CHAPTER ONE

BACKGROUND OF STUDY

1.1 Introduction

Disclosure of information in corporate annual reports has attracted a number of researchers in both developed and developing countries. The voluntary disclosure information in excess of mandatory disclosure, has been receiving an increasing amount of attention in recent accounting studies. Because of the inadequacy of compulsory information, the demand for voluntary disclosure provides investors with the necessary information to make more informed decisions (Alsaeed, 2006). Voluntary disclosure of decision-useful corporate information is considered to be the first step in solving the alleged problems of traditional financial reporting (Leadbetter, 2000). Its objectives are well defined: closing (or narrowing) the gap between a company's potential intrinsic market value and its current market value.

Voluntary disclosure, in the context of globalization of the world's financial markets, has received a great deal of attention in the accounting literature in recent years (Hossain, Berera and Rahman, 1995). This is due to the following reasons: Firstly, additional disclosures may help to attract new shareholders thereby helping to maintain a healthy demand for shares, and a share price that more fully reflects its intrinsic value. It is possible that poor disclosure could lead to an undervalued share making it attractive to a potential predator. Secondly, increased information may assist in reducing informational risk and thereby lower the cost of capital (Spero, 1979). A lower cost of capital should mean that marginal projects become profitable. Thirdly, in order to raise capital on the markets, companies will increase their voluntary disclosure. Consequently, listed companies are more likely to have a higher level of disclosure than unlisted companies and multiple listed companies those raising capital on the international markets will have a higher level of disclosure than domestically listed companies. Fourthly, multiple listed companies often have an interest in foreign capital markets since foreign operations are often financed by foreign capital (Choi and Mueller, 1984). Disclosure levels might be increased to adapt to local customs to meet the requirements of banks and other suppliers of capital; finally, listed and multiple listed companies might increase their social responsibility disclosures to demonstrate that they act responsibly (Watts and Zimmerman, 1979). Companies may have attained their status on the securities markets and be able to attract new funds, not least because they act responsibly.

According to Healy and Palepu (2001) a company's disclosure decision could be a response to innovation, globalization or changes in business and capital market environments.

Kuwait is the focus of this study for three reasons. First, Kuwait is a small rich country, relatively open economy with crude oil reserves of about 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait Stock Exchange to mobilize domestic savings and attract foreign capital investment. These measures include privatization of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is becoming an important capital market in the region. It is ranked the second largest market in the Arab world (after Saudi Arabia) in terms of total market capitalization. Its total market capitalization was US$128,951 million as of December 2006 (Arab Monetary Fund 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a result, investors may be interested in the information disclosure practices of listed companies in Kuwait (Al-Shammari, 2008).

1-2 Problem Statement

Many developing countries strive to mobilize financial resources from domestic as well as international sources with a view to attaining their economic and social development goals. Domestic and international investors utilize financial and non-financial information available on potential investment targets for assessing risk and making critical investment decisions. Thus, the availability of financial and non-financial information in sufficient quantity and of sufficient quality has an important bearing on efforts geared towards mobilizing investment for financing economic and social development.

Adequate reporting and disclosure of financial and non-financial information will reduce asymmetric information problem, hence are likely to improve investor confidence and a lower cost of investment. According to Gray, Meeks and Roberts (1995) investors demand information to assess the timing and uncertainty of current and future cash flows so that they may value firms and make other investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by supplying voluntary accounting information, thereby enabling them to raise capital on the best available terms (Gray et al., 1995).

Given the faster pace of globalization, the growing interdependence of international financial markets and increased mobility of capital, developing countries need to attach greater importance to corporate transparency and disclosure. Policy makers, legislators and regulators, in recognition of the significant influence that corporate transparency has on decisions of investors, need to strengthen further the various components of corporate disclosure infrastructure so that domestic and international resources are mobilized more efficiently.

Kuwait is one of the developing countries that face difficulties to attract foreign investments. Birgit Ebner at Germany's Frankfurt Trust, who helps manage a Middle Eastern stock fund, said Kuwait was not an attractive investment compared with others in the region (www.gulfnews.com). One of the main reasons that interpret this matter is the absence of voluntary disclosure as a result of sharp low supply of information by companies.

According to Birgit Ebner, We are underweight in Kuwait because in Kuwait there are many holding firms dominating the market. And on top of it, the transparency is currently lower than in other Gulf States.

In opinion of many analysts in Kuwait, the problem of gulf bank is related to absence of voluntary disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines (www.alaswaq.net 2007).

The purpose of this study is to empirically investigate the influence of several firm characteristics on the level of voluntary disclosure of companies listed in Kuwait and whether disclosure level improves over the years given changes in the accounting environment of the country and globalization that have taken placed.

There are many studies have examined the relationship between a company`s characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978); United Kingdom (Firth, 1979, 1980); Nigeria (Wallace, 1987); Sweden (Cooke, 1989); Japan (Cooke, 1992); United States (Imhoff, 1992; and Lang and Lundholm, 1993); Bangladesh (Ahmed and Nicholls, 1994); Switzerland (Raffournier, 1995); Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999); Jordan (Naser, Alkhatib and Karbhari, 2002); Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the role of voluntary disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).

The aim of this study is to understand what motivate or demonstrate a company's disclosure by empirically investigate the association between a number of company characteristics and the extent of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting year on voluntary disclosure will also be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammari's study only cover the year of 2005, the execution of this study is fully justified.

1.3 Research Questions

In general, this study seeks for explanation on voluntary disclosure behaviour of Kuwait companies. The followings are the research questions:-

1- What is the relationship between the firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and voluntary disclosure level?

2- Does reporting year influences voluntary disclosure?

3- To what extent do the above factors affect the voluntary disclosure?

1.4 Research Objectives

To determine the influences of firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and reporting year on the level of voluntary disclosure of companies listed in Kuwait.

1.5 Significance of the Study

The significance of study can be viewed from contributions given to Accounting academic discipline and to the practitioners and policymakers.

Contribution to Accounting body of knowledge

This study contributes to the literature on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and auditing profession. It also contributes to the corporate governance literature on whether the company characteristics found to be significant in companies operating in developed countries are similar to those a developing country like Kuwait.

This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help explain voluntary disclosure in Kuwait.

Contribution to the practitioners and policy makers

Knowledge on firms' characteristics that influence voluntary disclosure would enable policy makers to target training and monitoring activities to suitable target companies in order to improve disclosure level in the country. This is important because higher disclosure among companies could improve investors' confidence and help attracting more foreign investment into the country.

The study is also able to show whether the external environment in Kuwait have improved the voluntary disclosure activities.

1.6 Scope and Limitations of the Study

This study investigates the relationship between firm characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are different from those of non financial firms (Alsaeed, 2006).

A disclosure index was constructed as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to shareholders. Albeit not as conclusive, financial reports serve as a widely accepted (Knutson, 1992).

The disclosure index does not intend to be comprehensive, nor does it intend to specify what firms ought to disclose. Rather, the index is crafted solely for the purpose of capturing and measuring differences in disclosure practices among firms. The selection of items embedded into the index was entirely guided by Meek, Rober and Gray (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006)

1.7 Organization of the Study

The reminder of this study is organized as follows: Chapter Two discusses the literature review related to the study; Chapter Three consists of research methodology including theoretical framework, hypothesis development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter Five provides the discussion, implications and recommendation of the study as well as suggestions for future research.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which affect the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide foundation knowledge of the issue understudy. Section two discusses the concept and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as found from prior theoretical and empirical literature. These variables include firm size, debt ratio, ownership dispersion, profitability, audit firm size.

2.2 Disclosure Requirement in Kuwait

Mandatory disclosure refers to firms disclose information about their operations because of legal requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).

2.3 Voluntary disclosure level

More detailed disclosure by the firms beyond the level of information disclosed within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making public the financial and non-financial information regarding the firm's operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).

Alsaeed has identified a more comprehensive items for voluntary disclosure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in Table 2.1

Table 2.1: Voluntary disclosure items in Alsaeed (2006)

No.

Disclosure items

1

Strategic information

2

Brief history of company

3

Information on events affecting future year's results

4

Board directors' names

5

Top management's names

6

Majority shareholders

7

Information on different types of products

8

Information statistics for more than two years

9

Information on dividends policy

10

Information on future expansion projects

11

Percentage of foreign and national labor force

12

Information on training and workers development

13

Information on social and environmental activities

14

Statement of corporate goals and objectives

15

Principle markets

16

Average compensation per employee

17

Market share

18

Information on events affecting current year's results

19

Competitive environment

20

Forecasted profits

Many studies have examined the relationship between a company's characteristics and voluntary disclosure level. Alsaeed, (2006) argued that firm size, profitability and auditor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976); Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between company's firm size, debt ratio, owner ship and auditor firm size and the level of disclosure.

2.4 Determinants of Voluntary Disclosure

2.4.1 Firm size

Most of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006); Donnelly and Mulcahy (2008); Brammer and Pavelin (2004); Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hourigan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).

Many studies found a positive relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He found that there was a positive relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that agency costs are higher for larger companies because shareholders are widespread, therefore, additional disclosure might reduce these costs (Watts and Zimmerman, 1983). This finding is consistent with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).

In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might suffer from a competitive disadvantage if they provide additional disclosure. Thirdly, large companies might be of interest to different users of annual reports including government agencies.

2.4.2 Debt ratio

There is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies found a significant positive relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995); Hossain et al. (1995), Al-Shammari, (2008) and Bradbury, (1992).

Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency costs by facilitating debt ratio supplier's assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their structure of capital are prone to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information asymmetry with shareholders.

Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.

In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase with leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is negative relationship between voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).

2.4.3 Profitability

Many studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971); Foster (1986), Richard (1992), Meek et al. (1995) and Naser et al. (2002) they argues that when the level of firm's profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitability and disclosure with mixed results.

Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from less profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. However Wallace et al. (1994) found no significant relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.

Inchausti (1997) elaborated that agency theory suggests that managers of larger profitable companies may wish to disclose more information in order to obtain personal advantages like continuance of their management position and compensation.

Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variables provides an explanation of the disclosure level.

Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other hand found profitability to be positively and significantly related with two of the four disclosure categories, financial and forward looking disclosures, whereas other categories ware negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing sector were found to disclose less of financial information, and instead disclosed more on general and strategic information to explain in detail factors affecting their poor financial performance.

2.4.4 Ownership dispersion

The ownership dispersion represents the percentage of shares owned by outsider after subtracting shares owned by the insider. Many studies found positive relationship between voluntary disclosure level and ownership, as explained by the agency theory which suggests that difference in the proportion of the company's shares owned by outsider shareholders cause's differences in the voluntary disclosure level. This is because the companies with more outsider ownership are more likely to disclose more information than companies with less outsider ownership and also the demand for publicly available information is likely to increase (Wallace and Naser 1995).

Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunthe, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found evidence consistent with this prediction.

Many studies found negative relationship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.

Naser et al. (2002) examined the affect of ownership on US company's disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.

Ho and Wong (2001) found negative relationship between family ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.

Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level.

2.4.5 Audit firm size

According to Jensen and Meckling (1976) large audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports.

In terms of size, audit firms can be divided into two; large or small. Large audit firms are identified as being one of these Big Four (or Big Five or Six formerly) international auditing firms, and smaller audit firms are the rest; the firms are more likely to choose a Big Six auditing firm. Such choice of audit firms signals to investors that the contents of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world while small firms are domestically; hence the large audit firms have more capability to disclosure of the information and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm (Alsaeed, 2006).

Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosure and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didn't fine significant association.

2.4.6 Industry sector

According Cook (1989) disclosure level is more likely to vary from one industry to the other due to the likelihood that leading firms operating in a particularindustry could produce a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. Cooke (1992) found evidence that Japanese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982); Wallace (1987): Wallace et al. (1994); Raffournier (1995); Inchausti, (1997); Patton and Zelenka (1997); Naser (1998); Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found insignificant effect.

Table 2.2: Summary of independent variables influence on voluntary disclosure:

Study

Independent variable

findings

Akerlof (1970)

Profitability

Positive relationship

Singhvi and Desai, (1971)

Profitability

Positive relationship

Jensen and Meckling, (1976)

Debt ratio and audit firm size

Positive relationship with debt ratio and audit firm size.

Firth, (1979)

Firm size and audit firm size

Positive relationship with debt ratio and audit firm size.

Leftwich, Watts, and Zimmerman (1981)

Ownership dispersion

positive relationship with ownership dispersion

McNally et al.(1982)

Industry sector

Insignificant with industry sector

Fama and Jensen (1983)

Ownership dispersion

positive relationship with ownership dispersion

Watts and Zimmerman (1983).

Firm size

positive relationship with firm size

Foster, (1986)

Firm size, profitability

Significant positive with firm size and found positive with profitability.

Watts and Zimmerman (1986)

Profitability

positive with profitability

Wallace (1987)

Industry sector

Insignificant with industry sector.

Cook (1989)

Industry sector

Positive with industry sector.

Bradbury (1992)

Firm size and debt ratio.

Significant positive with firm size and debt ratio.

Richard, (1992)

Profitability

Positive with profitability.

Forker (1992)

Audit firm size

Positive but insignificant with audit firm size.

Craswell and Taylor (1992)

Audit firm size

Positively significant with audit firm size.

Cooke (1992)

Industry sector

positive with industry sector

Mckinnon and Dalimunthe, (1993)

Firm size, debt ratio, ownership dispersion.

Positive with firm size and ownership dispersion and negative with debt ratio.

Hossain et al. (1994)

Firm size, debt ratio, ownership dispersion and audit firm size.

Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.

Wallace et al. (1994)

Industry sector

Insignificant with industry sector.

Meek et al, (1995)

Firm size, debt ratio, profitability.

Positive with firm size and profitability whereas significant, negative with debt ratio.

Hossain et al. (1995)

Firm size and Debt ratio

Significant positive with firm size and debt ratio.

Mitchell et al. (1995)

Firm size and Debt ratio.

Significant positive with firm size and debt ratio.

Wallace and Naser (1995)

Firm size, profitability, Ownership dispersion

Positive with firm size, ownership dispersion and

industry sector but-

,audit firm size and industry sector

- Negatively with profitability and audit firm size.

Ahmed (1995)

Firm size and audit firm size

Positive significant with firm size and audit firm size.

Raffournier (1995)

Profitability, audit firm size and industry sector.

No significant with profitability and industry sector, but significant positive with audit firm size

Zarzeski (1996)

Firm size and debt ratio

Positive with firm size and debt ratio

Aitken et al. (1997)

Firm size, Debt ratio and owner ship dispersion

Positive with the firm size and ownership dispersion but negative with debt ratio.

Inchausti (1997)

Profitability, audit firm size and industry sector.

Positive with profitability and significant positive with audit firm size and insignificant with industry sector.

Patton and Zelenka (1997)

Industry sector

Insignificant with industry sector.

Naser (1998)

Debt ratio and industry sector.

Significant positive with debt ratio but insignificant with industry sector.

Owusu-Ansah (1998),

Industry sector

Insignificant with industry sector.

Mahmood (1999)

Audit firm size

Significant with audit firm size.

Brennan and Hourigan, (2000)

Firm size and debt ratio.

Significant positive with firm size and significant negative with debt ratio.

Gelb (2000)

Ownership dispersion

Negatively with Ownership dispersion

Depoers (2000)

Audit firm size

No significant with audit firm size.

Naser and Alkhatib (2000)

industry sector

Insignificant with industry sector.

Ho and Wong (2001)

Profitability, ownership dispersion and audit firm size.

No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.

Naser et al. (2002).

Firm size, Profitability, ownership dispersion and audit firm size.

Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.

Eng and Mak (2002)

Profitability

No significant with profitability

Chau and Gray (2002)

Ownership dispersion

Positively with outside ownership dispersion.

Camfferman and Cooke (2002)

Profitability, audit firm size and industry sector.

Significantly negative with profitability and significant positive with audit firm size and industry sector.

Haniffa and Cooke (2002)

Ownership dispersion and audit firm size.

Negative with Ownership dispersion and no significant with audit firm size.

Eng and Mak (2003)

Firm size, debt ratio and ownership dispersion

Positive with firm size and but negatively with debt ratio and ownership dispersion

Barammer and Pavelin (2004)

Firm size

Significant positive with firm size

Alsaeed (2006)

Firm size, debt ratio, profitability, ownership dispersion, audit firm size and industry sector.

Significant positive with firm size whereas no significant with remained variables

Donnelly and Mulcahy (2008)

Firm size and ownership dispersion.

Significant positive with firm size whereas no evidence with the ownership dispersion

Al-Shammari,(2008)

Firm size, debt ratio, audit firm size.

Significant positive with firm size and audit firm size but positive with debt ratio.

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

This chapter discusses the research hypotheses formulated and research method utilized to investigate which firm specific characteristics influence the voluntary disclosure of Kuwaiti companies. The discussion consists of theoretical framework and research hypotheses, sampling, data collection and data analysis method. The final section explains the measurement of variables and model specification.

3.2 Theoretical Framework and Hypotheses Development

Based on the theoretical and empirical literature reviewed in the previous chapter, the theoretical framework for this study is developed together with the hypotheses to be test as follows:

3.2.1 Company Size and Voluntary Disclosure

It has been argued that a larger firm has higher level of disclosure due to agency costs are higher for larger companies because shareholders are widespread, therefore, additional disclosure might reduce these costs, large companies might have sufficient resources to afford the cost of producing information or the user of annual reports and large companies might be of interest to different users of annual reports including government agencies.

Firth (1979), Foster (1986), Bradbury (1992), Mckinnon and Dalimunthe (1993), Hossain et al. (1994), Meek et al. (1995), Mitchell et al. (1995), Wallace and Naser (1995), Zarzeski (1996), Aitken et al. (1997), Brennan and Hourigan (2000), Naser et al. (2002), Eng and Mak (2003), Brammer and Pavelin (2004), Alsaeed (2006), Donnelly and Mulcahy (2008) and Al-Shammari (2008) found that there is a positive relationship between a company's size and its level of disclosure. Hence, the following hypothesis is set:

H1: There is a significant positive relationship between company`s size and voluntary disclosure level of Kuwaiti companies.

3.2.2 Debt ratio and Voluntary Disclosure

As argued by Meek et al. (1995), Zarzeski (1996), Alsaeed (2006), Al Shimmiri (2008) firms with higher level of leverage have to disclose more information in order to satisfy creditors' demand for additional information and reduce agency costs and information asymmetry with shareholders, than companies with a lower level of leverage. Bradbury (1992), Mitchell et al. (1995); Hossain et al. (1995), Zarzeski (1996), Naser (1998) and Al-Shammari (2008) found positive relationship between debt ratio and voluntary disclosure level. Hence the following hypothesis is to be tested.

H2: There is a positive association between debt ratio and voluntary disclosure level of Kuwaiti companies.

3.2.3 Profitability and voluntary disclosure

As argued by Akerlof (1970), Singhvi and Desai (1971), Foster (1986), Zimmerman (1986), Richard (1992), Meek et al. (1995), Inchausti (1997) and Naser et al. (2002) that when the level of firm's profitability increases the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased and also order to obtain personal advantages like continuance of their management position and compensation and firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. Ho and Wong (2001), Eng and Mak (2002), Barako et al. (2006) and Barako (2007) found positive relationship between profitability and voluntary disclosure level. Hence, for these reasons, it is hypothesized that:

H3: There is a positive relationship between firm profitability and voluntary disclosure level.

3.2.4 Audit firm size and voluntary disclosure

Many studies indicate that the relationship between the audit firm size and voluntary disclosure level is positive. This is because the choice of audit firms signals to investors that the contents of the annual reports are audited with high quality. Furthermore, the large audit firms are widely spread in the world while small firms are domestically; hence the large audit firms have more capability, expertise and experience and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm. The Big audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports. Therefore, the companies audited by local audit firms affiliated with one of the Big Four audit are more likely to disclose voluntary information than companies audited by local audit firms without that affiliated with Big four audit.

Jensen and Meckling (1976), Jensen and Meckling (1976), Firth (1979), Craswell and Taylor (1992), Craswell and Taylor,(1992), Forker (1992), Wallace et al. (1994), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found that there is positive relationship between the audit firm size and voluntary disclosure level. Thus, it is hypothesized that:

H4: There is a positive relationship between audit firm size and voluntary disclosure level.

3.2.5 Industry sector and voluntary disclosure

As argued by Cook (1989) disclosure level depends on the industry sector due to the likelihood that leading firms operating in a particular industry could produce a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. While some study found the significant association between industry type and voluntary disclosure (eg. Cooke,1992 and Wallace et al., 1994). Other studies found insignificant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002). In this the diclosure of two sectors will be compared, namely the investment sector and the real estate sector. Whether the voluntary disclosure varies significantly between this two sectors is yet to be determined by testing the following hypothesis.

H5: There is a significant relationship between industry sector and voluntary disclosure level.

3.2.6 The reporting year and voluntary disclosure

Apart from the above variables, changes that take place in the Kuwait's accounting environment and disclosure requirements may change the voluntary disclosure level of the companies operating in the country. It is expected that there are improvement in the disclosure levels due to these changes and globalization. However the exact year where the improvement takes in not known and yet to be examined in this study by testing the following set of hypotheses:

H6: Voluntary disclosure is influenced by the reporting year.

The research framework for this study can be represented as in 3.1.

3.3 Data Collection

3.3.1 Population

In this study, the population frame will include all companies listed in Kuwait Securities Exchange. According to Kuwait Securities Exchange there were 218 companies listed in Kuwait at 2005, 2006, 2007 and 2008. Therefore, the population frame of this study will be based on all the listed 218 companies in Kuwait market, from ten sectors in Kuwait exchange rate: banking, insurance, investment, real estate, industrial, services, food, non Kuwaitis, mutual funds and parallel market.

3.3.2 Sample Selection

The sample was confined to only investment and real estate sectors due to these sectors being the two biggest sectors in terms of the number of companies listed. All companies in these sectors were selected to be included in this study except a few without required data.

3.3.3 Data Collection

As in other studies on disclosure, secondary data is used. It consists of annual reports of the selected companies, retrieved from the companies' websites.

3.4 Measurement of Variables

3.4.1 Dependent Variable

3.4.1.1 Voluntary disclosure level

Voluntary disclosure level is the dependent variable in this study. Many studies used a disclosure index as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to investors. In this study the disclosure index used is based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006). A dichotomous scoring scheme is utilised whereby an item score 1 if it is disclosed and 0 otherwise. The un-weighted index, as opposed to weighted index suggested by Gray et al (1995), is used where all items are given the same weight of importance in calculating the index. This is due to the attempt to avoid subjectivity in the index calculation as argued by Erny Nurdin (2008).

3.4.2 Independent Variables

Based on the review of related literature five independent variables were identified, namely company size, debt ratio, profitability, audit firm size, ownership dispersion and industry sector. However after collection data for the disclosure index, ownership dispersion has to be dropped because the index shows less that 50% of the annual reports have information on ownership.

3.4.2.1 Company Size

The firm size is measured by log of the book value of total assets, similar as in Naser et al. (2002), Alsaeed (2006), Donnelly and Mulcahy, (2008) and Barako et al. (2006).

3.4.2.2 Debt Ratio

Firm leverage is measured by the ratio of total liabilities divided by the total assets following, Naser et al. (2002), Alsaeed (2006) and Barako et al. (2006).

3.4.2.3 Profitability

Profitability is measured by net income available to shareholders divided by net sales, following Naser et al. (2002), Alsaeed (2006) and Barako et al. (2006).

3.4.2.4 Audit firm size

Auditors are classified into the Big 4 and the non-Big 4. The Big 4 refers to PricewaterhouseCoopers, Deloitte Touché Tohmatsu, Ernst & Young and KPMG. Audit firm size is a dummy variable in which The Big 4 audit firms are assigned 1 and the others are assigned 0. This measurement is similar to Naser et al. (2002), Alsaeed (2006) and Barako et al. (2006).

3.4.2.5 Industry sector

Based on Wallace et al. (1994) and Wallace and Naser (1995) and Alsaeed (2006), type of sector may play a role in influencing the voluntary disclosure of a company. How the effect is different between investment and real estate sector is yet to be found in this study.

3.4.3 Model Specification and Analysis

A multiple regression model is employed to test the relationship between specific-related variables and the level of disclosure. It can be represented by the following equation:

Y = a + β1 X1 + β2 X2 + β3 X3 + β4 X4 + β5 X5 + β6 X6 + e

Where:

Y = Disclosure index level.

X1 = Company size (Log of the book value of total assets).

X2 = Debt ratio (total liabilities divided by total assets).

X3 = Profitability (net income available to shareholders divided by net sales).

X4 = A dummy variable for audit firm size (a Big 4 audit firm = 1 and 0 = small audit firm).

X5 = A dummy variable for the type of sector (1 for real estate and 0 for investment sector, based on the listing classification used in KSE)

X6a = A dummy variable for reporting year (1 for year 2005, 0 other wise)

X6b = A dummy variable for reporting year (1 for year 2005 and 2006, 0 other wise)

CHAPTER FOUR

DATA ANALYSIS AND RESEARCH FINDINGS

4.1 INDRODUCTION

This chapter discusses the result of the study. The discussion of the research findings will be based on the research objectives in Chapter One and hypotheses identified in Chapter two.

This chapter is divided into four main sections. Section 4.2 starts with the list of companies included in the study. Section 4.3 presents the descriptive analysis of the variables understudy. The next section discusses the results of the regression analysis together with hypotheses testing. The final section concludes the chapter.

4.2 DESCRIPTIVE ANALYSIS

4.2.1 The sample

There are a total of 38 companies in the real estate and investment sector in Kuwait Stock Exchange Market as at 2005, 2006, 2007 and 2008. After deleting some companies whose annual reports cannot be accessed from the website, the final number of company's annual reports is 35 in 2005, 38 in 2006, 37 in 2007 and Table 4.1 lists these companies.

Table 4.1: List of companies included in the study

Numbers

COMPANIES

1

United Real Estate Company

2

Salhiah Real Estate Company

3

Tamdeen Real Estate Company

4

Ajial Real Estate Entertainment Co.

5

Al-Massaleh Real Estate Co.

6

Al-Enma'a Real Estate Co.

7

Mabanee Company

8

Injazzat Real Estate Dev. Co.

9

The Commercial Real Estate Co.

10

Kuwait Real Estate Holding Co.

11

Tijara & Realestate Investment Co.

12

Tameer Real Estate Invest.Co.

13

Kuwait Investment Company

14

International Financial Advisors

15

National Investments Company

16

Kuwait Investment Projects Company

17

Al-Ahleia Holding Company

18

Coast Investment & Development Company

19

The International Investor Co.

20

Securities House

21

Industrial Investments Company

22

Kuwait Financial Centre

23

Kuwait & Middle East Fin. Inv. Co.

24

International Investment Group

25

Aref Investment Group

26

Al-Aman Investment Co.

27

Al-Mal Investment Company

28

Aayan Leasing & Investment Co.

29

Global Investment House

30

Gulfinvest International

31

Kuwait Finance & Investment Co.

32

Kipco Asset Management Co.

33

Al-Madar Finance and Investment Co.

34

Al-Deera Holding Co.

35

Al qurain Holding Co.

36

Noor Financial Investment

37

Al-Tamdeen Investment Co.

38

Strategia Investment Co.

4.2.2 Descriptive Analysis of Variables

Table 4.2: Descriptive analysis of the variables

N

Minimum

Maximum

Mean

Std. Deviation

Index

138

0.5

0.7

0.4670

0.126

Size

138

1.662

3.140

2.870

2.604

DR

138

0.003

0.991

0.425

0.202

Profit

138

-8.913

454.011

4.058

38.659

Based on descriptive analysis as summarised in Table 4.2, the mean value of firm size is 2.870 million KD, with a standard deviation of 2.604 million KD. This shows that there is little variation in the size across the companies in the sample.

The mean value of debt ratio is 42.5% with a a standard deviation of 20.2%. By comparing similar value for the sample in Alsaeed's study, it can be said that the sample firms in this study are more levered that those in Alsaeed's study.

The mean value of profitability is 4.058 which means that the company profitability ratio was high because the minimum value is -8.913 and the maximum is 454.011. Besides, there are big differences between values of profitability ratio because the standard deviation is high 38.659.

Finally, the mean value of disclosure index is 0.5 which indicates that disclosure level of Kuwaiti companies in the real estate and investment sector is relative higher than that of Saudi's companies as found by Alsaeed (2006).

In terms of audit firm size, industry sector and reportiong year, Table 4.3 provides the tabulation of the sample firm according to these variables.

Table 4.3: Descriptive analysis for sector, audit firm size and reporting year

Items

n

percentage

Sector

Real Estate

45

33.6%

Investment

93

67.4%

Audit Firm Size

Big

99

71.7%

Small

39

28.3%

Reporting Year

2005

34

24.6%

2006

38

27.5%

2007

37

26.8%

2008

29

21%

4.2.3 Correlation Analysis

Table 4.4 presents the results of pairwise correlation analysis among all the variables in the study.

The analysis shows that debt ratio has a significant relationship with the sector (p-value = 0.007) at 5 % level. Other variables do not seems to have relationship among each other. This results indicate the need to pay attention to possible multicolinearity problem in the regression analysis.

Table 4.4: Correlation Analysis

Cind

DR

Profit

Sec

lsize

audit

Cind

Pearson Correlation

1

.181(*)

-.059

-.084

-.087

.219(*)

Sig. (2-tailed)

.

.034

.494

.328

.308

.010

N

138

138

138

138

138

138

DR

Pearson Correlation

.181(*)

1

.018

-.229(**)

.190(*)

-.006

Sig. (2-tailed)

.034

.

.837

.007

.026

.947

N

138

138

138

138

138

138

Profit

Pearson Correlation

-.059

.018

1

-.064

.033

.059

Sig. (2-tailed)

.494

.837

.

.456

.704

.491

N

138

138

138

138

138

138

Sec

Pearson Correlation

-.084

-.229(**)

-.064

1

.076

-.078

Sig. (2-tailed)

.328

.007

.456

.

.376

.361

N

138

138

138

138

138

138

Lsize

Pearson Correlation

-.087

.190(*)

.033

.076

1

.022

Sig. (2-tailed)

.308

.026

.704

.376

.

.796

N

138

138

138

138

138

138

Audit

Pearson Correlation

.219(*)

-.006

.059

-.078

.022

1

Sig. (2-tailed)

.010

.947

.491

.361

.796

.

N

138

138

138

138

138

138

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

4.3 REGRESSION ANALYSIS

A series of regression analysis were performed. Firstly, a regression analysis was performed on AUDIT, LNSIZE, DR, PROFIT and SECTOR to check the existence of the multicolinearity problem and the heteroscadasticity problem. The result is shown in Table 4.5 and Table 4.6

Table 4.5: Regression results of selected variable on the disclosure level

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Collinearity Statistics

B

Std. Error

Beta

Tolerance

VIF

1

(Constant)

.623

.162

3.836

.000

debt ratio

.100

.054

.161

1.847

.067

.854

1.171

audit

.063

.023

.226

2.796

.006

.989

1.011

profit

.000

.000

-.068

-.839

.403

.989

1.011

lnsize

-.079

.058

-.113

-1.368

.175

.946

1.057

sector

year05

-.001

-.070

.023

.024

-.002

-.242

-.022

-2.917

.982

.004

.913

.940

1.095

1.063

a: Dependent Variable: Disclosure Index

b: “Year 05”: ‘1' if a report is published in 2005, ‘0' otherwise.

Table 4.6: The multiple correlation coefficient and coefficient of determination

Model

Sum of Squares

df

Mean Square

F

Sig.

D-W

1

Regression

.335

6

.056

3.972

.001(a)

2.420

Residual

1.842

131

.014

Total

2.177

137

a Predictors: (Constant), year05, audit, L size, profit, debt ratio

b Dependent Variable: Disclosure level

All the VIF are less than 10 therefore it can be said that there is no multicolinearity problem. The Durbin-Watson value of 2.420 indicates that the data has no serial correlation problem. Based on the regression of squared residuals of the squared fitted value run by MICROFIT, the regression is shown to be free of hereroscadasticity problem. Hence no treatment for the problem is required.

The findings indicate that the diclosure level of Kuwait real estate and investment sectors is significantly influenced by three factors examined in the study, namely, debt ratio (p-value = 0.067), audit firm size (p-value = 0.06) and whether annual reports are made before 2005 or after 2005 (p-value = 0.04). The signs of the coefficients show that the higher the debt ratio and the bigger the audit firm size, the higher is the disclosure level and, that disclosure level after 2005 is significantly higher than the disclosure level on the year 2005.

The regression is rerun but replacing ‘Year05' with ‘Year06' to examine if the diclosure level before 2006 is different than that after 2006. The output of the analysis is as shown in Table 4.6.

The result shows that the variable “Year06” is also significant at 5% level (p-value = 0.001) indicating that the level of diclosure improve significantly after year 2006.

Table 4.7 : Regression results with “Year 06” replacing “Year 05”

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Collinearity Statistics

B

Std. Error

Beta

Tolerance

VIF

1

(Constant)

.619

.161

3.843

.000

debt ratio

.086

.055

.139

1.584

.116

.830

1.205

audit

.062

.022

.221

2.750

.007

.989

1.011

profit

.000

.000

-.035

-.434

.665

.986

1.014

lnsize

-.068

.057

-.0.98

-1.191

.236

.941

1.063

Sector

year06

-.003

-.069

.022

.021

-.009

-.272

-.112

-3.262

.911

.001

.910

.912

1.099

1.097

Adjusted R-square = 0.128

a: Dependent Variable: Disclosure Index

b:“Year 06”: ‘1' if a report is published in 2005 and 2006, ‘0' otherwise.

Similar process is repeat, replacing “Year06” with “Year07”. The result as shown in Table 4.7, indicates that there is no improvement in the disclosure level in the year 2007.

Table 4.8: Regression results with “Year 07” replacing “Year 06”

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Collinearity Statistics

B

Std. Error

Beta

Tolerance

VIF

1

(Constant)

.639

.167

3.823

.000

debt ratio

.102

.058

.163

1.767

.080

.789

1.268

audit

.061

.023

.218

2.647

.009

.989

1.012

profit

.000

.000

-.050

-.607

.545

.990

1.010

Lnsize

sector

-.077

.000

.059

.023

-.110

.000

-1.305

-.005

.194

.996

.943

.901

1.060

1.110

year07

-.047

.027

-.152

-1.727

.086

.869

1.151

Adjusted R-square = 0.079

a: Dependent Variable: Disclosure Index

b:“Year 07”: ‘1' if a report is published in 2005 and 2006, ‘0' otherwise.

The adjusted R-squares for all the regression analysis performed are less than 11% indicating that only 11% of the variation is disclosure level of Kuwaiti real estate and investment sector is explained by the explanatory variables in the study.

4.4 CONCLUSION

This chapter discusses the results of data analysis. Only two variables suggested by the literature namely debt ratio and audit firm size are found to have a significant relationship with disclosure level of Kuwaiti real estate and investment sector. Interestingly the study found that there is a significant increase year to year until 2007.

CHAPTER FIVE

CONCLUSION, LIMITATIONS AND RECOMMENDATIONS

5.1 Introduction

In this chapter, results of the findings are discussed in relation to the hypotheses and research questions. The main findings and their implications will be highlighted. Based on the findings of the study a conclusion is drawn. The last section in this chapter includes the recommendation that describes the area that can be explored for future research that could be carried out by other researchers.

5.2 Overview of the research

The objective of this study is to investigate the influence of firm-specific characteristics which include firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and year on voluntary disclosure level of Kuwait companies in the real estate and investment sector. 20-items disclosure index, similar to that used by Alsaeed (2006), was utilized to measure voluntary disclosure level. 38 companies' annual reports for 4 years which are 2005, 2006, 2007 and 2008 were included in the sample. These companies represent all the companies listed under the investment and real estate sector but a few observations have to be dropped due to non availability of annual reports. The final number of observation is 138 annual reports.

Descriptive analysis was performed to provide the background statistics of the variables examined in the study. This was followed by regression analysis which forms the main data analysis method. The results indicate that firm size, sector and profitability are insignificantly related to the disclosure level while debt ratio and audit firm size are significantly related to the disclosure level. It is also found that the level of disclosure differs significantly for annual reports published before 2006 and those after 2006.

5.3 Discussion of Research Findings

The result that firm size is insignificantly related to the disclosure level suggests that larger firms do not disclose more than smaller firms. This finding may be due to less variation in firm size among the sample firms as shown in the descriptive analysis. The small variation in size does not allow us to examine the influence of size on disclosure level effectively. Perhaps this finding is an evident that, in Kuwait, size is simply not important in influencing voluntary disclosure level since they rely more on auditors in determining what to be disclosed and what not to be disclosed. This argument is supported by the finding that auditor firm size is significantly related to disclosure level.

The importances of audit firm size in determining the voluntary disclosure level is due to the large audit firms having more international exposure, capability, expertise and experience and have higher reputation and power to affect the voluntary disclosure level in compared to the smaller audit firms. The Big audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behaviour by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports. Therefore, the companies audited by local audit firms affiliated with one of the Big Four audit are more likely to disclose voluntary information than companies audited by local audit firms without that affiliated with Big four audit. This result is consistent with the results of previous studies such as Jensen and Meckling (1976), Jensen and Meckling (1976), Firth (1979), Craswell and Taylor (1992), Craswell and Taylor,(1992), Forker (1992), Wallace et al. (1994), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008).

Pertaining to debt ratio, the study finds that there is a significant positive relationship between debt ratio and the level of disclosure of companies listed in Kuwait. This finding is consistent with the agency cost theory which argues that leverage imposes some good governing mechanisms which helps to control, both, debt agency cost (conflict of interest between management and debt holders) as well as equity agency cost (conflict of interest between management and equity holders). One of the mechanisms is condition imposed on firms to disclose some additional information, leading to higher levered firms having higher level of voluntary disclosure. The result is consistent with that of Bradbury (1992); Mitchell et al. (1995); Hossain et al. (1995); Zarzeski (1996), Naser (1998) and Al-Shimmiri, (2008).

The present study also finds that there is a insignificant relationship between profitability and the level of disclosure of companies listed in Kuwait. This result is consistent with the results of previous studies such as Raffournier (1995); Wallace et al, (1994); Wallace and Naser (1995); and Alsaeed, (2006). This situation again may be explained by the dominant role of auditors and creditors in determining items to be disclosed.

The study finds the industry sector is namely the investment sector and the real estate sector is insignificantly associated with voluntary disclosure level. This result is consistent with the results of previous studies such as Wallace and Naser (1995) and Camfferman and Cooke (2002).

In addition to the above, the inclusion of year of reporting as another independent variables allows us to assess whether the voluntary disclosure level have changed since the last study undertaken by Al-Shammari, (2008), which use 2005 annual reports. The results show that there is improvement in the level of voluntary disclosure before 2005 in compared to after 2005 and before 2006 in compared to after 2007. The changes are due to some changes in the accounting environment, investor's requirement for information or globalization that seems to take place in year 2005 and 2006.

Overall, it can be said that the results of the study supports in different degrees, all the hypotheses except for hypotheses H1, H3 and H6. Hypotheses 1 which states that there is a significant positive relationship between firm size and voluntary disclosure level is not supported the result and ought to be rejected. Hypotheses 3 which states that there is a positive relationship between profitability and voluntary disclosure level is not supported by the result and ought to be rejected. Hypotheses 6 which state that there is a significant relationship between industry sector and voluntary disclosure level are not supported the result and ought to be rejected.

5.4 Limitation of Study

There are several limitations of the study. First, the study does not take into consideration other channels of disclosure, such as preliminary announcements to the stock exchange, press release to security analysts and financial news media editors and announcements in takeover documents. It just focuses on one source of information (i.e. annual reports).

Second, the disclosure Index is composed of only 20 voluntary items as in Alsaeed's (2006) study. This index does not take into consideration information on ownership structure such as ownership dispersion, institutional ownership and managerial ownership information.

In relation to the above, another weakness of this study is that it did not include ownership structure variables as potential independent variables. The low r-square value may be due to the exclusion of these variables as many studies on emerging markets have shown the important of ownership structure in influencing firms' activity (e.g. Fauzias and Zunaidah, 2007). The exclusion of this variable is purposely done due to this variable being found to be insignificant in influencing voluntary disclosure in Saudi Arabia by Alsaeed, 2006.

Thirdly, the un-weighted or binary approach is utilized to measure the level of disclosure same as several other studies. Despite its simplicity and the similarity of results under the un-weighted and weighted indexes as shown by previous studies, the approach used in this study may not entirely capture the depth of items, thereby not measuring the disclosure properly as found by Alsaeed (2006).

5.5 Suggestion and Recommendation

The findings from the present study provide various insights that should be of interest to government, scholars, shareholders, institutional investigation, policymakers and other relevant stakeholders in Kuwait.

5.5.1 Suggestion for policy maker

The findings from this study inform Kuwait's financial governing bodies of the current status of voluntary disclosure of companies listed in the stock markets and how it is affected by firm size, audit firm size, profitability and leverage. This knowledge to a certain extent could guide the policy makers as to how to improve the voluntary disclosure activities in order to improve transparency in the equity market in the attempt to attract more foreign fund into the equity market. Regulators may use the findings to suggest areas where efforts to improve the disclosure regulatory regime in Kuwait should be concentrated.

This study contributes to the literature on corporate financial reporting and disclosure practices is one of important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and auditing profession. It also contributes to the literature on whether the company characteristics that researchers have found to be significant in companies in developed countries can be applied in a developing country like Kuwait.

This study also may be useful for regulators, preparers and existing and potential investors. As suggested to Al-Shammari, (2008). This study also provides additional materials to enhance the comparative analysis of voluntary disclosure practices in developed and developing countries.

5.5.2 Suggestion for future research

This study contributes to the body of knowledge on financial disclosure of Kuwaiti companies. Even though there are already some studies done on this topic such as Alsaeed (2006), Al-Shammari, (2008), Naser et al., (2002) and Meek et al, (1995) the use of a more recent data in this study provide more current evidence.

However there are many more improvements that could be suggested for future researchers in this topic such as the following:

1- Introduce new voluntary disclosure index that includes some items excluded in this study such as ownership structure items;

2- Classify voluntary disclosure into discrete groups, such as financial and non- financial information;

3- Examine the linkage between the firm characteristics and mandatory disclosure information;

4- Incorporate other independent variables that may affect the voluntary disclosure level such as ownership structure variables;

5- Construct the disclosure index based on the value financial information users attached to every disclosure item; and

6- Assess the extent of disclosure of privately held and financial firms.

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