Impact of Voluntary Disclosure on Valuation of Firms: Evidence from Indian Companies

Abstract

This article investigates the effect of voluntary corporate disclosures on the firm value from the market value perspective. Financial reporting includes disclosures as prescribed by regulators, but few companies go beyond mandatory requirements and provide additional information voluntarily. This study empirically tests the extent of such voluntary disclosures using Corporate Voluntary Disclosure Index containing 81 items of both financial and non-financial information and panel data regression to test the hypotheses. The sample for this study is the non-financial companies in the BSE 100 Index and the period is five financial years from 2010–2011 to 2014–2015. This study finds a positive association between voluntary disclosures and firm value as measured by Tobin’s Q. Especially the market gives a higher valuation for companies disclosing optional information on social and environmental, corporate governance and financial information. This finding has a significant implication for emerging economies like India and it supports various disclosure theories such as agency, stakeholders and positive accounting theories.

Keywords

Voluntary Disclosures Financial Reporting Panel Data Regression Firm Value Tobin’s Q Ratio

Introduction

Opaque financial reporting has been a major contributing factor for information asymmetry in the capital market. Lack of adequate disclosures and governance issues that led to the fall of companies like Enron triggered the debate on the role of regulators and policymakers and led to stricter regulations such as the Sarbanes Oxley Act, 2002. Inadequate financial disclosures by companies may cause price dispersion in the market for want of critical information (Singhvi & Desai, 1971). To apply the classic lemons problem propounded by Akerlof (1970), in the capital market, the asymmetry of information between companies and investors could result in adverse selection. Companies use tools such as financial reporting to convey information to minimize information asymmetry (Grossman, 1981). Favourable news about a company tends to increase the price of the security and give incentive to the managers (Milgrom, 1981). Profitable companies have more motivation for higher voluntary disclosures (Lang & Lundholm, 1996).

Countries with opaque financial reporting practices have historically had a low foreign direct investment (FDI) flows and higher expected rate of returns for bondholders. Transparent financial disclosures, along with other good practices such as prudent economic policies and prevention of corruption, could mitigate the problem of opacity (Lipsey, 2001). Regulators around the world prescribe mandatory disclosures to reduce the opacity in financial reporting. A good corporate disclosure (a formal communication from companies containing economic, financial and non-financial information) is one of the critical factors in reducing information asymmetry (Healy & Palepu, 2001).

The framework for financial reporting is undergoing systemic changes due to the proliferation of knowledge-intensive industries. The role of intangible assets is becoming increasingly significant due to burgeoning mergers and acquisitions activities (Lev, 2001). Corporate houses are now expected not only to make a profit or increase their market value but also to fulfil their social obligations, and disclosure around their performance on the sustainability front is also gaining attention. Financial reporting has thus evolved to a point where companies voluntarily disclose information on different aspects of their business to win the confidence of their stakeholders. Voluntary disclosure refers to the key information which firm discloses on its own accord, over and above those prescribed under various laws.

Practices related to disclosure vary widely. Companies are reluctant to disclose additional information for various reasons. It might not always be desirable for companies to disclose sensitive information, because it could reach their competitors as well (Gigler, 1994). Some key disclosures are held back by the concern for privacy, lack of time and resources (Hutton, 2004). Companies could take the alternative route of going private or not listing the shares and thereby reduce the burden of regulatory compliance (Healy & Palepu, 2001). It is hence essential to achieve a trade-off in disclosures.

Voluntary disclosure practices of Indian companies deserve attention as the country is among the growing emerging economies in the world. This current study is carried out with longitudinal data (a) to design and develop a comprehensive, Corporate Voluntary Disclosure Index (CVDI) and find the degree of voluntary disclosure of Indian companies using CVDI and (b) to analyse the impact of voluntary disclosure and its subcategories on the value of the firm. This study is conducted with the data of five financial years from 1 April 2010 to 31 March 2014.

This study contributes to the literature in several ways. It is one of the first studies during a period when India went through several legislations involving the disclosure practices and show interesting results on the benefit of voluntary disclosures on the value of the firm.

The remainder of this article is organized as follows: The sections ‘Corporate Reporting Practices of India’ examines the corporate reporting practices of India; ‘Review of Literature and Hypothesis Development’ lists several earlier studies worldwide on voluntary disclosures and their impact; ‘Method and Sampling’ explains the methods and puts forth the hypotheses; ‘Empirical Results’ discusses the empirical results and ‘Conclusion’ offers concluding remarks and highlights the contributions of this study.

Corporate Reporting Practices of India

India, with a well-controlled capital market, gone through a series of events that determined the evolution of its financial reporting system. The Companies Act, which came into existence for the first time in 1882, underwent several amendments and came to be known as Companies Act 1956. This act is now phased out by the Companies Act 2013. The law prescribes Schedule II, which is the format to report the financial statements by corporates. There are other disclosure requirements by Companies Act (2013) such as (a) particulars of employees drawing more than 24 lakhs per annum as per section 217(2A); (b) statement regarding the subsidiary companies (as per Section 212); (c) format for directors responsibility statements (217(2A) and (d) statements regarding conservation of energy by certain companies as per Section 217(1).

The year 1992 saw the formation of Securities and Exchange, Board of India (SEBI) to monitor the capital market. During 2004, realizing the need for good corporate governance, Clause 49 of the listing agreement came into effect from 31 December 2005. SEBI regulates the companies listed in the stock markets with mandatory disclosures. It has also promulgated various clauses in the listing agreement concerning financial reporting. Clause 49 on corporate governance reporting and Clause 55 on business responsibility reporting prescribe various mandatory and voluntary disclosures for listed companies (SEBI, 2015).

Indian companies are increasingly expanding their global presence and attracting considerable FDI. To keep the disclosure practices on par with international practices, India decided to align its accounting standards with International Financial Reporting Standards (IFRS) in different phases starting from the financial year beginning 2016. However, unlike developed economies, no comprehensive metric, similar to the Association for Investment Management and Research (AIMR) score, is available to estimate the quality of disclosure practices of Indian companies.

The present study attempts to fill the gap with the following questions: (a) What are the voluntary disclosures that companies in India can make to increase transparency? (b) Can these disclosures be classified under different subcategories encompassing all stakeholders? (c) What is the level of such voluntary disclosures in Indian companies? (d) Do such voluntary disclosures, both overall and at the level of subcategories, have any impact on the value of the firm?

Review of Literature and Hypothesis Development

The ensuing section discusses the literature relating to various theories on disclosure, the elements of voluntary disclosures and the effect of voluntary disclosures giving an impetus for the current study.

Various theories mark the evolution of financial reporting explaining the motivation of corporate entities for disclosures. According to Jenson and Meckling (1976), who promulgated agency theory, the board of management acts as an agent of the shareholders, carrying out its business in its best interests. Shareholders need to monitor the board, which results in agency cost, and the managements’ willingness for better transparency can reduce it to a large extent. Trueman (1986) pointed out that in competitive markets, companies try to differentiate themselves from their competitors, and one way to do that is to provide extensive disclosures than their peers, a tactic that came to be known as the signalling theory. Verrecchia (1983) proposed that firms that plan for greater disclosure need to strike a balance between transparency and vulnerability, which came to be known as proprietary cost theory. Aboody and Kasznik (2000) identified stock compensation theory, implying that a company chooses to give out more information to improve its value. The social angle of corporate disclosures emerged in the late 2000s (Craig, 2006), maintaining that companies want to operate in a larger society and hence need to embrace it by providing information on the company’s performance on its social responsibility. Another version, namely the stakeholder theory, takes a much broader view of society and includes the key stakeholders (e.g. customers, vendors, employees and community at large). Such views are evident in the emergence of corporate sustainability reporting, whereby companies disclose information well beyond their financial performance to include the entire gamut of product safety, environmental contributions and social welfare performance. Theories on disclosures are continuously evolving to the business requirements and the current study address the set of disclosure that could help the companies and the stakeholders together.

Several studies looked at the different dimensions of voluntary disclosures. The number of voluntary disclosure items used in the studies ranged from 20 (Naser & Nuseibeh, 2003) to as many as 128 (Gray, Meek, & Roberts, 1996). Studies focusing on the voluntary disclosure practices of specific industries also emerged (Malone, Fries, & Jones, 1993; Zarb & Riddle, 2007).

Various subcategories of voluntary disclosures emerged as focus areas for several studies. Mangena and Tauringana (2007) studied different reports on the strategy of the companies, mainly in the interim statements. According to Chan and Watson (2011), the information on the diversification strategy is useful to assess the value of each segment of the organization. Zarb and Riddle (2007) constructed an index of voluntary disclosure items consisting of forward-looking statements that include a firm’s strategy and the macro environment among others. Kang and Gray (2011), motivated by the growing importance of intangibles in the knowledge-intensive business environment, researched to develop value-chain scoreboard to measure the extent of intangible disclosures and found the information to be value relevant. Abdolmohammadi (2005) used 10 categories of intellectual disclosure items and found that they were positively and significantly associated with firms’ value in the US markets. Human resources form one of the major intangible assets in the firm and companies use different methods to value and disclose them in the annual report. Kaur, Raman, and Singhania (2014) studied the human resource accounting disclosure practices of India and found that the valuation methods used were unstructured and inconsistent and they suggested the standardized practice of its valuation. Nekhili, Boubaker, and Lakhal (2012) analysed R&D disclosures of companies listed in France and found a positive association between the disclosures and the firms’ value. Faisal, Tower, and Rusmin (2012) examined the firms’ policies related to environmental disclosures and used the sustainability reporting index to understand if the companies reporting sustainability initiatives created a better value to the shareholders. Goel and Misra (2017) used a self-constructed framework with various subparametres to investigate the effect of sustainability reporting practices with the profitability of the firm. The sustainability disclosure practices of emerging economies captured the interest of academics. In this theme, Bhatia and Tuli (2017) found that Brazilian companies were improving on the disclosures on sustainability as per the Global Reporting Initiative (GRI) guidelines. Ho and Shun Wong (2001) analysed the impact of corporate governance disclosures on the value of the firm. In the financial disclosure category, Lev and Penman (1990) studied earnings forecasts by managers and documented their effect on the stock market performances to conclude that it was one of the ways by which good companies provide a signal to the market. Lopes and Rodrigues (2007) examined the effect of fair-value disclosures of financial instruments, including foreign exchange information.

With this background, we propose the following hypotheses:

H₁: There is a positive association between the extent of subcategories of voluntary disclosure (H_1a to H_1h) and the firm value.

The study by Lang and Lundholm (1996) on the effect of increased disclosures on the market performance of companies provided evidence that companies enjoyed a more considerable following among analysts and better investor relations, resulting in better valuations. Hail (2002) found a significant association between disclosure quality and valuation in Switzerland. A study in Malaysia by Abdulrahman Anam, Hamid Fatima, and Rashid Hafiz Majdi (2011) on intellectual capital disclosures examined their implications of market capitalization of companies and found a positive association between the two. Uyar and Kilic (2012) found a strong positive relationship between voluntary disclosure and firms’ value in Turkey. Hassan, Romilly, Giorgioni, and Power (2009) examined the association of mandatory and voluntary disclosures with a firm valuation in countries with emerging economies and found the association to be strong for mandatory disclosures but weak for voluntary disclosures.

This led to the following hypothesis

H₂: There is a positive association between the extent of voluntary disclosure and firm value.

Method and Sampling

The first objective of this study is to develop a comprehensive voluntary disclosure index applicable to India. As discussed earlier, voluntary disclosures are those that are not mandated by the various laws stipulated under various regulations as per the section ‘Corporate Reporting Practices of India’. Table 1 presents the process followed in compiling the list of voluntary disclosure items in India.

The outcome of the process is the CVDI which consist of 81 items (Charumathi & Ramesh, 2013) arranged into eight subcategories, as given in Table 2. The CVDI is tested for reliability and validity tests and found to satisfy the conditions.¹

Table 1.

The Process Followed in Developing Corporate Voluntary Disclosure Index

S. No.	Process
1	Referring to the available literature on voluntary disclosure both Indian and international, collating and consolidating all the relevant items (this yielded more than 200 items)
2	Skimming the award-winning annual reports to find out the kind of information disclosed (e.g. GE won the award for the best annual report in 2012)
3	Taking into account the latest developments in India on voluntary disclosures (e.g. voluntary disclosures in Clause 49, such as the whistle-blower policy)
4	Considering the usefulness of an item of disclosure by getting experts’ opinion (from equity analysts who use financial statements extensively for valuation)
5	Removing items that are specific to certain industries (e.g. input/output ratio)
6	Removing items that are mandatory in India by referring to the accounting standards set by the Indian Professional Accountant body, The Institute of Chartered Accountants of India, listing agreement of SEBI, various provisions of the Companies Act (2013) and other relevant regulations (e.g. segment reporting)

Source: Compiled by authors.

The scores are calculated using manual content analysis with the information contained in the direct corporate communication channels such as annual reports and corporate sustainability reports, among others. The scores are unweighted (there is an equal weight of all the items) and dichotomous (i.e. one point if the disclosure is made and zero otherwise).

Sample

The universe of this study is the listed companies in India, and the BSE 100 index is the representative sample. Since financial companies (including banking, insurance) have different norms of disclosure as prescribed by the respective regulators, this study excluded these companies. The data are taken from CMIE Prowess, and NIC code is used to separate financial companies from the sample. This study used a balanced panel of data to observe the same set of companies over 5-year period of the study from 2011 to 2014 which resulted in 65 companies and 325 observations as per Annexure 1.

Data

This study examines the impact of voluntary disclosure on firm value. The dependent variable of the study is Tobin’s Q (TOBQ), which is a proxy for firm value. Propounded by Tobin, Q is the ratio of the market value of the assets to its replacement value. Several studies, such as Sami and Zhou (2008) and Cormier, Aerts, Ledoux, and Magnan (2009), have used a modified version of Tobin’s Q. A high TOBQ ratio allows two interpretations: (a) the management of the company could have used the assets more efficiently than the competitors and (b) the balance sheet of the company does not capture all the assets employed in the business, which suggests intangible assets that cannot feature in the balance sheet (Bracker & Ramaya, 2011). Both interpretations may apply in some cases. The independent variable is the score of subcategories and an overall score of corporate voluntary disclosure. The corporate disclosures reach the market after a fixed interval of time, and hence it is appropriate to take the 1-year lag of the scores with the firm value variables.

Table 2.

Constituents of Corporate Voluntary Disclosure Index

Sub-index	No. of Variables	Score	Hypotheses
General and Strategy Disclosure Index (GSDI)	14	GSDS	H_1a
Forward-Looking Statement Disclosure Index (FLSDI)	12	FLSDS	H_1b
Human and Intellectual Capital Disclosure Index (HICDI)	15	HICDS	H_1c
Social and Environmental Disclosure Index (SEDI)	10	SEDS	H_1d
Corporate Governance Disclosure Index (CGDI)	4	CGDS	H_1e
Non-GAAP Financial Disclosure Index (NGAAPDI)	16	NGAAPDS	H_1f
Stock Market Information Disclosure Index (SMIDI)	5	SMIDS	H_1g
Foreign Exchange Disclosures Index (FEXDI)	5	FEXDS	H_1h
Corporate Voluntary Disclosure Index	81	CVDS	H₂

Source: Compiled by authors.

Note: All the scores are percentages and all the indices have equal weighting in the overall index.

This study used the following control variables: (a) size, (b) risk, (c) profitability and (d) age. Size as measured by total assets empirically found to influence the value of the firm (Henning, Lewis, & Shaw, 2000). Risk as estimated through leverage (LEV) is the debt-to-equity ratio of a company, and the impact could be both positive and negative (Cheng & Tzeng, 2011). Profitability, as computed by return on equity (ROE), could also positively influence the value of the firm (Barako, Hancock, & Izan, 2006). Companies listed for a longer duration had evolved the disclosure practices compared with younger firms (Alsaeed, 2005), and hence this study used listing age of the firm as the fourth control variable. All the firm-level variables are retrieved from CMIE prowess and winsorized at 95 per cent. Table 3 describes the variables of this study.

Table 3.

Variables of the Study

Nature	Variable	Code	Definition
Dependent	Tobin’s Q	TOBQ	Market value of equity + book value of debt/total assets
Independent	Voluntary disclosure score including sub-indices with a 1-year lag
Control	Size	LnTA	Natural logarithm of total assets
	Leverage	LEV	Total debt/equity
	Age	AGE	Natural logarithm of the no. of days since listing and the last date of the financial year
	Profitability	ROE	Net profit/total equity

Source: Compiled by authors.

Panel data

A balanced panel of data with fixed effects (FE) and random effects (RE) is used in two models to examine the impact of the level of voluntary disclosures on firm value. Panel data takes into account the omitted variables bias caused by unobserved heterogeneity, thus strengthening the model.

This study used FE model for understanding the relationship between the corporate voluntary disclosure score and the predictor variables on the premise that the characteristic variables of a firm (such as industry type and ownership type) that are time-invariant influence the outcome variables and that such effects need to be controlled. The RE model is also used, which assumed that error terms not explained in the model are caused by random factors unrelated to the predictor variables (Stock & Watson, 2007).

Specification test and the model

The test by Hausman (1978) is used for comparing FE and RE models. The null hypothesis of the test is that the RE model is suitable: if that is true, both the models are consistent (with the RE model being more efficient than the FE model). If the FE model proved unsuitable, the Breusch–Pagan Lagrange multiplier (LM) test is performed to choose between RE and ordinary least-squared (OLS) regression: if the LM test gave a significant value, the RE model is suitable.

The following models are used in this study:

\begin{matrix} T O B Q_{i t} = β_{0} + β_{1} G S D S_{i t - 1} + β_{2} F L S D S_{i t - 1} \\ + β_{3} H I C D S_{i t - 1} + β_{4} S E D S_{i t - 1} \\ + β_{5} C G D S_{i t - 1} + β_{6} N G A A P D S_{i t - 1} \\ + β_{7} S M I D S_{i t - 1} + β_{8} F E X D S_{i t - 1} \\ + β_{9} R O E_{i t - 1} + β_{10} L n T A_{i t - 1} \\ + β_{11} L E V_{i t - 1} + ε i t \end{matrix}

(1)

\begin{matrix} T O B Q_{i t} = β_{0} + β_{1} C V D S_{i t - 1} + β_{2} R O E_{i t - 1} \\ + β_{3} L n T A_{i t - 1} + β_{4} L E V_{i t - 1} + ε i t \end{matrix}

(2)

Empirical Results

Table 4 presents the frequency distribution of the overall disclosure score (CVDS).

It is clear that only two companies scored more than 71 per cent in all the years; one more attained that score, but only in 2014—most companies scored between 31 and 70 per cent. Another noteworthy observation is that the number of companies scoring below 30 per cent had dropped to two by financial year 2014, pointing to an increase in the number of items disclosed by the companies over the years.

Table 4.

Frequency Distribution of CVDS

Disclosure Score	Financial Year ending
	2010	2011	2012	2013	2014
	No. of companies
30% or less	9	20	8	6	2
31%–50%	31	14	38	29	33
51%–70%	23	29	17	28	27
71% or more	2	2	2	2	3

Source: Secondary data.

Note: Calculated using Excel.

CVDS, corporate voluntary disclosure score.

Table 5 presents the average score of disclosures for the eight sub-indices along with the overall score and indicates a steady increase in the disclosure scores in the social and environmental sub-index—clear evidence of the shift in focus towards reporting on sustainability initiatives. The next sub-index showing an increase in the level of disclosure is that of human and intellectual capital. Intangibles increasingly drive businesses in the knowledge-driven era, and the more significant investment in human resources and other intangibles is evident from the results. The lowest score is for the non-GAAP disclosures. Most of the items in that category, such as cash flow ratios and economic value added, are price-sensitive (Rick & Willem, 2005), and Indian companies seem reluctant to disclose such information. The presentation of financial statements under other GAAP is also limited: only 10 per cent of the companies presented financial statements using IFRS, and 12 per cent had given the financial statements in US GAAP. The rest of the companies presented their financials only by Indian accounting standards. This split indicates that Indian companies are not yet willing to adopt other GAAPs voluntarily (Forensic Asia, 2013). The overall disclosure score showed a marginal increase (approximately 49 per cent) in the latest financial year (2013–2014). The average score for all the years is 45 per cent. The descriptive statistics of all the variables are given in Table 6.

Table 5.

Average Scores of the Sub-indices of CVDS

Score	Overall Average Score (%)	2010 (%)	2011 (%)	2012 (%)	2013 (%)	2014 (%)
GSDS	50	55	48	50	52	44
FLSDS	43	48	36	37	47	49
HICDS	58	40	52	60	68	69
SEDS	60	40	60	62	70	70
CGDS	58	53	52	60	50	74
NGAAPDS	37	38	34	30	45	42
SMIDS	54	47	62	46	52	63
FEXDS	57	62	50	63	55	58
CVDS	45	47	41	43	48	49

Source: Secondary data.

Notes: Authors calculation. Disclosure score with respect.

GSDS, general and strategy disclosure; FLSDS, forward-looking statement disclosure; HICDS, human and intellectual capital disclosure; SEDS, social and environmental; CGDS, corporate governance; NGAAPDS, non-GAAP disclosure; SMIDS, stock market information; FEXDS, foreign exchange disclosure; CVDS, corporate voluntary disclosure score.

Table 6.

Descriptive Statistics of Variables

	Minimum	Maximum	Mean	Standard Deviation
CVDS (%)	14.9	81.5	45.1	12.2
ROE* (%)	0	24	8.68	6.9
LEV (times)	0	1.9	0.5	0.53
Tobin’s Q (ratio)	0.2	14.0	2.3	2.1
TA (INR, million)	18,884	36,77,440	4,01,553	5,40,338
Valid	(by list)	325

Source: Secondary data.

Note: Authors’ calculation.

CVDS, corporate voluntary disclosure score; ROE, return on equity; LEV, leverage; TA, total assets.

The highest score for CVDS is 81 per cent. The companies in the sample are debt-free with leverage as low as zero and as high as six times. The average leverage is 0.73, and the TOBQ of the companies ranged from 0.28 to 14 times. A higher ratio indicates that the market valued the companies much more than their book value. The Pearson test is also performed to understand the correlation between the variables. Table 7 presents the correlation matrix of the variables in the model.

Table 7.

Pearson Correlation of Variables

	gsds	flsds	hicds	seds	cgds	ngaapds	smids	fexds	cvds	tobq	roe	Age	lev	lnta
GSDS	1
FLSDS	0.454*	1
HICDS	0.398*	0.406*	1
SEDS	0.423*	0.258*	0.609*	1
CGDS	0.277*	0.180*	0.340*	0.217*	1
NGAAPDS	0.304*	0.332*	0.308*	0.328*	0.287*	1
SMIDS	0.126**	0.200*	0.169*	0.100	0.110**	0.223*	1
FEXDS	0.241*	0.195*	0.121**	0.096	0.148*	0.187*	0.172*	1
CVDS	0.536*	0.486*	0.618*	0.470*	0.414*	0.424*	0.115**	0.239*	1
TOBQ	0.008	0.028	0.058	0.080	−0.027	0.123**	−0.043	0.107	0.044*	1
ROE	0.062	0.036	0.035	−0.057	−0.048	0.083	0.103	0.069	0.059	0.037	1
AGE	0.120	0785	0.136	0.190	0.045	0.063	0.009	0.0516	0.151	0.063	0.043	1
LEV	−0.046	0.038	0.070	0.063	−0.005	0.079	0.058	−0.073	−0.022	−0.072	0.095	0.0011	1
LnTA	0.967*	0.195*	0.204*	−0.291*	0.227*	0.178**	−0.165*	0.472*	0.325*	0.124	0.028	0.180	0.42	1

Note: **Correlation significant at 0.05% (two-tailed); *correlation significant at 0.01% (two-tailed).

The close correlation between the scores of all the sub-indices validates the internal consistency of CVDI. The score of NGAAP disclosure is positively and significantly correlated to TOBQ. The positive and significant correlation between the size and the disclosure score indicates that bigger companies tend to have a more significant following among analysts, which may have increased the level of disclosure.

Table 8.

Fixed Effects Regression Results on Impact of the Scores of the Sub-indices of CVDI on Tobin’s Q (Model 1)

Dependent Variable TOBQ
Variable	Coefficient	Standard Error	p-Value
GSDS	0.716	0.413	0.085*
FLSDS	–0.118	0.378	0.755
HICDS	0.128	0.249	0.607
SEDS	–0.599	0.275	0.031**
CGDS	0.027	0.204	0.894
NGAAPDS	–0.112	0.448	0.004
SMIDS	0.420	0.282	0.138
FEXDS	0.375	0.291	0.098
LEV	0.085	0.115	0.456
LnTA	–0.066	0.076	0.387
ROE	1.753	1.113	0.117
AGE	–0.087	0.135	0.519
N	325
R-squared	12.250%
Hausman test	22.7 (0.000***)
F-test	17.06 (0.000^***)

Source: Authors’ calculation from secondary data.

Note: Figures in parenthesis represent the p-value; *, **, *** indicate significance at 10%, 5% and 1%, respectively. The one period lag value is used for the disclosure scores.

We performed multicollinearity diagnostics, and given that the variance inflation factor is below 5 the variables posed no serious problems and hence we incorporate all the variables in the model.

Panel data regression

All the three models of regression, namely OLS, FE and RE, are deployed to study the relationship between the scores on the sub-indices of CVDI and TOBQ. Based on Hausman test at 1 per cent significance level, the FE model was found to be suitable. Table 8 presents the FE regression results for Model 1.

There is a positive and significant association between Tobin’s Q and four sub-indices, namely social and environmental, corporate governance, non-GAAP financials and foreign exchange disclosures.

It is noteworthy that the market rewards companies with higher disclosure scores on social and environmental disclosures, a finding consistent with that by Cormier et al. (2009), supporting the stakeholder theory which emphasizes the creation of shared values—values that are not limited to shareholders but extend to all the stakeholders.

Voluntary disclosure of corporate governance increases the market value, thereby supporting the agency theory that agency cost is lower for well-governed companies (Suntraruk, 2013). Non-GAAP and foreign exchange disclosure are found to have a strong association with a firm’s valuation, a finding consistent with that by Bradshaw and Sloan (2002) which showed that market premium on stocks is more closely associated with disclosures of financial information.

Table 9.

Results of Fixed Effects Panel Data Regression of Model 2

Dependent Variable TOBQ
	Coefficient	Standard Error	p-Value
CVDS	0.013	0.765	0.079*
LEV	−0.108	0.137	0.203
LnTA	−0.375	0.087	0.000***
ROE	4.039	1.159	0.000***
AGE
N	325
R-squared	8.25%
Hausman test	22.700 (0.000)
F-test	17.060 (0.000)
Bruech Bagan LM test	NA

Source: Authors’ calculation from secondary data.

Note: Figures in parenthesis represent the p-value; *, **, *** indicate significance at 10%, 5% and 1%, respectively. All the independent variables are taken with 1-year lag.

CVDS, corporate voluntary disclosure score.

The second model analysed the relationship between the levels of voluntary corporate disclosures as measured by the overall disclosure score and firms’ valuation. Regressions are estimated using OLS, FE and RE models. Table 9 presents the results of the FE model.

The Hausman test with a significance at 1 per cent indicated that the FE model is suitable over the RE model, and Table 3 presents the results of the FE model. It indicates a positive and significant (at 10 per cent) association between the level of voluntary disclosures and a firm’s value. In other words, Indian markets give a higher premium for companies that disclose information voluntarily.

Robustness check

We checked the model using other proxies of firm valuation, namely P/B (price to book, model 3) ratio and natural logarithm of enterprise value (LnEV, model 4) and the results are robust with both the metrics having a positive and significant effect on CVDS at 1 and 10 per cent, respectively. Table 10 contains the results of the robustness check.

The results, along with the robustness check, show that firms with higher voluntary disclosures command a better firm value. Interestingly it is contrary to the results obtained by Alencar (2005) in Brazil, by Banghøj and Plenporg (2008) in Denmark and by Hassan et al. (2009) in Egypt. All the mentioned studies found that disclosures in annual reports neither reduced information asymmetry nor enabled users of the reports to incorporate the voluntarily disclosed information into the estimated value of a firm.

Table 10.

Results of the Robustness Check

Dependent Variable	Model 3		Model 4
	P/B Ratio		Enterprise Value
	Coefficient (p-value)	Standard Error	Coefficient (p-value)	Standard Error
CVDS	0.34 (0.038*)	0.54	1.00 (0.033)**	0.148
LEV	0.36	0.33	−0.03 (0.706)	1.892
LnTA	0.530 (0.00**)	0.217	0.021 (0.695)	0.242
ROE	8.54 (0.00**)	3.29	0.961	0.236
AGE	−0.145	0.4043	−0.123	0.423
N	325
R-squared	8.25%		11.24%
Hausman test	22.700 (0.000)		18.5 (0.045)
F-test	17.060 (0.000)		2.25(0.0135)
Bruech Bagan LM test	NA

Source: Authors calculation from secondary data.

Note: Figures in parenthesis represent the p-value; **, *** indicate significance at 5% and 1%, respectively. All the independent variables are taken with a 1-year lag.

CVDS, corporate voluntary disclosure score.

In an emerging economy such as India, the potential for the growth of the capital market is enormous, which, in turn, increases the number of users of financial statements, particularly analysts who use it for the valuation of a company. This pattern matches what Sheu, Chung, and Liu (2010) found in Taiwan and what AbdulRahman et al. (2011) found in Malaysia, that there is a positive association between the metrics of market value and extent of voluntary disclosures leading to greater transparency. The possible explanation lies in the economies—the developed and the emerging—and time, with the latest studies showing a markedly higher relevance of voluntary disclosures to valuation.

Conclusion

This study examined the effect of voluntary disclosures on the value of the firm and contributed to the literature by providing evidence of a definite link between the level of voluntary disclosures and firm value in the Indian context. This study reinforces the positive accounting theory which focuses on the economic consequences and the effect of shareholders’ wealth on the accounting choices of companies (Watts & Zimmerman, 1978).

The results also suggest that non-GAAP financial information from Indian companies tends to be minimal, and there is ample scope for companies to widen their disclosures in the coming years. For example, Off-Balance Sheet Financing (OBF) is challenging to figure out from the disclosures, and more often it does not get the attention of typical users of financial statements. To a great extent, Ind AS which got implemented after this study addresses this issue.

The limitations of this study include the use of manual content analysis and the sample size, which got limited to a set of companies. The constraints of secondary data research will be applied to this as well.

This study could be extended using computerized content analysis that will allow larger samples and future studies could focus on the impact of voluntary disclosures on the cost of capital.

The motivation of firms to disclose information voluntarily is particularly relevant in case of emerging economies because firms in those economies need to grow financially, and hence their need for capital is high. This study also found that the disclosure level of companies across the study period kept rising, particularly concerning social and environmental disclosures, the probable reason being the increasing role of enterprises in the well-being of society than ever before.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Appendix

Annexure 1.

Sample Selection Process

Sample Selection
	Financial Year Ending
	2011	2012	2013	2014	2015
No. of Companies in BSE 100	100	100	100	100	100
Less: Banking and financial companies	17	21	21	18	19
Less: Companies not a part of the index in all the years of the study	18	14	14	17	16
Companies in the final sample	65	65	65	65	65

Source: CMIE prowess.

Note: Calculated by authors.

Note

References

Abdolmohammadi

(2005). Intellectual capital disclosure and market capitalisation. Journal of Intellectual Capital, 6(3), 397–446.

Abdulrahman Anam

, Hamid Fatima

, & Rashid Hafiz Majdi

(2011). Effects of intellectual capital information disclosed in annual reports on market capitalization: Evidence from Bursa Malaysia. Journal of Human Resource Costing & Accounting, 15(2), 85–101.

Aboody

, & Kasznik

(2000). CEO stock options awards and the timing of corporate voluntary disclosure. Journal of Accounting and Economics, 29(1), 73–100.

Akerlof

G. A.

(1970). The market for lemons: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500.

Alencar

(2005). Cost of equity capital and disclosure level in Brazilian companies. Brazilian Business Review, 2(1), 1–12.

Alsaeed

(2005). The association between firm-specific characteristics and disclosure: The case of Saudi Arabia. The Journal of American Academy of Business, 7(1), 310–321.

Banghøj

, & Plenporg

(2008). Value relevance of voluntary disclosure in the annual report. Accounting and Finance, 48(1), 159–180.

Barako

, Hancock

, & Izan

(2006). Factors influencing voluntary corporate disclosure by Kenyan companies. Corporate Governance, 14(2), 107–125.

Bhatia

, & Tuli

(2017). Sustainability reporting under G3 guidelines: A study on constituents of Bovespa Index. Vision: The Journal of Business Perspective, 21(2), 204–213.

10.

Bracker

, & Ramaya

(2011). Examining the impact of research and development expenditures on Tobin’s Q. Academy of Strategic Management Journal, 10(Special), 63–79.

11.

Bradshaw

M. T.

, & Sloan

R. G.

(2002). GAAP versus the street: An empirical assessment of two alternative definitions of earnings. Journal of Accounting Research, 40(1), 41–66.

12.

Chan

M. C.

, & Watson

(2011). Voluntary disclosure of segment information in a regulated environment: Australian evidence. Eurasian Business Review, 1(1), 37–53.

13.

Charumathi

, & Ramesh

(2013). Voluntary disclosures by Nifty companies: A content analysis. Indian Accounting Review, 17(2), 67–82.

14.

Cheng

M. C.

, & Tzeng

Z. C.

(2011). The effect of leverage on firm value and how the firm financial quality influence on this effect. World Journal of Management, 3(2), 30–53.

15.

Cormier

, Aerts

, Ledoux

, & Magnan

(2009). Attributes of social and human capital disclosure and information asymmetry between managers and investors. Canadian Journal of Administrative Sciences, 26(1), 71–88.

16.

Craig

(2006). Legitimacy theory. In Hoque

(Ed.), Methodological issues in accounting research (pp. 161–181). Spiramus Press Limited.

17.

Faisal

, Tower

, & Rusmin

(2012). Legitimizing corporate sustainability reporting throughout the world. Australasian Accounting Business & Finance, 6(2), 19–34.

18.

Forensic Asia (2013). India’s accounting bombshell. CHM Research Limited.

19.

Gigler

(1994). Self-enforcing voluntary disclosure. Journal of Accounting Research, 32(2), 224–240.

20.

Goel

, & Misra

(2017). Sustainability reporting in India: Exploring sectoral differences and linkages with financial performance. Vision: The Journal of Business Perspective, 21(2), 214–224.

21.

Gray

S. J.

(1988). Towards a theory of cultural influences on the development of accounting systems internationally. Abacus, 24(1), 1–15.

22.

Gray

, Meek

, & Roberts

(1996). International capital market pressures and voluntary annual report disclosures by US and UK multinationals. Journal of International Financial Management and Accounting, 6(1), 44–67.

23.

Grossman

(1981). The information role of warranties and private disclosure about product quality. Journal of Law and Economics, 24(December), 461–483.

24.

Hail

(2002). The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms. The European Accounting Review, 11(4), 741–773.

25.

Hassan

O. A. G.

, Romilly

, Giorgioni

, & Power

(2009). The value relevance of disclosure: Evidence from the emerging market of Egypt. The International Journal of Accounting, 44(1), 79–102.

26.

Hausman

(1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.

27.

Healy

, & Palepu

(2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting & Economics, 31(1), 405–440.

28.

Henning

L. H.

, Lewis

, & Shaw

W. H.

(2000). Valuation of the components of purchased goodwill. Journal of Accounting Research, 38(2), 375–386.

29.

S. S. M.

, & Shun Wong

(2001). A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), 139–156.

30.

Hutton

(2004). Beyond financial reporting—An integrated approach to disclosure. Journal of Applied Corporate Finance, 16(4), 8–16.

31.

Jenson

, & Meckling

(1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

32.

Kang

, & Gray

S. J.

(2011). The content of voluntary intangible asset disclosures: Evidence from emerging market companies. Journal of International Accounting Research, 10, 109–125.

33.

Kaur

, Raman

A. V.

, & Singhania

(2014). Human resource accounting disclosure practices in Indian companies. Vision: The Journal of Business Perspective, 18(3), 217–235.

34.

Lang

, & Lundholm

(1996). Corporate disclosure policy and analyst behavior. The Accounting Review, 71(4), 467–492.

35.

Lev

(2001). Intangibles: Management, measurement and reporting. The Brookings Institution.

36.

Lev

, & Penman

S. H.

(1990). Voluntary forecast disclosure, non-disclosure and stock prices. Journal of Accounting Research, 28(1), 49–76.

37.

Lipsey

(2001). Pwc’s opacity index: A powerful new tool for global investors. Journal of Corporate Accounting & Finance, 12(6), 35–44.

38.

Lopes

, & Rodrigues

(2007). Accounting for financial instruments: An analysis of the determinants of disclosure in the Portuguese stock exchange. The International Journal of Accounting, 42(2), 25–56.

39.

Malone

, Fries

, & Jones

(1993). An empirical investigation of the extent of corporate financial disclosure in the oil and gas industry. Journal of Accounting, Auditing and Finance, 8(3), 249–275.

40.

Mangena

, & Tauringana

(2007). Corporate compliance with non-mandatory statements of best practice: The case of the ASB statement on interim reports. European Accounting Review, 16(2), 399–427.

41.

Milgrom

(1981). Good news and bad news: Representation theorems and applications. Bell Journal of Economics, 12(2), 380–391.

42.

Naser

, & Nuseibeh

(2003). Quality of financial reporting: Evidence from the listed Saudi non-financial companies. The International Journal of Accounting, 38(3), 41–69.

43.

Nekhili

, Boubaker

, & Lakhal

(2012). Ownership structure voluntary R&D disclosure and market value of firms: The French case. International Journal of Business, 17(2), 126–139.

44.

Rick

, & Willem

(2005). Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences. European Accounting Review, 14(3), 487–524.

45.

Sami

H. S.

, & Zhou

(2008). The economic consequences of increased disclosure: Evidence from cross listings of Chinese firms. Journal of International Financial Management and Accounting, 19(1), 1–24.

46.

SEBI (2015, September). Legal framework. http://www.sebi.gov.in/sebiweb/home/list/1/3/0/0/Regulations

47.

Sheu

H.-J.

, Chung

, & Liu

C.-L.

(2010). Comprehensive disclosure of compensation and firm value: The case of policy reforms in an emerging market. Journal of Business Finance & Accounting, 37(9–10), 1115–1144.

48.

Singhvi

, & Desai

(1971). An empirical analysis of quality of corporate financial disclosure. Accounting Review, 46(1), 129–138.

49.

Stock

H. J.

, & Watson

(2007). Introduction to econometrics. Pearson Addison Wesley.

50.

Suntraruk

(2013). An empirical analysis on the association between corporate governance rating and firms’ characteristics: Evidence from MAI Thailand. International Journal of Academic Research in Business and Social Sciences, 3(12), 732–744.

51.

Trueman

(1986). Why do managers voluntarily release earnings forecasts? Journal of Accounting and Economics, 8(1), 53–72.

52.

Uyar

, & Kilic

(2012). Value relevance of voluntary disclosure: Evidence from Turkish firms. Journal of Intellectual Capital, 13(3), 363–376.

53.

Verrecchia

R. E.

(1983). Discretionary disclosure. Journal of Accounting and Economics, 5(1), 179–194.

54.

Watts

, & Zimmerman

(1978). Towards a positive theory of the determination of accounting standards. The Accounting Review, 53(1), 112–134.

55.

Zarb

, & Riddle

(2007). Voluntary disclosures of forward-looking earnings information and firm value in the airline industry. International Journal of Business Research, 8(6), 1–18.