
Size
1984   
13.47681   
1.594504  
7.249215  
18.96301
BORR
1984   
.9953428   
18.68155  
-197.79    
638.52
ROA
1897   
6.749968   
11.04603   
-108.96     
66.13
Beta
1983   
.8831064   
8.192617   
-304.14    
199.21
ND
1977   
.4965756   
.1421584         
0  
.8888889
CHS
1886   
9.277605   
2.442712  
1.791759  
16.02931
Disclosure
1984   
6.644657    
4.784961         
0        
31
DPO
1802   
.7028021   
2.915616         
0  
66.39999
LIQ
1984   
1.426869   
1.497137 
.0865671  
29.20516
MB
1953   
7.951874   
153.8685
-444.17   
6431.85

Size = Log total asset; BORR= Borrowing ratio; ROA = Return on Assets; BETA= Firm risk for the firm; ND = The number of outside directorships on boards; CHS = Closely held shares. The significance levels are: * = 10 percent, ** = 5 percent, *** = 1 percent.













Table (2): Correlation Matrix
Variables
Size
BORR
ROA
Beta
NEXDR
CHS
Disclosure
DPO
LIQ
MB
Size
1.0000









BORR
-0.0037  
1.0000








ROA
-0.0753 
-0.0172  
1.0000







Beta
0.1119 
-0.0286 
-0.1258  
1.0000






NEXDR
0.2400 
-0.0053 
-0.0666 
-0.0146  
1.0000





CHS
-0.1107  
0.0212 
-0.0259  
0.0494 
-0.0479  
1.0000




Disclosure
0.3585 
-0.0025 
-0.0937  
0.0666  
0.0836
-0.0264  
1.0000



DPO
0.1071 
-0.0023 
-0.0215  
0.0855  
0.0733  
0.0457  
0.0883  
1.0000


LIQ
-0.2222   
0.0099 
-0.0516  
0.1597 
-0.0743
0.0735
-0.0958
-0.0065
1.0000

MB
-0.0426  
0.1801  
0.0023  
0.0421  
0.0122  
0.0230 
-0.0170
-0.0029
0.0344  
1.0000

Size = Log total asset; BORR= Borrowing ratio; ROA = Return on Assets; BETA= Firm risk for the firm; NEXDR = The number of outside directorships on boards; CHS = Closely held shares. The significance levels are: * = 10 percent, ** = 5 percent, *** = 1 percent. Observation =1704 firm-years.













Table (3): Determinants of Future-Oriented Narrative Reporting

Independent Variables
Fixed-effects models
Random-effects tobit models
Random-effects logistic model
Without year dummies
With year dummies
Without year dummies
With year dummies
Intercept
-6.378942**
-.0221179
-8.375315***
-7.765003***
.4352021
Size
.8740846***
.3977313*
1.110618***
1.044464***
.4151392***
BORR
-.0012396
-.0004371
-.0008001
-.0003232
-.0007085
ROA
-.0195327*
-.0069005
-.0170527*
-.0077538
-.0040131
Beta
.1545213
.18917
-.0381649
-.0432862
-.0161433
NEXDR
.1638046
-2.043972*
-.7486529
-1.721843*
-.2976772
CHS
.1270611**
.1403545**
.0632107
.0688869
-.1413472
Observations
1860
1860
1860
1860
1860
F-Value
5.33***
5.50***



Wald chi2(8)


132.48
157.97
14.16
Prob > chi2


0.0000
0.0000
0.0279

Size = Log total asset; BORR= Borrowing ratio; ROA = Return on assets; BETA= Firm risk for the firm; NEXDR = The number of outside directorships on boards; CHS = Closely held shares. The significance levels are: * = 10 percent, ** = 5 percent, *** = 1 percent.










Table (4): Corporate Dividend Policy and Future-Oriented Narrative Reporting
                 
Independent Variables
Fixed-effects models
Random-effects Tobit models
Random-effects Logistic model
Without year dummies
With year dummies
Without year dummies
With year dummies
Intercept
3.934007***
3.980554***
2.412632***
2.23459**
1.831927
Future Disclosure
.0131378*
.0129369*
.0148202*
.0152126*
.1936827***
SIZE
-.1850791***
-.189934**
-.0788344
-.0673784
.5902575**
BORR
.000354
.0001121
.0002692
.0000381
.0223444
ROA
-.0104139***
-.0106118***
-.0087241**
-.0094453***
.1358564***
Beta
.0941989
.1140728
.1233792
.1393037
-1.352552***
LIQ
-.037615
-.0352308
-.0377479
-.0361549
-.3852685
MTBV
.0000231
.0000211
.0000239
.0000165
-.0006447
CHS
-.0684596***
-.0680216***
-.0582569***
-.058235***
-.0222109
NEXDR
-.2827165
-.2889346
-.1753319
-.1036647
-4.547272**
Observations
1704
1704
1704
1704
1704
F-Value
3.53***
2.63***



Wald chi2(8)


23.74
31.55
58.92
Prob > chi2


0.0047
0.0074
0.0000

Future Disclosure = Number of future-oriented sentences in the annual report narratives; Size = Log total asset; BORR= Borrowing ratio; ROA = Return on assets; BETA= Firm risk for the firm; LIQ = liquidity ratio; MTBV = Market to book value; CHS = Closely held shares. NEXDR = The number of outside directorships on boards; The significance levels are: * = 10 percent, ** = 5 percent, *** = 1 percent.





Table 5: A Summary of the Outcomes of the Hypotheses Testing
Hypotheses
Expected sign based on prior empirical research
Sign based on the findings of the current research
Accepted (√)
or
Rejected (x)
H1
Dep = Disclosure
INDEP = SIZE
+
+
H2
Dep = Disclosure
INDEP = BORR
+
-
X
H3
Dep = Disclosure
INDEP = ROA
+/-
-
√/ x
H4
Dep = Disclosure
INDEP = BETA
-
+/-
X
H5
Dep = Disclosure
INDEP = NEXDR
+/-
+/-
√/ x
H6
Dep = Disclosure
INDEP = CHS
-
+/-
√/ x
H7
Dep = Dividend
INDEP = Disclosure
+/-
+
‘+’ sign means positive association; ‘- ‘sign means negative association.



[1] Correspondence should be addressed to Dr. Khaled Hussainey, Accounting & Finance Division, Stirling Management School, University of Stirling, Stirling, FK9 4LA, UK. Email: Khaled.Hussainey@stir.ac.uk.

[2] We wish to thank the International Centre for Corporate Social Responsibility (ICCSR), Nottingham Business School Nottingham University (UK) for allowing us to use Datastream items 242 and 243 for our research projects.

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