Is Voluntary Disclosure Value Relevant? Evidence from Top Listed Firms in India

Abstract

In view of ongoing reforms in India with emphasis on improving transparency of corporate, the present study aims to examine the influence of voluntary disclosure on the market value of India’s top-listed firms. To this end, the study uses a sample of top 100 non-financial and non-utility firms listed at Bombay Stock Exchange based on market capitalization over a 5-year period (2014–2018). To control potential endogeneity in the relationship between voluntary disclosure and firms’ market valuation, fixed effect panel data model and two-stage least squares model of estimation have been employed. The result obtained from the analysis suggests that enhanced level of voluntary disclosure significantly improves the market value of sample firms. The study further undertakes additional analysis by categorizing voluntary disclosure into its sub-components wherein the findings reveal that three components of voluntary disclosure such as corporate and strategic disclosure, forward looking disclosure and corporate governance disclosure make positive contribution towards market value of firms, while the remaining components of voluntary disclosure such as human and intellectual capital disclosure and financial and capital market disclosure do not appear to have any significant influence on the same. Overall, the finding suggests that voluntary disclosure made by sample firms is considered relevant by investors. However, value relevance of different components of voluntary disclosure varies with the nature and extent of information disclosed. The study offers some important policy implications.

Keywords

Endogeneity India Market Value Voluntary Disclosure

Introduction

Aftermath of globalization of financial markets is coupled with the enormous accounting scandals around the world in the recent years; corporate disclosure has drawn considerable attention of the researchers in the accounting literature. Enhanced corporate disclosure facilitates information flow between managers and shareholders and thereby reduces the chances of misvaluation of companies’ stock prices and managerial myopia emerging out of information asymmetry (Jiao, 2011). Corporate disclosure is classified as mandatory and voluntary disclosure. While the former is concerned with information specified by different regulatory framework, voluntary disclosure includes additional information over and above mandatory disclosure (Ho & Wong, 2001; Healy & Palepu, 2001). Though, it is not mandated under any regulation, yet disclosing such information is deemed to be best practice.

The concept of ‘value relevance’ is concerned with the capacity of disclosure to influence stock prices by providing superior information (Francis & Schipper, 1999). Though sizeable literature have focused on the value relevance aspect of voluntary disclosure, studies in the initial years are mostly confined to developed market (Botosan, 1997; Collins et al., 1997; Hail, 2002) while in the recent past the focus has been shifted to some emerging markets (Banghøj & Plenborg, 2008; Hassan et al., 2009; Uyar & Kılıç, 2012). In particular, value relevance of voluntary disclosure in the Indian context has been largely ignored so far in the existing literature, probably due to opaque disclosure practices by Indian companies (Raithatha & Bapat, 2012). While evidence from developed market mostly exhibits that voluntary disclosure adds value to firms, in the case of emerging market, the results are contradictory and inconsistent. Such inconsistencies might arise on account of some unique prevailing characteristics of emerging market such as flourishing growth potential, closely held corporation, fragile investor protection environment, less-liquid stock markets, weak corporate governance mechanisms to protect minority shareholders’ interest, and self-serving motives of managers and substantial owners encouraging firms to keep disclosure at lower level.

Examining the value relevance of voluntary disclosure in the Indian context is particularly interesting due to some reasons. First, India secured the seventh position in gross domestic product (GDP) ranking by World Bank in 2018, making it the second largest emerging economy of the world with GDP of $2.74 trillion. The impressive growth rate coupled with foreign investment friendly policies of the government has made India one of the most favoured destinations for international investors which, in turn, created increased demand of corporate information beyond what is prescribed by country specific regulations. Thus, to persist such a trend, there is a genuine need for the concerned parties to have insights about voluntary disclosure practices of Indian companies. Second, the unique features of emerging market as discussed above are also equally applicable in the case of India, making it one of the suitable platforms to know whether voluntary disclosure of Indian companies is actually relevant to investors or not.

Against this backdrop, the present study attempts to fulfil two objectives: first, to examine the influence of voluntary disclosure on the market value of firms and second, to examine the influence of different components of voluntary disclosure on market value of firms. Employing a sample of top 100 non-financial and non-utility firms listed at Bombay Stock Exchange (BSE) based on market capitalization over a 5-years period (2014–2018), the findings exhibit strong positive influence of voluntary disclosure on firms’ market valuation. In addition, the findings also reveal significant positive influence of three sub-components of voluntary disclosure, that is, corporate and strategic disclosure, forward looking disclosure and corporate governance disclosure on market value of firms, while its remaining two components such as human and intellectual capital disclosure and financial and capital market disclosure do not appear to have any significant influence on the same.

The present study has enriched the extant literature in certain ways. First, it contributes to the scarce Indian literature pertaining to voluntary disclosure, especially on the value relevance aspect of voluntary disclosure. Second, the study by employing a comprehensive voluntary disclosure index has rated voluntary disclosure done by sample firms in five consecutive years (2014–2018), thus exhibiting the trend of voluntary disclosure of top listed Indian firms subsequent to the implementation of major corporate reforms. Finally, the study together with the use of 5 years data set employs fixed effect panel data regression model and two-stage least squares model of estimation for eliminating the endogeneity issue to the best possible extent, which is evident in most of the studies in literature till date.

An Overview of Corporate Disclosure in India

As the study mainly emphasizes on value relevance of corporate voluntary disclosure, it is necessary to acquire understanding about the regulatory framework of corporate disclosure in India. The disclosure practices of Indian companies are basically governed by three statutes, namely, Companies Act, Institute of Chartered Accountants in India (ICAI) and Securities and Exchange Board of India (SEBI). The Indian Companies Act came into existence in 1882, has undergone several amendments in order to adapt the UK-based law to Indian conditions and is recently being phased out in form of Companies Act, 2013. The new act prescribes Schedule III, which underlines the disclosures to be made in financial statements. In addition, financial reporting in India is supplemented by the pronouncements of ICAI, a body established through Chartered Accountants Act, 1949. Further, Indian stock exchanges, that is, BSE and National Stock Exchange (NSE), also require all listed companies to follow certain disclosure rules across different market segments.

Concerns about corporate disclosure in India were realized soon after the announcement of a new economic policy in 1991, coupled with the waves of corporate scandals witnessed by market. This led the government to confer statutory recognition to SEBI in 1992 as a regulator of the stock market. Subsequently, some committees were constituted by SEBI to assists it in, including major governance and disclosure requirements for Indian corporate. Following their recommendations, SEBI introduced Clause 49 in the listing agreement in 2000, which specified some crucial disclosure requirements such as including management discussion and analysis section in annual report, preparation of separate corporate governance report and disclosure on subsidiaries and related party transactions, etc. Further, Clause 49 was revised in 2004, wherein it emphasized more on quality of financial disclosure, mandates some additional disclosure requirements such as performance evaluation of the independent directors, whistle-blower policy, etc. In response to non-financial information needs of stakeholders, SEBI introduced Business Responsibility Report (BRR) in 2012 whereby it mandates top 500 listed entities to disclose information about their environment, social and governance initiatives. Parallel with the Organisation for Economic Co-operation and Development (OECD) principles, SEBI recently introduced Listing Obligations and Disclosure Requirement (LODR) Regulations, 2015, replacing Clause 49 for the purpose of ensuring better enforceability of the existing regulations.

Thus, it is evident that the standard of corporate reporting for Indian companies is gradually being raised to make companies comparable with international standard. However, regarding compliance, it was observed in a study of top 100 Indian companies by Forensic Technologies International (FTI) Consulting Ltd. in 2018 that top companies were only complying with 50–60% of the overall benchmark. Thus, it is the prime necessity to know the extent to which companies are making discretionary disclosure and further to investigate whether the information provided by Indian companies are relevant to investors or not.

Theoretical and Empirical Literature

Managerial intention to disclose information voluntarily is predominantly explained in the agency theory and the positive accounting theory. While agency theory suggests that in view of information asymmetry between managers and owners, the former disclose information opportunistically based on their cost–benefit trade-off (Jensen & Meckling, 1976); the positive accounting theory contends that the choice of accounting method made by firms is based on wealth maximization motive of managers (Watts & Zimmerman, 1990). In addition, the signalling theory also highlights the issue of information asymmetry, wherein firms use voluntary information to reveal their superiority in the market for the purpose of attracting capital and favourable reputation (Ross, 1977). In addition, some socio-political theories such as political economy theory, stakeholders’ theory and legitimacy theory explain the rationale for voluntary disclosure as these theories consider firms as a part of wider political and social system, and voluntary disclosure is used as a strategic tool in the process of legitimizing their activities in the overall external network (Dowling & Pfeffer, 1975; Freeman, 1994; Gray et al., 1997). Thus, theoretical literature presents several underlying motives of voluntary disclosure; the motives, in turn, have an ultimate goal of maximizing the value of the firm.

Prior empirical literature also exhibits several motivating factors for firms to disclose information voluntarily. These factors include diminishing influence on the firm’s cost of capital (Botosan, 1997), better market liquidity (Diamond & Verrecchia, 1991), less probability of agency conflict through better information intermediation (Fama & Jensen, 1983), better analyst following (Lang & Lundholm, 1993), signalling of management’s expertise (Elshandidy, 2013) and stock price incentive (Brockman et al., 2010). Moreover, regarding the market valuation influence of disclosure, Cheung et al. (2010) find that market does not offer any reward to companies for complying with mandatory disclosure as it is generally expected from them to do so for avoiding non-compliance issues, while companies with voluntary disclosure are fairly rewarded by the market. However, voluntary disclosure is not free from costs like competitive disadvantage or proprietary costs (Dye, 1986; Verrecchia, 1983), cost of litigation (Darrough & Stoughton, 1990), information production and dissemination cost and political cost (Cormier et al., 2005). Considering the multiple costs and benefits, companies make a trade-off while deciding the extent of voluntary disclosure (Gisbert & Navallas, 2013).

Empirical literature on the relationship between voluntary disclosure and market value of firms suggests that the value relevance of voluntary disclosure can be routed in two forms: first, numerator effect or enabling investors to have better prediction of firms’ financial performance and second, denominator effect or reducing firms’ cost of capital (Clarkson et al., 2013). Following the first route, numerous studies exhibit that voluntary disclosure made by companies assists investors to make better prediction of firms’ financial performance that, in turn, leads to better market value of firms (Al-Akra & Ali, 2012; Anam et al., 2011; Cahan et al., 2016; Moumen et al., 2015; Sahore & Verma, 2017; Uyar & Kılıc, 2012). Similarly, based on the second route, studies reveal that voluntary disclosure has significant negative influence on firms’ cost of capital (Botosan, 1997; Botosan & Plumlee, 2002; Clarkson et al., 1996; Leuz & Schrand, 2009; Plumlee et al., 2015). Nevertheless, some studies suggest that voluntary disclosure does not have any significant influence on market value of firms (Banghøj & Plenborg, 2008; Dawd & Charfeddine, 2019; Hassan et al., 2009; Wang et al., 2008), indicating that such relationship is determined by a number of intervening factors such as misinterpretation of investors, less extent of disclosure, inefficient market, etc. Although empirical literature provides mixed evidence, considering the rapid transformation of corporate reporting regulations in the Indian context and well-built theoretical framework; the following hypothesis can be framed:

H₁: Voluntary disclosure has significant positive influence on the market value of Indian firms.

Methodology

Sample Selection and Data Source

The sample employed in this study includes top 100 non-financial and non-utility firms based on market capitalization listed on BSE as on 31 March 2014. The rationale for selecting top 100 firms lies in the fact that such firms constitute around 76% of BSE’s total market capitalization.¹ The study particularly focused on top listed firms in BSE as it is the oldest stock exchange in Asia, and market capitalization based on its price quotes is more prevalent in the country. Nevertheless, the sample firms under consideration are listed at both BSE as well as NSE. Financial and utility firms are eliminated from the sample as additional regulations and reporting requirements such as Banking Regulation Act, 1949 and Electricity Act, 2003 are applicable to them. The study is conducted over a period of 5 years, that is, 2013–2014 to 2017–2018, since prominent reforms relating corporate reporting in India (e.g., Companies Act, 2013; SEBI’s Revised Clause 49, 2014) were implemented during this period. The required information regarding voluntary disclosure have been generated by undertaking content analysis of annual reports of sample firms, and other financial information are collected from corporate database called Capitaline Plus.

Measurement of Independent Variable

The independent variable in this study is voluntary disclosure. For the purpose of measurement, a voluntary disclosure index (VDI) is constructed as a surrogate measure to capture the voluntary information unveils by firms in their annual reports by following certain steps as discussed below:

To begin with, an extensive review of extant literature is undertaken, wherein a preliminary list of 131 is prepared (Botosan, 1997; Charumathi & Ramesh, 2015; Eng & Mak, 2003; Ho & Wong, 2001; Lim et al., 2007; Meek et al., 1995; Patelli & Prencipe, 2007).

To modify the preliminary list in the Indian context, it is checked with respect to prevailing Indian regulations that are associated with disclosure requirement of sample firms (Companies Act, 2013, SEBI [Listing Obligation and Disclosure Requirement] Regulation, 2015, Converged Indian Accounting Standards [Ind AS], 2016) for the purpose of excluding the mandatory items.

Further, in accordance with prior studies (Adams & Hossain, 1998; Barako et al., 2006), opinion of three practicing chartered accountants is considered for scrutinization of voluntary disclosure items, as these persons are well versed with the prevailing disclosure requirements of listed entities in India.

Following the above steps, a final list of 69 voluntary disclosure items was derived; these voluntary disclosure items are further categorized under five board components of voluntary disclosure as presented in Annexure 1. Subsequent to finalizing voluntary disclosure items, the next task is concerned with scoring of the items considered, which are extensively debated in disclosure studies. Studies mostly followed unweighted approach of scoring that is only concerned with presence or absence of different items without taking into account the quality of information provided (Akhtaruddin et al., 2009; Charumathi & Ramesh, 2015; Lim et al., 2007; Meek et al., 1995). In some studies, weighted approach of scoring was followed wherein they have scored the items using two bases: first, information presented in a comprehensive manner is assigning more score on the basis of quantity of information disclosed (Eng & Mak, 2003; Wallace et al., 1994) and, second, information reported in quantitative terms is assigning more score based on the precise nature of information (Botosan, 1997; Patelli & Prencipe, 2007). However, in case of voluntary disclosure, it is a combination of both financial and non-financial items and thereby it is unlikely for firms to report all information in quantitative terms as some non-financial items such as corporate outlook, policy, strategy, etc., cannot be expressed in quantitative terms, yet such items constitute as significant portion of voluntary disclosure. Hence, to capture voluntary disclosure quality, this study adopts a weighted index wherein a combination of both the prior approaches of scoring has been used and a score of 0 is assigned for absence of information, 1 for partial disclosure of information and 2 for extensive disclosure.² Then, each firm’s VDI score is calculated as percentage of actual disclosure score obtained against the maximum score.

V D I_{i t} = \frac{\sum_{i = 1}^{n} X_{i j t}}{N_{j}} \times 100

where N_j is the maximum expected score, j refers to company, i stands for VD items and t refers to time. To capture VD quality, X_ij assumes the score of 0–2.

Measurement of Dependent Variable

The dependent variable of this study, that is, the market value of firms is captured by using market capitalization as its proxy measure (Abdolmohammadi, 2005; Uyar & Kılıç, 2012). Further, to normalize the data, natural logarithm of market capitalization (Ln_MCAP) is considered as the dependent variable in all the models.

Control Variables and Their Measurements

Extant literature suggests that there are some firm specific factors that need to be controlled while examining the relationship between voluntary disclosure and market value of firms. Accordingly the study includes some firm characteristics as control variables such as firm size (Cheung et al., 2010; Uyar & Kılıc, 2012), firm age (Jackling & Johl, 2009), financial leverage (Cheung et al., 2010; Hassan et al., 2009), profitability (Wang et al., 2008), growth opportunities proxied by research and development (R&D) ratio and advertisement ratio (Dwivedi & Jain, 2005) and big4 auditors (Dawd & Charfeddine, 2019, see Table 1).

Table 1.

Measurement of Control Variables

Acronym	Variables	Measurements
Ln_FSIZE	Firm size	Natural logarithm of total sales
Ln_AGE	Firm age	Natural logarithm of firm age since incorporation
LEV	Financial leverage	Ratio of total debt by equity share capital and reserves
PROF	Profitability	Ratio of earnings before interest and tax to equity share capital
Ln_R&D	R&D ratio	Natural logarithm of R&D expenses by total sales
Ln_ADV	Advertisement ratio	Natural logarithm of advertisement expenses by total sales
BIG4	Big4 auditors	‘1’ for companies audited by big4 audit firms otherwise ‘0’

Source: Compiled by authors based on literature.

Model Development

Studies have mostly employed pooled ordinary least squares (OLS) model to estimate the relationship between voluntary disclosure and market valuation of firms (Hassan et al., 2009; Uyar & Kılıc, 2012). However, it is evident from some studies that endogeneity is a cause of concern in such kind of relationship (Al-Akra & Ali, 2012; Cheung et al., 2010). Thus, in presence of endogeneity pooled OLS may give biased estimates as endogeneity violates its basic assumption of no correlation between independent variables and error term (Harvey, 1990). Further, to verify the appropriateness of using pooled OLS model, the study performs a formal test known as Breusch–Pegan Lagrange multiplier (LM) test wherein the result (chi-square value = 563.92, p-value = 0.000) suggests that pooled OLS model is not appropriate for the present data set. Moreover, there are some potential sources of endogeneity that trouble the studies relating to voluntary disclosure and market value of firms such as unobserved heterogeneity and simultaneity or reverse causality. The issue of unobserved heterogeneity exists when the relation between two variables is determined by some cross-sectional characteristics. Thus, to control the influence of cross-sectional factors in estimation of the relationship, the study employs fixed effect model (FEM) as it allows each cross-sectional unit to have its own intercept value whereby the net influence of independent variables on dependent variable can be obtained. Moreover, the result obtained from Hausman test (chi-square = 42.74, p-value = 0.000) also advocates in favour of the same.

The following FEM is initially adopted to examine the influence of voluntary disclosure on market value of firms:

\begin{matrix} L n_M C A P_{i t} = α_{i} + β_{1} V D I_S c o r e_{i t} + β_{2} L n_F S I Z E_{i t} + \\ β_{3} L n_A G E_{i t} + β_{4} L E V_{i t} + β_{5} P R O F_{i t} + \\ β_{6} L n_R & D_{i t} + β_{7} L n_A D V_{i t} + \\ β_{8} B I G 4_{i t} + ε_{i t} \end{matrix}

where α_i is the unique intercept for each firm; β₁ … β₈ are coefficients of VDI score and other firm characteristics to be estimated; ε_it is a disturbance term; i = 1,…,100 sample firms; t = 2014–2018.

Though, fixed-effect model takes into account cross-sectional heterogeneity or another potential source of endogeneity still remains in the relationship, that is, simultaneity or reverse causality. It exists when two variables are co-determined and each variable may affect the other simultaneously (voluntary disclosure is determined in response to change in market value of firms). Hence, this study also conducts Durbin-Wu-Hausman test to find whether independent variables are actually exogenous or not. The result obtained reveals that Durbin chi-square = 215.92 (p = 0.000) and Wu-Hausman F-statistic = 373.97 (p = 0.000) are highly significant, which strongly contradict the null hypothesis of exogeneity of independent variables and thereby justify the employment of single-equation two-stage least squares (2SLS) model of estimation over panel regression technique.

Results and Discussion

Descriptive Statistics

Descriptive statistics for all variables are presented in Table 2. The Ln_MCAP reveals ‘reasonably’ close mean and median values of 4.50 and 4.47, respectively, indicating lesser variations among sample firms in terms of their market value. The VDI_score reveals a range of 11.53–67.69%, indicating wide variation among sample firms in terms of voluntary disclosure. Though, Indian companies with voluntary disclosure are considered relatively poor as compared to the companies of developed countries (Raithatha & Bapat, 2012), yet considering the year-wise VDI_score of sample companies over the study period (Figure 1), the trend is increasing, thus suggesting proactive response from selected companies to the higher demand for voluntary disclosure by international investors. Regarding control variables, Ln_FSIZE and Ln_AGE indicate less variation as their mean and median values are quite close while LEV gives a mean of .31. Profitability (PROF) of sample firms indicates wide variation as evident from its standard deviation value of 18.26. Sample firms’ growth proxied by natural logarithm of R&D ratio and advertisement ratio shows mean values of .18 and .04, respectively. The mean value of big4 indicates that only 35% of the sample firms are audited by big4 audit firms. To get an idea about symmetricity in distribution of all continuous variables under consideration as well as to identify outliers, their skewness values are computed, which suggests that all the variables except LEV, Ln_R&D and PROF follow a symmetrical distribution as the values lies within the acceptable range of skewness as given by Haniffa & Hudaib (2006), that is, ±1.96. To lessen the influence of outliers in case of LEV, Ln_R&D and PROF, the variables have been winsorized at 5th and 95th percentiles as applied by Flannery and Rangan (2006) and Byoun (2008), which brings their skewness values within the acceptable range.

Table 2.

Descriptive Statistics

Variables	Mean	Median	Standard Deviation	Minimum	Maximum	Skewness
Ln_MCAP	4.50	4.47	.49	2.83	5.75	.324
VDI_Score	34.15	33.07	8.86	11.53	67.69	.58
Ln_FSIZE	3.94	3.86	.61	2.31	5.68	.443
Ln_AGE	1.57	1.56	.24	.84	2.05	−.324
LEV	.31	.11	.44	0	2.74	1.95
PROF	19.54	15.55	18.26	−27.68	130	1.94
Ln_R&D	.18	–	.44	−.045	2.11	1.96
Ln_ADV	.04	–	.56	−2.45	1.28	−.886
Big4	.35	–	.47	0	1	–

Source: Calculated by authors using SPSS 22.

Figure 1.

Source: Computed and presented by authors.

Correlation matrix of all variables is presented in Table 3, which indicates that VDI_score has significant positive correlation with some firm characteristics such as Ln_FSIZE, Ln_AGE, LEV, ADV and BIG4. These findings are parallel with prior literature (Allegrini & Greco, 2013; Barako et al., 2006; Liu, 2015), thus extending support for the VDI employed in the study. Correlation among the independent variables appears to be moderate as the highest correlation coefficient for independent variables is 0.447, suggesting that multicollinearity is not a cause of concern. Further, to confirm severeness of multicollinearity, variance inflation factors (VIF) for all variables are computed whereby the highest VIF value obtained is 1.49, which is quite less than the threshold limit of 10.

Table 3.

Pearson’s Correlation Matrix

Variables	Ln_MCAP	VDI_Score	Ln_FSIZE	AGE	LEV	PROF	Ln_R&D	Ln_ADV	BIG4
Ln_MCAP	1
VDI_Score	0.486^a	1
Ln_FSIZE	0.615^a	0.447^a	1
Ln_AGE	0.105^a	0.262^a	0.190^a	1
LEV	−0.172^a	0.123^a	0.264^a	−0.121^a	1
PROF	0.224^a	−0.011	−0.129^a	0.112^a	−0.351^a	1
Ln_R&D	0.056	0.011	−0.032	0.313^a	−0.092^b	0.036	1
Ln_ADV	0.006	0.104^a	−0.150^a	0.074^c	−0.149^a	0.036^a	−0.062	1
Big4	0.274^a	0.170^a	0.213^a	0.110^a	0.022	0.015	0.010	0.090^b	1

Source: Calculated by authors using STATA 14.

Note: ^aSignificant at 1% level, ^bsignificant at 5% level and ^csignificant at 10% level.

Multivariate Analysis

The result obtained from FEM is presented in column 2 of Table 4. The model shows an R-square of 0.3097 and highly significant F-value of 28.16. These values indicate that the independent variables considered in this study explain a significant percentage of variation in dependent variable. The finding also reveals that voluntary disclosure has strong positive influence on market value of firms. This is consistent with the findings of some other emerging market studies such as Taiwan, Malaysia and Turkey (Anam et al., 2011; Sheu et al., 2010; Uyar & Kılıç, 2012). Regarding control variables, firm size, firm age and profitability depict highly significant positive influence on firms’ market value while financial leverage and advertisement ratio has significant negative influence on the same.

As discussed in the previous section, studies dealing with the relationship between voluntary disclosure and market value suffer from endogeneity. While FEM controls omitted variable bias due to firm specific factors, it is unable to handle possible simultaneity or reverse causality in the relationship. Accordingly, this study employs single equation 2SLS estimation and the result of 2SLS is presented in column 3 of Table 4. The findings obtained under 2SLS also reveal strong positive influence of voluntary disclosure on the market value of firms, thus extending support to the previous regression result. Considering the overall findings, H₁ fails to get rejected, suggesting that voluntary disclosure made by Indian firms is value relevant.

Table 4.

Influence of Voluntary Disclosure on Market Value of Firms Using FEM and 2SLS

Variables	FEM		2SLS
Variables	Coefficient	t-statistic	Coefficient	t-statistic
VDI_Score	.0065	3.58^***	.0147	9.16^***
Ln_SIZE	.5365	7.29^***	.4477	17.95^***
Ln_AGE	1.258	3.63^***	−.3564	−5.99^***
LEV	−.2260	−5.66^***	−.2997	−9.74^***
PROF	.0021	2.42^***	.0058	7.61^***
Ln_R&D	−.0121	−0.07	.4601	3.05^***
Ln_ADV	−.0469	−1.32^***	−.0466	−1.94^**
Big4	−.0025	−0.10	.1180	4.46^***
CONSTANT	.2128	0.39	2.72	24.48^***
R-SQUARE	0.3097		0.6305
F- STATISTIC	28.16^***		104.71^***
N	500		500

Source: Authors’ findings using STATA 14.

Note: ***, ** indicates significance at 1% and 5% respectively.

Further Investigation

This study further investigates the influence of different components of voluntary disclosure on firms’ market valuation. To do so, the VDI_score is further categorized into five sub-indexes such as corporate and strategic disclosure index (CSDI), forward looking disclosure index (FWDI), human and intellectual capital disclosure index (HICDI), corporate governance disclosure index (CGDI) and financial and capital market disclosure index (FCMDI). The sub-index scores are computed as the ratio of score obtained under particular component of voluntary disclosure divided by maximum obtainable score under respective categories and VDI_score in the regression is replaced by the sub-index score. The results obtained by using both FEM and 2SLS are reported in columns 2 and 3 of Table 5. For interpretation purpose, the result of 2SLS is considered, as it takes into account endogeneity in the relationship which is checked and confirmed by Durbin–Wu–Hausman test in case of all components of VDI. Three components of VDI, that is, CSDI, FWDI and CGDI, reveal strong positive influence on Ln_MCAP, while HICDI and FCMDI appear to have no significant influence on the same. Overall, the findings exhibit that investors are responsive towards corporate and strategic disclosure (CSD), forward looking disclosure (FWD) and corporate governance disclosure (CGD) rather than human and intellectual capital disclosure (HICD) and financial and capital market disclosure (FCMD). One of the possible reasons for such finding could be due to variation in the nature of different categories of information and differences in the extent of disclosure of different categories of information. In case of CSD, FWD and CGD, these disclosures assist investors in making better prediction about firms’ performance due to their futuristic nature while FCMD is generally historical in nature. Regarding HICD, such concept is still at a natal stage in the Indian context; hence, firms tend to provide least information regarding the same leading to such insignificant impact.

Table 5.

Influence of Different Components of Voluntary Disclosure on Market Value of Firms Using FEM and 2SLS

Variables	FEM		2SLS
Variables	Coefficient	t-statistic	Coefficient	t-statistic
CSDI	.0029	2.38^***	.0033	2.32^***
FWDI	−.0013	−0.94	.0072	4.48^***
ICDI	−.0019	−1.19	.0004	0.27
CGDI	−.0001	−0.35	.0019	3.92^***
FCMDI	.0046	3.92^***	.0020	1.32
Ln_SIZE	.5382	7.41^***	.4602	17.97^***
Ln_AGE	1.038	2.86^***	−.2852	−4.65^***
LEV	−.2397	−6.01^***	−.2843	−9.19^***
PROF	.0020	2.28^***	.0063	8.22^***
Ln_R&D	−.0305	−0.17	.5264	3.45^***
Ln_ADV	−.0435	−1.24	−.0513	−2.12^***
Big4	−.0054	−0.22	.1097	4.18^***
CONSTANT	.5688	1.00	2.48	18.84^***
R-SQUARE	0.3345		0.6461
F- STATISTIC	20.24^***		74.10^***
N	500		500

Source: Authors’ findings using STATA 14.

Note: *** indicates significance at 1%.

Conclusion

In view of ongoing corporate reforms in India aimed at improving transparency, this study empirically examines the influence of voluntary disclosure on the market value of Indian firms. To this end, the study uses 500 annual reports of top 100 non-financial and non-utility firms listed at BSE over a 5-year period (2014–2018). Appropriate methodology has been applied to control for endogeneity in voluntary disclosure and firms’ market value relationship wherein the results indicate that enhanced levels of voluntary disclosure significantly improves market value of sample firms. Further, to investigate the influence of different components of voluntary disclosure on market value, voluntary disclosure is divided into five components wherein the findings reveal that three components of voluntary disclosure such as corporate and strategic disclosure, forward looking disclosure and corporate governance disclosure have value adding influence on the market value of firms, while the remaining components like human and intellectual capital disclosure and financial and capital market disclosure do not appear to have any significant influence on the same. Overall, the finding suggests that voluntary disclosure makes value addition for firms in terms of market capitalization. However, relevance of voluntary disclosure for investors varies in case of different categories of voluntary disclosure.

The findings of the study offer some important policy implications: First, considering the intense competition of attracting capital in the international market, the study highlights the relevance of voluntary disclosure for Indian firms as one of the media of enhancing their market valuation. Second, the study also reveals that investors do not reward firms for all components of voluntary disclosure. However, it does not suggest that the insignificant components of voluntary disclosure are not important; rather it implies firms to improve the informational content and extent of disclosure of those components in order to assist investors in making better firms’ performance prediction. Finally, the study also suggests regulators to recommend firms the best practice of voluntary disclosure by framing some guidelines.

Though, the use of a disclosure index is considered as an excellent way of capturing voluntary disclosure in the literature, the subjectivity involved in scoring of various disclosure items cannot be entirely removed, which constitutes a limitation of the study. Future research can further enrich the extant literature by considering some other modes of corporate disclosure like websites, press release, etc., apart from annual reports. Nevertheless, the present evidence in support of promoting voluntary disclosure is hoped to inspire more disclosure studies in the context of some other emerging market.

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.

List of Items Included in Voluntary Disclosure Index

A. Corporate and Strategic Disclosure (CSD) (40)

1. Brief history of the company (0–2)

2. Organization structure (0–2)

3. Corporate mission and vision (0–2)

4. Objectives (0–2)

5. Description of marketing network for finished goods (0–2)

6. Physical output and capacity utilization (0–2)

7. Strategy—general (0–2)

8. Strategy—financial (0–2)

9. Strategy—marketing (0–2)

10. Strategy—social (0–2)

11. Strategy—HR (0–2)

12. Impact of strategy on current results (0–2)

13. Impact of strategy on future results (0–2)

14. Multi language presentation (0–2)

15. Actions taken during the year to achieve the corporate goals (0–2)

16. Actions to be taken in the future year discussed (0–2)

17. Discussion about major regional economic development (0–2)

18. Reasons for acquisitions (0–2)

19. Reasons for disposals (0–2)

20. Future capital expenditure (0–2)

B. Forward-Looking Disclosure (FWD) (20)

21. Forecast of cash flow (0–2)

22. Forecast of profits (0–2)

23. Forecast of sales (0–2)

24. Forecast of market share (0–2)

25. Assumptions underlying the forecast (0–2)

26. Expected rate of return on project (0–2)

27. Order book or backlog information (0–2)

28. Political influences on future profit (0–2)

29. Economical influences on future profit (0–2)

30. Technological influences on future profit (0–2)

C. Human and Intellectual Capital Disclosure (HICD) (28)

31. Geographical distribution of employees (0–2)

32. Line of business distribution of employees (0–2)

33. Number of employees for two or more years (0–2)

34. Reason for changes in the employees numbers or categories (0–2)

35. Redundancy information (0–2)

36. Recruitment policy (0–2)

37. Marketing innovation (0–2)

38. Value of customer relationship (0–2)

39. No. of employees engaged in R&D (0–2)

40. R&D focus areas (0–2)

41. Discussion of new product development (0–2)

42. Forecast of R&D expenditure (0–2)

43. Human resources accounting (0–2)

44. Valued added statement (0–2)

D. CG Disclosure (CGD) (5)

45. Reimbursement of maintenance expenses by non-executive chairperson (0–1)

46. Interim financial report sent to each household of shareholders (0–1)

47. Separate position for CEO and chairman (0–1)

48. Unmodified audit opinion with declaration (0–1)

49. Reporting by internal auditor directly to the audit committee (0–1)

E. Financial and Capital Market Disclosure (FCMD) (37)

50. Cash flow ratio (0–2)

51. Disclosure of intangible asset valuations (except goodwill and brands) (0–2)

52. Index of selling price (0–2)

53. Advertisement information—qualitative (0–2)

54. Financial history of 5 years or more (0–2)

55. Effect of inflation on assets (0–2)

56. Effects of inflation on profits (0–2)

57. Inflation-adjusted financial statements (0–1)

58. Effects of fluctuating interest rate on results (0–2)

59. Cost of capital (0–2)

60. Economic value added (0–2)

61. Fund flow statement (0–2)

62. Bankers’ details (0–1)

63. Transfer pricing policy (0–2)

64. Market capitalization trend (0–2)

65. Share price trend (0–2)

66. Volume of shares traded (0–2)

67. Effects of foreign currency fluctuations on future operations (0–2)

68. Foreign currency exposure management description (0–2)

69. Debt currency (0–1)

Source: Measurement of dependent, independent and control variables are adapted from Saha and Kabra (2019a, 2019b).

Notes

References

Abdolmohammadi

M. J.

(2005). Intellectual capital disclosure and market capitalization. Journal of Intellectual Capital, 6(3), 397–416.

Adams

, & Hossain

(1998). Managerial discretion and voluntary disclosure: Empirical evidence from the New Zealand life insurance industry. Journal of Accounting and Public Policy, 17(3), 245–281.

Akhtaruddin

, Hossain

M.A.

, Hossain

& Yao

(2009). Corporate governance and voluntary disclosure in corporate annual reports of Malaysian listed firms. Journal of Applied Management Accounting Research, 7(1), 1–20.

Al-Akra

, & Ali

M. J.

(2012). The value relevance of corporate voluntary disclosure in the Middle-East: The case of Jordan. Journal of Accounting and Public Policy, 31(5), 533–549.

Allegrini

, & Greco

(2013). Corporate boards, audit committees and voluntary disclosure: Evidence from Italian listed companies. Journal of Management & Governance, 17(1), 187–216.

Anam

O. A.

, Fatima

A. H.

, & Majdi

A. R. H.

(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.

Banghøj

, & Plenborg

(2008). Value relevance of voluntary disclosure in the annual report. Accounting & Finance, 48(2), 159–180.

Barako

D. G.

, Hancock

, & Izan

H. Y.

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

Botosan

C. A.

(1997). Disclosure level and the cost of equity capital. Accounting Review, 72(3), 323–349.

10.

Botosan

C. A.

, & Plumlee

M. A.

(2002). A re-examination of disclosure level and the expected cost of equity capital. Journal of Accounting Research, 40(1), 21–40.

11.

Brockman

, Martin

, & Unlu

(2010). Executive compensation and the maturity structure of corporate debt. The Journal of Finance, 65(3), 1123–1161.

12.

Byoun

(2008). How and when do firms adjust their capital structures toward targets? The Journal of Finance, 63(6), 3069–3096.

13.

Cahan

S. F.

, De Villiers

, Jeter

D. C.

, Naiker

, & Van Staden

C. J.

(2016). Is CSR disclosures value relevant? Cross-country evidence. European Accounting Review, 25(3), 579–611.

14.

Charumathi

, & Ramesh

(2015). On the determinants of voluntary disclosure by Indian companies. Asia-Pacific Journal of Management Research and Innovation, 11(2), 108–116.

15.

Cheung

Y. L.

, Jiang

, & Tan

(2010). A transparency disclosure index measuring disclosures: Chinese listed companies. Journal of Accounting and Public Policy, 29(3), 259–280.

16.

Clarkson

P. M.

, Fang

, Li

, & Richardson

(2013). The relevance of environmental disclosures: Are such disclosures incrementally informative? Journal of Accounting and Public Policy, 32(5), 410–431.

17.

Clarkson

, Guedes

, & Thompson

(1996). On the diversification, observability, and measurement of estimation risk. Journal of Financial and Quantitative Analysis, 31(1), 69–84.

18.

Collins

D. W.

, Maydew

E. L.

, & Weiss

I. S.

(1997). Changes in the value-relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24(1), 39–67.

19.

Cormier

, Magnan

, & Van Velthoven

(2005). Environmental disclosure quality in large German companies: Economic incentives, public pressures or institutional conditions? European Accounting Review, 14(1), 3–39.

20.

Darrough

M. N.

, & Stoughton

N. M.

(1990). Financial disclosure policy in an entry game. Journal of Accounting and Economics, 12(1-3), 219–243.

21.

Dawd

, & Charfeddine

(2019). Effect of aggregate, mandatory and voluntary disclosure on firm performance in a developing market: The case of Kuwait. International Journal of Accounting, Auditing and Performance Evaluation, 15(1), 31–56.

22.

Diamond

D. W.

, & Verrecchia

R. E.

(1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46(4), 1325–1359.

23.

Dowling

, & Pfeffer

(1975). Organizational legitimacy: Social values and organizational behavior. Pacific Sociological Review, 18(1), 122–136.

24.

Dwivedi

, & Jain

A. K.

(2005). Corporate governance and performance of Indian firms: The effect of board size and ownership. Employee Responsibilities and Rights Journal, 17(3), 161–172.

25.

Dye

R. A.

(1986). Proprietary and nonproprietary disclosures. Journal of Business, 59(2), 331–366.

26.

Elshandidy

, Fraser

, & Hussainey

(2013). Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies. International Review of Financial Analysis, 30, 320–333.

27.

Eng

L. L.

, & Mak

Y. T.

(2003). Corporate governance and voluntary disclosure. Journal of Accounting and Public Policy, 22(4), 325–345.

28.

Fama

E. F.

, & Jensen

M. C.

(1983). Separation of ownership and control. The Journal of Law and Economics, 26(2), 301–325.

29.

Flannery

M. J.

, & Rangan

K. P.

(2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79(3), 469–506.

30.

Francis

, Schipper

, & Vincent

(2002). Expanded disclosures and the increased usefulness of earnings announcements. The Accounting Review, 77(3), 515–546.

31.

Freeman

R. E.

(1994). The politics of stakeholder theory: Some future directions. Business Ethics Quarterly, 4(4), 409–421.

32.

FTI (2018). India disclosure index. https://www.globenewswire.com/news-release/2018/11/20/1654176/0/en/FTI-Consulting-Releases-India-Disclosure-Index-2018.html

33.

Gisbert

, & Navallas

(2013). The association between voluntary disclosure and corporate governance in the presence of severe agency conflicts. Advances in Accounting, 29(2), 286–298.

34.

Gray

, Owen

, & Adams

C. A.

1997, Accounting and accountability: Changes and challenges in corporate social and environmental. Prentice Hall Europe.

35.

Hail

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

36.

Haniffa

, & Hudaib

(2006). Corporate governance structure and performance of Malaysian listed companies. Journal of Business Finance & Accounting, 33(7–8), 1034–1062.

37.

Harvey

A. C.

, & Peters

(1990). Estimation procedures for structural time series models. Journal of Forecasting, 9(2), 89–108.

38.

Hassan

O. A.

, Romilly

, Giorgioni

, & Power

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

39.

Healy

P. M.

, & Palepu

K. G.

(2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440.

40.

S. S.

, & Wong

K. S.

(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.

41.

Jackling

, & Johl

(2009). Board structure and firm performance: Evidence from India’s top companies. Corporate Governance: An International Review, 17(4), 492–509.

42.

Jensen

M. C.

, & Meckling

W. H.

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

43.

Jiao

(2011). Corporate disclosure, market valuation, and firm performance. Financial Management, 40(3), 647–676.

44.

Lang

, & Lundholm

(1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31(2), 246–271.

45.

Leuz

, & Schrand

(2009). Disclosure and the cost of capital: Evidence from firms’ responses to the Enron shock (WP. No. 14897). National Bureau of Economic Research, Cambridge, MA, pp. 1–50.

46.

Lim

, Matolcsy

, & Chow

(2007). The association between board composition and different types of voluntary disclosure. European Accounting Review, 16(3), 555–583.

47.

Liu

(2015). Corporate governance and forward-looking disclosure: Evidence from China. Journal of International Accounting, Auditing and Taxation, 25, 16–30.

48.

Meek

G. K.

, Roberts

C. B.

, & Gray

S. J.

(1995). Factors influencing voluntary annual report disclosures by US, UK and continental European multinational corporations. Journal of International Business Studies, 26(3), 555–572.

49.

Moumen

, Othman

H. B.

, & Hussainey

(2015). The value relevance of risk disclosure in annual reports: Evidence from MENA emerging markets. Research in International Business and Finance, 34, 177–204.

50.

Patelli

, & Prencipe

(2007). The relationship between voluntary disclosure and independent directors in the presence of a dominant shareholder. European Accounting Review, 16(1), 5–33.

51.

Plumlee

, Brown

, Hayes

R. M.

, & Marshall

R. S.

(2015). Voluntary environmental disclosure quality and firm value: Further evidence. Journal of Accounting and Public Policy, 34(4), 336–361.

52.

Raithatha

, & Bapat

(2012). Corporate governance compliance practices of Indian companies. Corporate Governance, 3(8), 19–26.

53.

Ross

S. A.

(1977). The determinants of financial structure: The incentive signaling approach. Bell Journal of Economics, 8, 23–40.

54.

Saha

, & Kabra

K. C.

(2019a). Does corporate governance influence voluntary disclosure? Evidence from India. Indonesian Journal of Sustainability Accounting and Management, 3(2), 203–214.

55.

Saha

, & Kabra

K. C.

(2019b). Does corporate governance influence firm performance? Evidence from India. Economics and Business Review, 5(4), 70–89.

56.

Sahore

N. S.

, & Verma

(2017). Annual report disclosures and their extent and variance in India. Journal of Applied Management and Investments, 6(1), 58–66.

57.

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.

58.

Uyar

, & Kılıç

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

59.

Verrecchia

R. E.

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

60.

Wallace

R. O.

, Naser

, & Mora

(1994). The relationship between the comprehensiveness of corporate annual reports and firm characteristics in Spain. Accounting and Business Research, 25(97), 41–53.

61.

Wang

, Sewon

, & Claiborne

M. C.

(2008). Determinants and consequences of voluntary disclosure in an emerging market: Evidence from China. Journal of International Accounting, Auditing and Taxation, 17(1), 14–30.

62.

Watts

R. L.

, & Zimmerman

J. L.

(1990). Positive accounting theory: A ten year perspective. Accounting Review, 65(1), 131–156.