Examining Corporate Governance Influencing Nonfinancial Information Disclosure Quality Accounting Essay


Modern accounting emphasizes on nonfinancial measures as a device to compensate the financial measures weakness and the financial measures are recommended to be used with nonfinancial ones. This study is to examine the factors influencing the nonfinancial information disclosure quality in the firms listed in Tehran stock exchange. So the necessary information were gathered from 102 firms listed in Tehran stock exchange in 2008-2012. The regression analysis was used to test the hypotheses. A model including 50 indexes based on Iran accounting standards and other regulations concerning disclosure were used to measure nonfinancial information disclosure quality. The findings indicate that the possession type and possession concentration have positive and significant effect on nonfinancial information disclosure quality.

Keywords: nonfinancial information disclosure, possession type, possession concentration.


One of the economic development factors in developing countries is to have an information system. The information give intelligence and knowledge, create motives and decrease uncertainty, reveal the information concerning new choices or eliminate the weak ones and finally influence people and motivate them to do something. The information should send signals warn and inform about future specially in business and commerce space before it would be too late (Eccles and Mavrinac, 1995). One of the purposes of the information system is to prepare and present information to create a basis for the investors and grantors to take logic decisions; in line with this the information should be useful, related and be able to influence people's economic decisions and lead to the best decisions; on the other hand, it is necessary financial and nonfinancial information be disclosed and available to everybody so the financial information are useful for the mentioned groups, accounting purposes and financial reporting (Gray et al., 1996). Nowadays there is an unanimity among the researchers that the company's real values are not shown in old financial statements. It is reasoned that it is necessary to focus on nonfinancial information in yearly reports to decrease the problem (Flostrand and Strom, 2006). Nonfinancial disclosure means the presentation of all qualitative and quantitative nonfinancial information issued through the descriptive notes with financial statements and directors' board report. New literature focuses on nonfinancial measures as a device to compensate financial measures' weakness and recommends the usage of the nonfinancial measures beside the financial ones. Thus, these measures may be informer and guide to take current decisions without imposing additional costs on the firm (Sajadi et al. 2009). It seems necessary to examine and know factors influencing the companies' nonfinancial disclosure quality.

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It is possible to consider the financial and nonfinancial information disclosure as the assessment of firm operation, judgment about how the firm uses available sources and foreseeing the firm profitability process. So information disclosure should be in related, appropriate and complete. By virtue of above mentioned matters concerning the study subject it is indicated that the information disclosure is not limited to a special category of the financial statements beneficiaries, but in includes a vast spectrum of the community such as professional circles, grantors, legislating groups and accounting standards compilers; also lack of enough studies in this field may be another factor indicating the importance of this study. So the study purposes are briefly as follows:

1-Studying the quality of nonfinancial information disclosure in the producing firms listed in Tehran stock exchange.

2-Knowing the factors influencing the quality of nonfinancial information disclosure and how they influence in the producing firms listed in Tehran stock exchange.


Simply disclosure means the transfer of economic information including financial, nonfinancial, quantitative or other forms in relation to the company's financial conditions and operation. If the disclosure is obligatory by virtue of some regulations and laws, it is obligatory and if it is not by virtue of some regulations, it is optional. Also implicitly it indicates the least information disclosure by which it is possible to have acceptable assessment about the risks and relative value of the firm to help the information users (Ansah, 1997).

Complete disclosure necessitates the financial statements be programmed and prepared to present a more precise image of the economic occurrences effective in a define period and include the information useful for the investors and do not mislead the reader. More evidently complete disclosure principle means not eliminating or hiding any information important for or interested by the investors (Belkaoui and Kahl, 1978).

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Having examined the analysers' report it was indicated that they have benefited importantly from nonfinancial information to assess the company's future operation (Flostrand and Strom, 2006). Generally these studies have indicated that nonfinancial information have relationship value and influence greatly the beneficiaries' judgements and decisions to benefit from the financial statements. Shan (2009) has examined the level of the nonfinancial information benefited by the experts and concluded that the nonfinancial information influence the assessments about shares price. Briefly there are many reasons to promote the nonfinancial information disclosure quality and there are many evidences to recommend the advantages of such disclosures.

Notwithstanding all emphases on promoting nonfinancial reporting some serious obstacles influence new forms of companies' disclosure; the obstacles are as follows (Taylor et al., 2010):

1-Lack of comparable data: Nonfinancial disclosures are low comparable because they are quantitative.

2-Lack of reliable and clear data: The voluntary disclosure reliability may be questionable when there is no clear regulations or effective auditing system to support nonfinancial reports.

3-Time and sources limits: The investors encounter with limits in relation to time and sources to analyze the firm data. More information disclosure specially if they have no clear relation with investment decisions create serious problems. The information should be available, attainable and reliable to protect efficient market.

In this section some expressions used in the study are described:

Disclosure: Presenting information by methods and channels other than identifying or registering the events in financial statements differing from identifying in financial statements and this the aspect of the information which is very interested (SFAC No. 5).

Nonfinancial disclosure: The foresightful information including management programs, opportunities, risks and focus on factors emphasizing on long-term value creation and presenting the information to adapt better the information reported to outer users with the information reported to directors' board in order to manage better the commercial processes (AICPA, 1994).

Obligatory disclosure: Some aspects on information reported because of some governmental regulations, laws and contracts, capital market and professional accounting institutions reported through financial statements (Ansah, 1997).

Optional disclosure: Presenting information additional to the obligatory ones when first selected by the firm management and secondly influenced by no force legally or by capital market pressures, analyzers, etc. (Meek et al., 1995).


Information disclosure and financial transparency are of the most important dimensions of firm corporate governance. Proper and appropriate financial information disclosure adjust the agency issue by filling the gap of information asymmetry between directors and shareholders. Precise and timely predictions improve the decisions of the people benefiting from financial reports. Weak information disclosure misleads the shareholders and has unfavorable effect on their wealth. Theoretical analysis and experimental evidences indicate that the information asymmetry increase between firm directors and shareholders has direct relation with decreasing stock exchange liquidity potential, diminishing transactions and generally decreasing social benefits due to the trading (Lau et al., 2009).

Thus, the presence of firm corporate governance mechanisms guarantees the investors', grantors', clients' and other beneficiaries' benefits and is realized by the optimal decisions taken by executive boards and compiling enforceable regulations and laws; all of these cases meet four essential goals: response, transparency, justice and fairness and observing beneficiaries' rights (Lau et al., 2009).

H1: Possession concentration has significant effect on nonfinancial information disclosure quality.

By virtue of high possession concentration the owners usually have authority on the firm activities and access to necessary information (Lau et al., 2009); in contrast, there is a reverse condition for the firms with low-ranking and dispersed shareholders as Patton and Zelenka (2009) believe that directors' and shareholders' benefits contradiction is due to more possession dispersion than directors' opportunistic behaviour; in other words, when the firm are include many incongruous, dispersed and low ranking it is less probable to supervise the management behaviour and may lead to more contradiction between the benefits. In such conditions it is expected the firm disclose more information to decrease the contradiction

H2: Type of possession has significant effect on the nonfinancial information disclosure.

Great shareholders have effect on management's decisions and strategies as much as the shares they have in the firm (Lau et al., 2009). Gelb (2000) examined the effect of directional possession on information disclosure in U.S.A. companies; their findings showed the directional possession in low rates (When the possession management has few shares) leads to higher rank in information disclosure quality in yearly reports. Habib and Jiang (2009) showed that the firms with the shareholders who are mostly institutional possessors disclose more information in yearly reports. Notwithstanding these evidences many studies have shown that there is a negative relation between the type of possession and the information disclosure rate (Shan, 2009).

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Wallace et al. (1994) found no significant relation between the type of possession and the information disclosure quality.


The researchers have become interested in accounting information disclosure since 1960s; such studies have usually been executed in two ways: by virtue of the first method based on gathering data through questionnaire sent for people benefiting from accounting information; they were requested to rank special accounting items in decision process according to their importance (Buzby, 1974) the second method is to examine the relations between information disclosure indexes and companies' features such as firm size, profitability, possession structure, etc. Considering this study is of second group only related previous studies are mentioned; most of them were executed in developed countries and few ones were executed in developing countries. Some of the studies executed in developed and less developed countries are summarized as follows:

By regression analysis Vanstraelen et al. (2003) examined the quality of nonfinancial disclosures quality and financial analyzers' potency to predict between the producing firms listed in three European countries' (Germany, Netherland and Belgium) stock exchange in 1999; their findings indicated that the nonfinancial information disclosure quality has positive and significant relation with companies' size. Also more foresightful nonfinancial information disclosure is with less information asymmetry and higher precision by the analyzers in predicting companies' profitability.

Al-Saeed (2006) studied the relation between companies' features and the information disclosure rate in financial statements of the firms listed in Saudi Arabia stock exchange in 2003 so he defined 20 disclosure indexes by virtue of previous studies and assessed the sample of 40 firms according to non-weight index method. His findings indicated that the information disclosure rate average is less than the possible points medium rate. Also the firm sizewho was measured by total assets logarithm had positive and significant relation with information disclosure rate while unexpectedly the debt ratio, possession dispersion, firm age, profit marginal, industry type and auditing firm size had no relation with the information disclosure rates in the financial statements.

Dorestani (2009) examined the relation of nonfinancial information disclosure with accounting and market operations, profit quality standards and analyzers' prediction in the firms listed in NYSE stock exchange by virtue of regression analysis; the findings indicated no relation between above variables with nonfinancial information disclosure.

Arvidsson (2011) examined the nonfinancial information disclosure rate in yearly reports of the firms listed in Stockholm stock exchange in 2008; the study indicated that the rate of attention and concentration on nonfinancial information related to intangible assets were interested in yearly disclosures. This attention increase was evident in both compiled laws and demands rate. The management team should not only present tangible assets in yearly reports but also show the role played in the process creating companies' value and strategy by intangible assets. Besides, the study indicated the process change in the companies' yearly reports towards the presentation of the information related to the created companies' social responsibilities, studies and development. The study findings indicated that if nonfinancial information are disclosed properly, the financial statements weakness and inefficiency are compensated and if they are not disclosed, perhaps it would be a risk damaging efficient allocation of the sources in the shares market.

By virtue of regression analysis Rao et al. (2012) examined the relation between firm corporate governance features and information disclosure rate in 100 firms listed in Australia stock exchange in 2008; firm corporate governance standards, number of independent members in directors' board, institutional possession and possession concentration were considered in the study; the findings confirmed the study hypotheses.


Regression model designed to test the corporate governance influencing nonfinancial information disclosure quality is as follows:

The study variables and their measurement method are shown in following table.

Table 1: Independent variables, dependent variables, measurement method and symbols incorporated into the model


independent variables

measurement method

symbol incorporated into the model


possession concentration

the shares percent of five superior shareholders



possession type

if the possession is institutional, number 1, otherwise, zero



the rate of nonfinancial disclosure

issuing checklist



In this section mean statistics, middle, minimum,maximum and standard deviation of each variable is presented.

Table 2: Descriptive statistics of the study variables

















standard deviation












Inferential statistics:

Testing the effect of corporate governance on nonfinancial information disclosure quality.

Table 3: Correlation of firm features and corporate governance with nonfinancial disclosure.





Pearson correlation







Pearson correlation










Pearson correlation












Summarized statistics model study.

Table 4: Summarized statistics model study.

independent variable

dependent variable

correlation coefficient

definition coefficient

estimated standard deviation

significance rate



nonfinancial disclosure






(a): Predictors: Fixed variable, possession type, possession concentration.

By virtue of the findings in Table 4 considering the significance is less than 5 percent the firm features and corporate governance variables have significant effect on the dependent variable (Nonfinancial information disclosure quality).

Testing significance of regression model (Test 'F'):

In this section the study's model significance is tested by variance analysis test as follows:

Table 5: ANOVAb

regression equation

total squares

freedom grade

squares mean

statistic 'F'

significance rate







0/000 (a)








(a) Predictors: Fixed variable, possession type, possession concentration.

(b) Dependent variable: Nonfinancial information disclosure.

As you see in Table 5 considering the significance is less than 5 percent the regression model significance is accepted.

Testing significance of regression coefficients (Test 'T') and examining if there is collinearity.

Table 6: Test 'T'

regression model

nonstandard coefficients

standard coefficient

statistic 'T'

significance rate

statistical collinearity

variables coefficient

standard deviation




fixed variable





possession concentration








possession type








As you see in Table 6 the possession type variable has the most effect and possession concentration has the least effect on the dependent variable (Nonfinancial information disclosure quality) in above model. Final equation of the study is stated as follows:

Defining regression model accuracy and examining the effect of the presented model:

It is necessary to examine the presence of three following conditions in the remainders by virtue of Spss output in order to define the accuracy of the regression model and effectiveness of the presented model:

1-The remainders should be normal.

2-The remainders variance should be fixed.

3-The remainders should be independent.

Having defined the Durbin-Watson amounts we concluded that the errors independent for all variables and 1.5<Durbin-Watson<2.5. Also having examined the outputs we concluded that the errors were fixed and their variance was fixed.


The findings from H1 indicated the possession concentration has had positive and significant effect on nonfinancial information disclosure quality. Agency theory predicted that when the firm shareholders include mostly low-ranking, dispersed and incongruous shareholders the probable supervision decreases on the management behaviour and may lead to more intense contradiction between the benefits; in such condition it is expected the firm disclose more information to decrease the contradiction; one of the reasons for this unexpected relation may be related to the arrangement and size of the sampled companies. The sample includes 102 producing firms listed in Tehran stock exchange and the model may be not able to distinguish the difference in the nonfinancial information disclosure rate because of concentrated structure of possession in such companies.

The findings from H2 indicated the possession type has had positive and significant effect on nonfinancial information disclosure quality. The possession separated from companies' control way creates agency costs and then leads to benefits contradiction between possession and management. So it is more possible the agency cost increases for the firms with public, dispersed possession. The presence of a great interface such as institutional investor may solve the agency and undisclosed information problems because of benefiting from economic advantage due to scale and variety. One another probable justification for this relation may be (As mentioned before) the institutional investors who are insurance fund, retirement fund and investment firms in Iran. Considering these people have limited control on the firm reporting perhaps they have not enough access to necessary information and that is why it is more possible they rely on company's public disclosure.