Voluntary Disclosure Behaviour of Kuwait Companies

free revealing Behaviour of with child(p) of capital of capital of capital of Kuwait CompaniesBACKGROUND OF STUDY1.1 basisdivine revelation of info in corporal annual reports has gained a soma of queryers in both developed and education countries. The conscious manifestation breeding in excess of authorization manifestation, has been receiving an increasing amount of attention in late(a) accounting studies. Because of the inadequacy of everyplacebearing schooling, the demand for willful revelation appends investors with the necessary breeding to make much informed decisions (Alsaeed, 2006). Voluntary revealing of decision-useful corporate selective development is considered to be the first step in run the alleged problems of traditional m maventary account (Leadbetter, 2000). Its objectives argon well defined closing (or narrowing) the gap mingled with a companys potential integral grocery store value and its current market value.Voluntary manifes tation, in the context of globalisation of the worlds m anetary markets, has authentic a great deal of attention in the accounting literary works in recent divisions (Hossain, Berera and Rahman, 1995). This is due to the fol humiliateding reasons Firstly, additional revealings may help to attract forward-looking grappleholders in that respectby helping to of importtain a healthy demand for sh ars, and a sh be price that much(prenominal) than than(prenominal) fully reflects its intrinsic value. It is think up to(p) that poor manifestation could lead to an undervalued shargon making it attractive to a potential predator. Secondly, increased breeding may assist in reducing tuitional riskiness and thereby disdain the be of capital (Spero, 1979). A pooh-pooh cost of capital should mean that marginal projects become economic. Thirdly, in arrangement to raise capital on the markets, companies will increase their conscious manifestation. Consequently, listed co mpanies argon more(prenominal) presumable to arrive a steeper train of apocalypse than unlisted companies and duple listed companies those raising capital on the global markets will deport a high take of revelation than domestic helpally listed companies. Fourthly, multiple listed companies ofttimes urinate an interest in unknown capital markets since foreign ope proportionalityns be often financed by foreign capital (Choi and Mueller, 1984). Disclosure aims might be increased to adapt to local customs to neat the requirements of intrusts and some former(a) suppliers of capital finally, listed and multiple listed companies might increase their social responsibility divine revelations to demonstrate that they act responsibly (Watts and Zimmerman, 1979). Companies may throw come through their status on the securities markets and be able to attract new funds, non least because they act responsibly. tally to Healy and Palepu (2001) a companys apocalypse decision could be a response to innovation, globalization or changes in moving in and capital market environments.Kuwait is the focus of this take on for three reasons. First, Kuwait is a small voluminous inelegant, relatively open economy with crude oil re dish outs of active 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait bourgeon swop to mobilize domestic savings and attract foreign capital investing. These measures implicate privatization of state corpo proportionalityns through with(predicate) the stock exchange and stoping foreign investors to own shares in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is decorous an principal(prenominal) capital market in the region. It is ranked the second swelledst market in the Arab world (after Saudi-Arabian Arabia) in toll of append market capitalization. Its total market capitalization was US$128,951 million as of D ecember 2006 (Arab Monetary depot 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a result, investors may be interested in the information manifestation practices of listed companies in Kuwait (Al-Shammari, 2008).1-2 Problem StatementMany developing countries strive to mobilize fiscal resources from domestic as well as international sources with a status to attaining their economic and social development goals. Domestic and international investors utilize fiscal and non-financial information available on potential investment targets for measureing risk and making critical investment decisions. Thus, the availability of financial and non-financial information in commensurate quantity and of sufficient quality has an important bearing on efforts geared towards mobilizing investment for funding economic and social development. competent reporting and apocalypse of financial and non-financial information will reduce cro oked information problem, hence are in all probability to improve investor confidence and a impose cost of investment. tally to hoary, Meeks and Roberts (1995) investors demand information to assess the timing and uncertainty of current and future cash flows so that they may value slosheds and make separate investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by provision willful accounting information, thereby enabling them to raise capital on the best available terms (Gray et al., 1995).Given the faster pace of globalization, the growing interdependence of international financial markets and increased mobility of capital, developing countries hold to attach greater importance to corporate transparency and revealing. Policy makers, legislators and regulators, in recognition of the remarkable make that corporate transparency has on decisions of investors, need to strengthen further the divers(prenominal) components of c orporate disclosure infra social organisation so that domestic and international resources are mobilized more efficiently.Kuwait is one of the developing countries that face difficulties to attract foreign investments. Birgit Ebner at Ger some(prenominal)s Frankfurt Trust, who helps manage a center(a) easterly stock fund, said Kuwait was non an attractive investment compared with others in the region (www.gulfnews.com). One of the main reasons that interpret this matter is the absence seizure of impulsive disclosure as a result of sharp low supply of information by companies.According to Birgit Ebner, We are underweight in Kuwait because in Kuwait there are many holding steadfastlys dominating the market. And on top of it, the transparency is currently lower than in other disjuncture States.In opinion of many analysts in Kuwait, the problem of gulf bank is relate to absence of military volunteer disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines (www.alaswaq.net 2007).The purpose of this select is to empirically investigate the set of several squiffy characteristics on the take aim of intended disclosure of companies listed in Kuwait and whether disclosure level improves over the days given over changes in the accounting environment of the country and globalization that have interpreted placed.There are many studies have examined the kind mingled with a companys characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978) United Kingdom (Firth, 1979, 1980) Nigeria (Wallace, 1987) Sweden ( takee, 1989) japan (Cooke, 1992) United States (Imhoff, 1992 and Lang and Lundholm, 1993) Bangladesh (Ahmed and Nicholls, 1994) Switzerland (Raffournier, 1995) Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999) Jor dan (Naser, Alkhatib and Karbhari, 2002) Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the consumption of voluntary disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).The aim of this ascertain is to understand what motivate or demonstrate a companys disclosure by empirically investigate the tie-up in the midst of a number of company characteristics and the consummation of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting class on voluntary disclosure will in like manner be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammaris report card only cover the year of 2005, the execution of this study is fully justified.1.3 Research QuestionsIn general, this study seeks for accounting on voluntary disclosu re behaviour of Kuwait companies. The followings are the research questions-1- What is the family between the libertine coat, debt ratio, self-will sprinkling, favourableness, canvass unanimous surface, persistence area and voluntary disclosure level?2- Does reporting year influences voluntary disclosure?3- To what extent do the above factors light upon the voluntary disclosure?1.4 Research ObjectivesTo steady down the influences of buckram coat of it, debt ratio, will power airing, gainfulness, analyze strong coat of it, attention celestial sphere and reporting year on the level of voluntary disclosure of companies listed in Kuwait.1.5 Significance of the considerThe significance of study can be viewed from contri plainlyions given to Accounting academic correspond and to the practitioners and insurancemakers.Contribution to Accounting body of knowledgeThis study contributes to the belles-lettres on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which worldwide financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and canvasing profession. It in addition contributes to the corporate governance literature on whether the company characteristics prepare to be profound in companies operate in developed countries are quasi(prenominal) to those a developing country like Kuwait.This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help explain voluntary disclosure in Kuwait.Contribution to the practitioners and policy makersKnowledge on self-coloureds characteristics that influence voluntary disclosure would enable policy makers to target information and monitor activities to suitable target companies in order to improve disclosure level in the country. This is important because higher(prenominal)(prenominal)(prenominal) disclosure among c ompanies could improve investors confidence and help attracting more foreign investment into the country.The study is in addition able to show whether the external environment in Kuwait have meliorate the voluntary disclosure activities.1.6 grasp and Limitations of the StudyThis study investigates the kinship between steadfast characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are different from those of non financial dissipateds (Alsaeed, 2006).A disclosure index number was constructed as a yardstick to measure the level of disclosure by the listed potents. The social organization of the disclosure index is establish on the information that heartys supply in their annual financial reports to shareholders. Albeit non as conclusive, financial reports serve as a wide accepted (Knutson, 1992).The disclosure index does not m ean to be comprehensive, nor does it intend to specify what blottos ought to break in. Rather, the index is crafted solely for the purpose of capturing and measuring passings in disclosure practices among fuddleds. The selection of items embedded into the index was entirely guided by Meek, Rober and Gray (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006)1.7 Organization of the StudyThe monitor of this study is organized as follows Chapter Two discusses the literature review related to the study Chapter Three consists of research methodology including theoretical framework, possible action development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter cardinal provides the discussion, implications and recommendation of the study as well as suggestions for future research.CHAPTER iiLITERATURE REVIEW2.1 IntroductionT his Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which affect the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide beation knowledge of the issue understudy. Section devil discusses the innovation and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as nominate from introductory theoretical and empirical literature. These covariants include firm sizing, debt ratio, self-control dispersion, profitableness, scrutinise firm coat.2.2 Disclosure Requirement in KuwaitMandatory disclosure refers to firms disclose information about their operations because of juristic requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).2.3 Voluntary disclosure levelMore enlargeed disclosure by the firms beyond the level of information disclosed within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making normal the financial and non-financial information regarding the firms operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).Alsaeed has place a more comprehensive items for voluntary disclosure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in mesa 2.1Table 2.1 Voluntary disclosure items in Alsaeed (2006) zero(prenominal)Disclosure items1Strategic information2Brief level of company3 education on events affecting future years results4Board directors names5Top managements names6Majority shareholders7 cultivation on different types of pro ducts8Information statistics for more than two years9Information on dividends policy10Information on future amplification projects11Percentage of foreign and national labor force12Information on training and workers development13Information on social and environmental activities14Statement of corporate goals and objectives15Principle markets16Average compensation per employee17Market share18Information on events affecting current years results19Competitive environment20Forecasted meshworkMany studies have examined the alliance between a companys characteristics and voluntary disclosure level. Alsaeed, (2006) argued that firm size, favorableness and analyzeor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976) Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between companys firm size, debt ratio, owner ship and visitor firm size and the level of disclosure.2.4 Determi nants of Voluntary Disclosure2.4.1 watertight sizeMost of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006) Donnelly and Mulcahy (2008) Brammer and Pavelin (2004) Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hourigan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).Many studies put a prescribed relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He put together that there was a official relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that agency be are higher for big(a)r companies because s hareholders are widespread, therefore, additional disclosure might reduce these costs (Watts and Zimmerman, 1983). This finding is tenacious with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might fulfill from a competitive wrong if they provide additional disclosure. Thirdly, large companies might be of interest to different users of annual reports including government agencies.2.4.2 Debt ratioThere is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies be a large domineering relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995) Hossain et al. (1995), Al-Sh ammari, (2008) and Bradbury, (1992).Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency costs by facilitating debt ratio suppliers assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their complex body part of capital are disposed to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information imbalance with shareholders.Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase wi th leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is negative relationship between voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).2.4.3 lucrativenessMany studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971) Foster (1986), Richard (1992), Meek et al. (1995) and Naser et al. (2002) they argues that when the level of firms profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitability and disclosure with mixed results.Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from little profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. However Wallace et al. (1994) found no significant relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.Inchausti (1997) elaborated that agency system suggests that managers of larger profitable companies may wish to disclose more information in order to hold back personal advantages like continuance of their management position and compensation.Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variables provides an explanation of the disclosure level.Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other hand found profitability to be domineeringly and significantly related with two of the four disclosure categories, financial and forward looking disclosures, whereas other categories ware negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing sphere of influence were found to disclose less(prenominal) of financial information, and instead disclosed more on general and strategic information to explain in detail factors affecting their poor financial performance.2.4.4 monomania dispersionThe monomania dispersion represents the percentage of shares owned by alien after subtracting shares owned by the insider. Many studies found positive relationship bet ween voluntary disclosure level and self-will, as explained by the agency theory which suggests that difference in the proportion of the companys shares owned by outsider shareholders causes differences in the voluntary disclosure level. This is because the companies with more outsider willpower are more likely to disclose more information than companies with less outsider will power and also the demand for publically available information is likely to increase (Wallace and Naser 1995).Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunthe, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found evidence consistent with this prediction.Many studies found negative relationship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.Naser et al. (2002) examined the affect of ownership on US companys disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.Ho and Wong (2001) found negative relationship between family ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level.2.4.5 Audit firm sizeAccording to Jensen and Meckling (1976) large visit firms act as a mechanism to reduce agency costs and exert more of a monitoring aim by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports.In terms of size, size up firms can be dual-lane into two large or small. Large canvas firms are identified as being one of these extended Four (or Big Five or Six formerly) international scrutinizeing firms, and smaller study firms are the rest the firms are more likely to choose a Big Six analyseing firm. Such resource of audit firms signals to investors that the contents of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world trance small firms are domestically hence the large audit f irms have more capability to disclosure of the information and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm (Alsaeed, 2006).Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosure and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didnt fine significant association.2.4.6 intentness sectorAccording Cook (1989) disclosure level is mor e likely to vary from one pains to the other due to the likeliness that leading firms operating in a particular assiduity could produce a bandwagon effect on the level ofdisclosure adoptive by other firms running(a) in the same industry. Cooke (1992) found evidence that Japanese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982) Wallace (1987) Wallace et al. (1994) Raffournier (1995) Inchausti, (1997) Patton and Zelenka (1997) Naser (1998) Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found insignificant effect.Table 2.2 Summary of independent variables influence on voluntary disclosureStudyIndependent variablefindingsAkerlof (1970) profitability corroboratory relationshipSinghvi and Desai, (1971)Profitability corroborative relationshipJensen and Meckling, (1976)Debt ratio and audit firm size plus relationship with debt ratio and audit firm size.Firth, (1979) sozzled size and audit firm sizePositive relationship with debt ratio and audit firm size.Leftwich, Watts, and Zimmerman (1981) self-command dispersionpositive relationship with ownership dispersionMcNally et al.(1982)Industry sectorInsignificant with industry sectorFama and Jensen (1983)Ownership dispersionpositive relationship with ownership dispersionWatts and Zimmerman (1983). besotted sizepositive relationship with firm sizeFoster, (1986)Firm size, profitability material positive with firm size and found positive with profitability.Watts and Zimmerman (1986)Profitabilitypositive with profitabilityWallace (1987)Industry sectorInsignificant with industry sector.Cook (1989)Industry sectorPositive with industry sector.Bradbury (1992) Firm size and debt ratio. crucial positive with firm size and debt ratio.Richard, (1992) ProfitabilityPositive with profitability.Forker (1992) Audit firm sizePosi tive but insignificant with audit firm size.Craswell and Taylor (1992)Audit firm sizepositively significant with audit firm size.Cooke (1992)Industry sectorpositive with industry sectorMckinnon and Dalimunthe, (1993)Firm size, debt ratio, ownership dispersion.Positive with firm size and ownership dispersion and negative with debt ratio.Hossain et al. (1994)Firm size, debt ratio, ownership dispersion and audit firm size.Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.Wallace et al. (1994)Industry sectorInsignificant with industry sector.Meek et al, (1995)Firm size, debt ratio, profitability. Positive with firm size and profitability whereas significant, negative with debt ratio.Hossain et al. (1995)Firm size and Debt ratioSignificant positive with firm size and debt ratio.Mitchell et al. (1995) Firm size and Debt ratio.Significant positive with firm size and debt ratio.Wallace and Naser (1995) Firm size, profitability, Ownership dis persionPositive with firm size, ownership dispersion andindustry sector but-,audit firm size and industry sector Negatively with profitability and audit firm size.Ahmed (1995)Firm size and audit firm sizePositive significant with firm size and audit firm size.Raffournier (1995)Profitability, audit firm size and industry sector.No significant with profitability and industry sector, but significant positive with audit firm sizeZarzeski (1996) Firm size and debt ratioPositive with firm size and debt ratioAitken et al. (1997) Firm size, Debt ratio and owner ship dispersionPositive with the firm size and ownership dispersion but negative with debt ratio.Inchausti (1997)Profitability, audit firm size and industry sector.Positive with profitability and significant positive with audit firm size and insignificant with industry sector.Patton and Zelenka (1997)Industry sectorInsignificant with industry sector.Naser (1998)Debt ratio and industry sector.Significant positive with debt ratio but i nsignificant with industry sector.Owusu-Ansah (1998),Industry sectorInsignificant with industry sector.Mahmood (1999)Audit firm sizeSignificant with audit firm size.Brennan and Hourigan, (2000)Firm size and debt ratio.Significant positive with firm size and significant negative with debt ratio.Gelb (2000)Ownership dispersionNegatively with Ownership dispersionDepoers (2000)Audit firm sizeNo significant with audit firm size.Naser and Alkhatib (2000)industry sectorInsignificant with industry sector.Ho and Wong (2001)Profitability, ownership dispersion and audit firm size.No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.Naser et al. (2002).Firm size, Profitability, ownership dispersion and audit firm size.Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.Eng and Mak (2002)ProfitabilityNo significant with profitabilityChau and Gray (2 002)Ownership dispersionPositively with outside ownership dispersion.Camfferman and Cooke (2002)Profitability, audit firm size and industry sectorVoluntary Disclosure Behaviour of Kuwait CompaniesVoluntary Disclosure Behaviour of Kuwait CompaniesBACKGROUND OF STUDY1.1 IntroductionDisclosure of information in corporate annual reports has attracted a number of researchers in both developed and developing countries. The voluntary disclosure information in excess of mandatory disclosure, has been receiving an increasing amount of attention in recent accounting studies. Because of the inadequacy of compulsory information, the demand for voluntary disclosure provides investors with the necessary information to make more informed decisions (Alsaeed, 2006). Voluntary disclosure of decision-useful corporate information is considered to be the first step in solving the alleged problems of traditional financial reporting (Leadbetter, 2000). Its objectives are well defined closing (or narrowing ) the gap between a companys potential intrinsic market value and its current market value.Voluntary disclosure, in the context of globalization of the worlds financial markets, has received a great deal of attention in the accounting literature in recent years (Hossain, Berera and Rahman, 1995). This is due to the following reasons Firstly, additional disclosures may help to attract new shareholders thereby helping to keep an eye on a healthy demand for shares, and a share price that more fully reflects its intrinsic value. It is possible that poor disclosure could lead to an undervalued share making it attractive to a potential predator. Secondly, increased information may assist in reducing informational risk and thereby lower the cost of capital (Spero, 1979). A lower cost of capital should mean that marginal projects become profitable. Thirdly, in order to raise capital on the markets, companies will increase their voluntary disclosure. Consequently, listed companies are more likely to have a higher level of disclosure than unlisted companies and multiple listed companies those raising capital on the international markets will have a higher level of disclosure than domestically listed companies. Fourthly, multiple listed companies often have an interest in foreign capital markets since foreign operations are often financed by foreign capital (Choi and Mueller, 1984). Disclosure levels might be increased to adapt to local customs to meet the requirements of banks and other suppliers of capital finally, listed and multiple listed companies might increase their social responsibility disclosures to demonstrate that they act responsibly (Watts and Zimmerman, 1979). Companies may have attained their status on the securities markets and be able to attract new funds, not least because they act responsibly.According to Healy and Palepu (2001) a companys disclosure decision could be a response to innovation, globalization or changes in business and capital market environments.Kuwait is the focus of this study for three reasons. First, Kuwait is a small rich country, relatively open economy with crude oil reserves of about 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait Stock Exchange to mobilize domestic savings and attract foreign capital investment. These measures include privatization of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is becoming an important capital market in the region. It is ranked the second largest market in the Arab world (after Saudi Arabia) in terms of total market capitalization. Its total market capitalization was US$128,951 million as of December 2006 (Arab Monetary Fund 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a result, investors may be inte rested in the information disclosure practices of listed companies in Kuwait (Al-Shammari, 2008).1-2 Problem StatementMany developing countries strive to mobilize financial resources from domestic as well as international sources with a view to attaining their economic and social development goals. Domestic and international investors utilize financial and non-financial information available on potential investment targets for assessing risk and making critical investment decisions. Thus, the availability of financial and non-financial information in sufficient quantity and of sufficient quality has an important bearing on efforts geared towards mobilizing investment for financing economic and social development.Adequate reporting and disclosure of financial and non-financial information will reduce asymmetric information problem, hence are likely to improve investor confidence and a lower cost of investment. According to Gray, Meeks and Roberts (1995) investors demand information t o assess the timing and uncertainty of current and future cash flows so that they may value firms and make other investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by supplying voluntary accounting information, thereby enabling them to raise capital on the best available terms (Gray et al., 1995).Given the faster pace of globalization, the growing interdependence of international financial markets and increased mobility of capital, developing countries need to attach greater importance to corporate transparency and disclosure. Policy makers, legislators and regulators, in recognition of the significant influence that corporate transparency has on decisions of investors, need to strengthen further the various components of corporate disclosure root word so that domestic and international resources are mobilized more efficiently.Kuwait is one of the developing countries that face difficulties to attract foreign investments. Birgit E bner at Germanys Frankfurt Trust, who helps manage a Middle Eastern stock fund, said Kuwait was not an attractive investment compared with others in the region (www.gulfnews.com). One of the main reasons that interpret this matter is the absence of voluntary disclosure as a result of sharp low supply of information by companies.According to Birgit Ebner, We are underweight in Kuwait because in Kuwait there are many holding firms dominating the market. And on top of it, the transparency is currently lower than in other Gulf States.In opinion of many analysts in Kuwait, the problem of gulf bank is related to absence of voluntary disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines (www.alaswaq.net 2007).The purpose of this study is to empirically investigate the influence of several firm characteristics on the leve l of voluntary disclosure of companies listed in Kuwait and whether disclosure level improves over the years given changes in the accounting environment of the country and globalization that have taken placed.There are many studies have examined the relationship between a companys characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978) United Kingdom (Firth, 1979, 1980) Nigeria (Wallace, 1987) Sweden (Cooke, 1989) Japan (Cooke, 1992) United States (Imhoff, 1992 and Lang and Lundholm, 1993) Bangladesh (Ahmed and Nicholls, 1994) Switzerland (Raffournier, 1995) Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999) Jordan (Naser, Alkhatib and Karbhari, 2002) Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the role of voluntary disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).The aim of this study is to understand what motivate or demonstrate a companys disclosure by empirically investigate the association between a number of company characteristics and the extent of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting year on voluntary disclosure will also be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammaris study only cover the year of 2005, the execution of this study is fully justified.1.3 Research QuestionsIn general, this study seeks for explanation on voluntary disclosure behaviour of Kuwait companies. The followings are the research questions-1- What is the relationship between the firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and voluntary disclosure level?2- Does reporting year influences voluntary disclosure?3- To what extent do the above factors affect th e voluntary disclosure?1.4 Research ObjectivesTo determine the influences of firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and reporting year on the level of voluntary disclosure of companies listed in Kuwait.1.5 Significance of the StudyThe significance of study can be viewed from contributions given to Accounting academic discipline and to the practitioners and policymakers.Contribution to Accounting body of knowledgeThis study contributes to the literature on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and auditing profession. It also contributes to the corporate governance literature on whether the company characteristics found to be significant in companies operating in developed countries are similar to those a developing country like Kuwait.This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help explain voluntary disclosure in Kuwait.Contribution to the practitioners and policy makersKnowledge on firms characteristics that influence voluntary disclosure would enable policy makers to target training and monitoring activities to suitable target companies in order to improve disclosure level in the country. This is important because higher disclosure among companies could improve investors confidence and help attracting more foreign investment into the country.The study is also able to show whether the external environment in Kuwait have improved the voluntary disclosure activities.1.6 Scope and Limitations of the StudyThis study investigates the relationship between firm characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are different from those of non financial firms (Alsaeed, 2006).A disclosure index was constructed as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to shareholders. Albeit not as conclusive, financial reports serve as a widely accepted (Knutson, 1992).The disclosure index does not intend to be comprehensive, nor does it intend to specify what firms ought to disclose. Rather, the index is crafted solely for the purpose of capturing and measuring differences in disclosure practices among firms. The selection of items embedded into the index was entirely guided by Meek, Rober and Gray (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006)1.7 Organization of the StudyThe reminder of this study is organized as follows Chapter Two discusses the literature review related to the study Chapter Three consists o f research methodology including theoretical framework, hypothesis development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter Five provides the discussion, implications and recommendation of the study as well as suggestions for future research.CHAPTER TWOLITERATURE REVIEW2.1 IntroductionThis Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which affect the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide foundation knowledge of the issue understudy. Section two discusses the concept and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as fo und from prior theoretical and empirical literature. These variables include firm size, debt ratio, ownership dispersion, profitability, audit firm size.2.2 Disclosure Requirement in KuwaitMandatory disclosure refers to firms disclose information about their operations because of legal requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).2.3 Voluntary disclosure levelMore detailed disclosure by the firms beyond the level of information disclosed within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making public the financial and non-financial information regarding the firms operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).Alsaeed has identified a more comprehensive items for voluntary discl osure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in Table 2.1Table 2.1 Voluntary disclosure items in Alsaeed (2006)No.Disclosure items1Strategic information2Brief history of company3Information on events affecting future years results4Board directors names5Top managements names6Majority shareholders7Information on different types of products8Information statistics for more than two years9Information on dividends policy10Information on future expansion projects11Percentage of foreign and national labor force12Information on training and workers development13Information on social and environmental activities14Statement of corporate goals and objectives15Principle markets16Average compensation per employee17Market share18Information on events affecting current years results19Competitive environment20Forecasted profitsMany studies have examined the relationship between a companys characteristics and voluntary disclosure level. Alsaeed, (20 06) argued that firm size, profitability and auditor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976) Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between companys firm size, debt ratio, owner ship and auditor firm size and the level of disclosure.2.4 Determinants of Voluntary Disclosure2.4.1 Firm sizeMost of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006) Donnelly and Mulcahy (2008) Brammer and Pavelin (2004) Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hourigan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).Many studies found a positive relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He found that there was a positive relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that agency costs are higher for larger companies because shareholders are widespread, therefore, additional disclosure might reduce these costs (Watts and Zimmerman, 1983). This finding is consistent with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might suffer from a competitive disadvantage if they provide additional disclosure. Thirdly, large companies might be of interest to dif ferent users of annual reports including government agencies.2.4.2 Debt ratioThere is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies found a significant positive relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995) Hossain et al. (1995), Al-Shammari, (2008) and Bradbury, (1992).Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency costs by facilitating debt ratio suppliers assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their structure of capital are prone to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information asymmetry with shareholders.Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase with leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is negative relationship between voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).2.4.3 ProfitabilityMany studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971) Foster (1986), Richard (1992), Meek et al. (1995) and Nase r et al. (2002) they argues that when the level of firms profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitability and disclosure with mixed results.Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from less profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. However Wallace et al. (1994) found no significant relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.Inchausti (1997) elaborated that agency theory sug gests that managers of larger profitable companies may wish to disclose more information in order to obtain personal advantages like continuance of their management position and compensation.Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variables provides an explanation of the disclosure level.Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other hand found profitability to be positively and significantly related with two of the four disclosure categories, financial and forward looking disclosures, whereas other categories ware negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing sector were found to disclose less of financial information, and instead disclosed mo re on general and strategic information to explain in detail factors affecting their poor financial performance.2.4.4 Ownership dispersionThe ownership dispersion represents the percentage of shares owned by outsider after subtracting shares owned by the insider. Many studies found positive relationship between voluntary disclosure level and ownership, as explained by the agency theory which suggests that difference in the proportion of the companys shares owned by outsider shareholders causes differences in the voluntary disclosure level. This is because the companies with more outsider ownership are more likely to disclose more information than companies with less outsider ownership and also the demand for publicly available information is likely to increase (Wallace and Naser 1995).Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunth e, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found evidence consistent with this prediction.Many studies found negative relationship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.Naser et al. (2002) examined the affect of ownership on US companys disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.Ho and Wong (2001) found negative relationship between f amily ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level.2.4.5 Audit firm sizeAccording to Jensen and Meckling (1976) large audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports.In terms of size, audit firms can be divided into two large or small. Large audit firms are identified as being one of these Big Four (or Big Five or Six formerly) international auditing firms, and smaller audit firms are the rest the firms are more likely to choose a Big Six auditing firm. Such choice of audit firms signals to investors that the contents of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world while small firms are domestically hence the large audit firms have more capability to disclosure of the information and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm (Alsaeed, 2006).Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosur e and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didnt fine significant association.2.4.6 Industry sectorAccording Cook (1989) disclosure level is more likely to vary from one industry to the other due to the likelihood that leading firms operating in a particularindustry could produce a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. Cooke (1992) found evidence that Japanese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982) Wallace (1987) Wallace et al. (1994) Raffournier (1995) Inchausti, (1997) Patton and Zelenka (1997) Naser (1998) Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found insignificant effect.Table 2 .2 Summary of independent variables influence on voluntary disclosureStudyIndependent variablefindingsAkerlof (1970) ProfitabilityPositive relationshipSinghvi and Desai, (1971)ProfitabilityPositive relationshipJensen and Meckling, (1976)Debt ratio and audit firm sizePositive relationship with debt ratio and audit firm size.Firth, (1979)Firm size and audit firm sizePositive relationship with debt ratio and audit firm size.Leftwich, Watts, and Zimmerman (1981)Ownership dispersionpositive relationship with ownership dispersionMcNally et al.(1982)Industry sectorInsignificant with industry sectorFama and Jensen (1983)Ownership dispersionpositive relationship with ownership dispersionWatts and Zimmerman (1983).Firm sizepositive relationship with firm sizeFoster, (1986)Firm size, profitabilitySignificant positive with firm size and found positive with profitability.Watts and Zimmerman (1986)Profitabilitypositive with profitabilityWallace (1987)Industry sectorInsignificant with industry sec tor.Cook (1989)Industry sectorPositive with industry sector.Bradbury (1992) Firm size and debt ratio.Significant positive with firm size and debt ratio.Richard, (1992) ProfitabilityPositive with profitability.Forker (1992) Audit firm sizePositive but insignificant with audit firm size.Craswell and Taylor (1992)Audit firm sizePositively significant with audit firm size.Cooke (1992)Industry sectorpositive with industry sectorMckinnon and Dalimunthe, (1993)Firm size, debt ratio, ownership dispersion.Positive with firm size and ownership dispersion and negative with debt ratio.Hossain et al. (1994)Firm size, debt ratio, ownership dispersion and audit firm size.Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.Wallace et al. (1994)Industry sectorInsignificant with industry sector.Meek et al, (1995)Firm size, debt ratio, profitability. Positive with firm size and profitability whereas significant, negative with debt ratio.Hossain et al. (1 995)Firm size and Debt ratioSignificant positive with firm size and debt ratio.Mitchell et al. (1995) Firm size and Debt ratio.Significant positive with firm size and debt ratio.Wallace and Naser (1995) Firm size, profitability, Ownership dispersionPositive with firm size, ownership dispersion andindustry sector but-,audit firm size and industry sector Negatively with profitability and audit firm size.Ahmed (1995)Firm size and audit firm sizePositive significant with firm size and audit firm size.Raffournier (1995)Profitability, audit firm size and industry sector.No significant with profitability and industry sector, but significant positive with audit firm sizeZarzeski (1996) Firm size and debt ratioPositive with firm size and debt ratioAitken et al. (1997) Firm size, Debt ratio and owner ship dispersionPositive with the firm size and ownership dispersion but negative with debt ratio.Inchausti (1997)Profitability, audit firm size and industry sector.Positive with profitability and significant positive with audit firm size and insignificant with industry sector.Patton and Zelenka (1997)Industry sectorInsignificant with industry sector.Naser (1998)Debt ratio and industry sector.Significant positive with debt ratio but insignificant with industry sector.Owusu-Ansah (1998),Industry sectorInsignificant with industry sector.Mahmood (1999)Audit firm sizeSignificant with audit firm size.Brennan and Hourigan, (2000)Firm size and debt ratio.Significant positive with firm size and significant negative with debt ratio.Gelb (2000)Ownership dispersionNegatively with Ownership dispersionDepoers (2000)Audit firm sizeNo significant with audit firm size.Naser and Alkhatib (2000)industry sectorInsignificant with industry sector.Ho and Wong (2001)Profitability, ownership dispersion and audit firm size.No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.Naser et al. (2002).Firm size, Profitability, ownership di spersion and audit firm size.Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.Eng and Mak (2002)ProfitabilityNo significant with profitabilityChau and Gray (2002)Ownership dispersionPositively with outside ownership dispersion.Camfferman and Cooke (2002)Profitability, audit firm size and industry sector