The Impact of Voluntary Disclosure on the Mandatory Disclosure of Financial Information: A Study of Companies on the Saudi Arabian Stock Exchange

By Robertson, Christopher J.; Al-Angari, Hussam A. et al. | International Journal of Management, March 2012 | Go to article overview

The Impact of Voluntary Disclosure on the Mandatory Disclosure of Financial Information: A Study of Companies on the Saudi Arabian Stock Exchange


Robertson, Christopher J., Al-Angari, Hussam A., Al-Alsheikh, Sulaiman A., International Journal of Management


Firms that voluntarily disclose financial data that is not required by law convey a general policy of transparency and compliance. In this study we assess the impact of voluntary disclosure of annual report data on mandatory disclosure of financial information. Building upon research in this area we extend previous research by incorporating the company variables of age, industry, stock price, annual revenues and net income. Utilizing data from the 100 largest firms traded on the Saudi Arabian stock market our results from Ordinary Least Squares regression analysis reveal a positive relationship between two types of voluntary disclosure and mandatory disclosure while controlling for company variables. A positive link is also identified between industry, revenues and disclosure activity. Future research directions as well as managerial and audit implications are also discussed.

In many countries globalization has led to a period of deep reflection by government officials and industry leaders over what the ideal set of standards for financial reporting should be for publicly held firms (Bruton, Freid and Manigart, 2005). Indeed, with the surge in foreign direct investment in the past two decades many local firms are now faced with multiple, and often conflicting, sets of guidelines when determining a policy for external financial disclosure (Francis, Khurana and Pereira, 2005). As trade barriers continue to fall globally the pressure to adopt more open and transparent financial disclosure practices has undoubtedly increased. Despite the burgeoning relevance of this phenomenon little is known about the extent to which munificence of firm resources may lead to an embracement of more or less financial disclosure. This lack of clarity in the literature is particularly apparent in emerging markets.

One world region where very little academic research related to financial disclosure practices has been conducted is the Middle East. Saudi Arabia, with its robust stock market and capitalist-leaning economic model, is arguably the standard-bearer for setting financial reporting guidelines in the region. As more Western firms enter Saudi Arabia through a wide range of channels the importance of understanding the full set of financial information available and corresponding regulations will become more important. Moreover, the trade relationship between the United States and Saudi Arabia has been tightening in recent years and these two nations have become important strategic allies (Noer, Leupold and Valle, 2007). Saudi relations with the majority of European Union nations also remain strong and strategically significant.

Perhaps the most significant study of disclosure in Saudi Arabia to date was conducted by Al-Razeen and Kharbari (2004) in which they examined the disclosure practices of 100 publicly trades Saudi firms. In the current study we seek to build on this earlier study by Al-Razeen and Kharbari (2004) by developing a more comprehensive model in which various plausible variables that have potential predictive value when assessing the driving forces behind mandatory and voluntary disclosure. Thus we make a contribution to the literature in three ways: first, we construct a theoretical framework that widens the net when assessing disclosure activity; second, we utilize a range of methodologies to test our hypotheses; and third we explore the links between institutional theory and disclosure in the context of Saudi Arabia.

This paper is organized as follows. A discussion of the theoretical foundation for the study is presented next. This is followed by the presentation of specific research hypotheses and an overview of our methodology. The results are then presented and evaluated, and the paper concludes with a discussion of managerial and research implications, limitations, and future research directions.

Theory And Hypotheses

Globalization has stimulated an era of reflection related to business traditions and corporate governance best practices around the globe. …

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