Academic journal article Management Review : An International Journal

Corporate Governance and Voluntary Financial Disclosure by Canadian Listed Firms

Academic journal article Management Review : An International Journal

Corporate Governance and Voluntary Financial Disclosure by Canadian Listed Firms

Article excerpt


Research on corporate accounting policy has been the subject of interest from researchers for many years. Lev (1992) argues that a technical change to the presentation of financial statements is to disseminate information voluntarily. The voluntary financial disclosure is therefore part of the company's accounting policy. Thus the concept of voluntary disclosure is the subject of increasing attention in accounting and reflects the number and diversity of studies in this area (Verrecchia, 1983, 1990; Cooke, 1989; Raffournier 1995; Cormier & Magnan, 1999; Bamber, Jiang, & Wang, 2010). We can therefore speak of accounting choices optimization as much as we can speak of information dissemination choices on financial performance. Meek, Roberts, & Gray, 1995) define voluntarily published information as "disclosures in excess of requirements - represent free choices on the part of company managements to provide accounting and other information deemed relevant to the decision needs of users of their annual reports".

Voluntary disclosure has certain characteristics. Firstly, the voluntary financial communication process is not limited to traditional channels, such as annual and quarterly financial statements. The need for timely disclosed information pushed companies towards the adoption of other means of communication such as conferences, press releases, meetings with financial analysts, letters to shareholders and the provision of information in the annual report. The more frequent use of these channels is sustained by the rapid and constant rise of information technology. Secondly, disclosed information is of a quantitative and qualitative nature and can be financial or non-financial. However, the voluntary supply of financial performance information does not include all information disclosed by the firm, like what is related to marketing, public relations and union negotiations. It is limited to economic performance, financial condition and prospects that can be expressed in monetary terms.

Empirical research documents several advantages hnked to the voluntary financial disclosure. Among these advantages, the voluntary information allows one to:

* Report the ability of managers to anticipate changes in the economic environment (Trueman, 1986);

* Align investor expectations with those of managers (Ajinkya & Gift, 1984);

* Mitigate adverse financial market reactions following bad news (Skinner, 1994; Kasnik & Lev, 1995);

* Attract new capital (Frankel, McNichols, & Wilson, 1995);

* Reduce the cost of capital (Botosan, 1997; Healy, Hutton, & Palepu, 1999).

On the other hand, the literature mentions that the financial communication strategy of a company must take into account several constraints such as proprietary costs (Verrecchia, 1990), political costs (Wong, 1988) and agency costs (Leftwitch, Watts, & Zimmerman, 1981). The voluntary financial disclosure is therefore not neutral. Gibbins, Richardson, & Waterhouse, (1990) stipulate that disclosed information is incorporated in a set of social relationships that structure the way that information is managed. The financial communication process plays an important role in the functioning of not only capital markets, but also in corporate governance.


Increased demand for information from investors puts pressure on leaders to voluntarily disclose private information that is richer in details than accounting information. However, despite this increased demand, managers are not willing to reveal all of the information they possess due to the inconveniences of competition (exclusive cost theory), legal responsibilities that can arise from these disclosures, the costs of faulty signals (signal theory) or costs associated to agency problems (agency theory). We are particularly interested in agency theory since it presents the theoretical framework for the issue of corporate governance. …

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