As Williams (2008) defined, disclosure can be extended to consider all the types, which include social, environmental and financial disclosure and two forms, which are mandatory and voluntary disclosure. So disclosure, also referred to corporate disclosure includes any purposeful public release of information---financial, social or environmental, required or voluntary qualitative or quantitative---that is likely to have an impact on the company's competitive performance and on the strategic decision making of its internal and external audiences.
Voluntary financial disclosures include forward-looking information, management forecasts, industry and business segment information and discussions about a company's market strategies. Voluntary social disclosures involve independent audits of company facilities, the number of minorities hired, and employee training costs; besides the required compliance on emissions and disposal activities, voluntary environmental disclosures comprise the impact or risks of environmental management programs, pollution controls, or environmentally friendly office policies and green architecture, such as hydroelectricity and solar panels, which relate to costs or revenues.
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There are several theories to support the reasons why firms voluntarily disclose information which are not required by regulations, such as Capital market transactions hypothesis and the corporate control contest hypothesis from the economic or financial view; and on the other hand, from the sociological or non-financial view, the legitimacy theory, the institutional theory and the stakeholder theory.
Healy and Palepu (2001) conducted the research on voluntary disclosures, and stock market motives are what they focused on. They assume that managers always have much more clarified and greater information than outsider investors. Secondly, accounting and auditing regulation are more likely possible to be imperfect, such that they can trade off between accounting and disclosures for their contracting, political or corporate governance reasons which are explained below.
As summarised by Healy and Palepu (2001), there are six main hypotheses to support incentives for managers to disclose information from the financial aspect:
Capital market transactions hypothesis
Since investors' perceptions of a firm are important, the fact that managers have superior information will lead to information asymmetry which is costly for existing shareholders to raise public equity or debt. So the managers have motives to disclose voluntarily in order to reduce the firm's cost of external financing, then reduce the cost of capital and Lang and Lundholm (1997) actually found that disclosures increase significantly often before six months to the firm's equity offerings.
Corporate control contest hypothesis
Palepu (1986) and Morck (1990) found that the greater the possibility of hostile takeovers which followed by CEO turnover, the poorer stock performance. So Healy and Palepu (2001) hypothesize that with the risk of job loss and poor stock and earning performance, managers chose to disclose so as to reduce the likelihood of undervaluation and to explain away poor earnings performance. The hypothesis has been confirmed by Brennan (1999) that targets are more likely to make management earnings forecasts during contested takeover bids.
Stock compensation hypothesis
According to Healy and Palepu (2001), there are several incentives for managers to involve in corporate disclosure if their compensation schemes are stock-based which contain stock option grants and stock appreciation rights.
First, with the insider trading rules, managers disclose private information to meet restrictions and to increase liquidity of the stock. Second, if managers act for the benefit of existing shareholders, voluntary disclosure will help to decrease contracting costs generated from stock compensation offered to new employees. Stock compensation can be used as a form of remuneration for managers and owners if stock prices can present the firm's intrinsic value, so additional disclosure will reduce the risk of misvaluation for firms whose compensation schemes are based on stock performance.
Just as Aboody and Kasznik (2000) investigated, delaying the announcement of good news and accelerating the disclosure of bad news often happen before firm's stock option award periods so that managers can increase their stock compensation.
Litigation cost hypothesis
Manager increase voluntary disclosure in the fear of legal actions against inadequate or untimely disclosures and reduce issuing forward-looking information which is difficult to qualify and substantiate in the future on condition that managers " believe that the legal system penalises forecasts made in good faith because it cannot effectively distinguish between unexpected forecasts errors due to chance and those due to deliberate management bias".
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For the reason why incentives not to disclose forward-looking information like litigation cost should be brought out, Healy and Palepu (2001) noticed that "pre-disclosure of bad news is beneficial because it spreads the stock price decline over multiple dates, thereby reducing the likelihood of being detected in screens used to identify claims."
Management talent signalling hypothesis
This hypothesis mentions that the market value of a firm is treated as a function of the managers' ability to judgement to firm's future changes in economic environment. Thus investors prefer earlier information to be revealed and this favour will be reflected to the confidence on managers' competency and hen on the firm's market value. So management talent can also be a incentive for managers to disclose information voluntarily and earlier as expected of investors.
Proprietary cost hypothesis
This hypothesis shows that the firm will hesitate and delay to disclose information if they concern about damage of their competitive position caused by the disclosure, even at the cost of more expensive to raise additional equity
Along with the financial explanations that firms make voluntary disclosures, there are some social and environmental explanations backed up by also several accounting theories:
Deegan (2002) observed several managerial motivations for social and environmental kind of disclosures:
The first motivation is put forward from legitimacy Theory. Described by Gray et al. (1996), the Legitimacy theory is a kind of system-oriented view of the organisation and society and this permits us to focus on the role of information and disclosure in the relationship(s) between organisations, the State, individuals and groups.
Dowling and Pfeffer (1975) explained that legitimacy can be regarded as a resource on which an organisation is dependent for survival, so that Deegan (2002) pointed out that if society perceives that a organisation has breached its social contract, the organisation's survival will be threatened. As a result, legitimacy will become a resource the organisation used to impact or manipulate as a react to the society's perceptions. At this moment disclosure can be used for managers to take as remedial strategies to have any effect on external parties, which information is necessary to change perceptions.
Lindblom (1994) also surpported that "if an organisation perceives that its legitimacy is in question it can also adopt a number of strategies---all of which will rely on the use of external disclosures."
To explain the reason why firms make voluntary disclosures, legitimacy theory is associated with other theories and they have overlaps within each other.
Institutional theory is another theory reflects that "under this theory, organisations will change their structure or operations to conform with external expectations about what forms or structures are acceptable (legitimacy)."
Deegan (2002) illustrate that in an industry the majority of organisations might have particular governance structures there might be "institutional" pressure on an organisation to take such kind of governance structures, then this organisation is expected to move towards conformance with the majority.
Similar to legitimacy theory, measures taken by a organisation due to the threat to survival can also be considered as remedial strategies to maintain or create congruence, often through disclosing information.
Derived both from political economy theory, stakeholder theory has two branches. Raised by Deegan (2000), for ethical (normative) branch, stakeholder theory analyses how organisations should treat their stakeholders and focus on the responsibilities of organisations; for managerial (positive) branch, stakeholder theory discusses the need to manage particular stakeholder groups.
From the managerial branch, Gray et al. (1996) believe that "information is a major element that can be employed by the organisation to manage (or manipulate) the stakeholder in order to gain their support and approval, or to distract their opposition and disapproval." Therefore managers are motivated to disclose information highly connected to particular stakeholders' expectations.
Robers, R. (1992) conducted an empirical tests on the determinants of corporate social responsibility disclosure, in the corporate social responsibility model built by him, the results support that stakeholder power should be one of the three dimensions that influence corporate management and can be viewed as a function of the stakeholder's degree of controls over resources required by the corporation.
It has been verified by varieties of accounting theories that managers have various motivations to make voluntary disclosures for financial, social and environmental reasons. These theories can not be viewed separately and some of them have overlaps and interrelated to each other. (1431 words)
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