Mapping corporate disclosuretheories

Larissa von Alberti-AlhtaybatSchool of Management and Logistic Sciences, German-Jordanian University,

Amman, Jordan

Khaled HutaibatFaculty of Business Administration, Mutah University, Mutah, Jordan, and

Khaldoon Al-HtaybatCollege of Business Administration and Economics,Al-Hussein Bin Talal University, Maan, Jordan

Abstract

Purpose – The purpose of this paper is to map corporate disclosure theories as a step towards fillinga gap in the theoretical background for corporate disclosure research. The purpose of the map is toencompass a range of particular theories relating to corporate disclosure and to demonstrate thecomplex relationships between different notions of the financial disclosure phenomenon. This will helpnew researchers to understand how particular corporate disclosure theories are related, as well as helpwith teaching accounting theories at undergraduate and postgraduate level.

Design/methodology/approach – A deductive and inductive approach to theory building wasapplied. The deductive approach suggests identifying the gap in the literature, the inductive approachthen prescribes theory building in three stages: phenomenon observation, categorisation andrelationship building. This approach serves to develop a theoretical map integrating the corporatedisclosure theories.

Findings – The paper discusses theories that recognise actual features of financial markets – marketfailure, information asymmetry and adverse selection – to provide an explanation for the existence ofcorporate reporting regulations and managerial incentives, which control and determine the maximumlevel of corporate information under these conditions. It then integrates these theories in a map seekingto explain corporate disclosure levels, mandatory and voluntary, financial and narrative.A combination of theoretical supplements – codification theory, Dye’s theory of mandatory andvoluntary disclosure, and disclosure transformation theory – are proposed in this framework astheories to explain processes of change in mandatory and voluntary corporate disclosure in practice.

Originality/value – Another benefit mapping these theories is to provide useful insights intoexisting disclosure theories, which may help to explain why some empirical results have beeninconsistent with the predictions of these theories. No similar attempts have been published in theaccounting literature.

KeywordsCorporate reporting, Accounting theory, Information asymmetry, Disclosure transformation,Narrative disclosure, Financial disclosure, Disclosure

Paper type Research paper

1. Introduction and contribution of the studyCorporate disclosure covers a wide range, including narrative and financial, mandatoryand voluntary, printed and internet disclosure (Ali et al., 2007; Xiao et al., 2002).In attempting to formulate a comprehensive theoretical basis of corporate financialreporting, accounting scholars have developed different disclosure theories, each ofwhich explains different sub-points of financial disclosure. Furthermore, prior scholars

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Journal of Financial Reporting &Accounting

Vol. 10 No. 1, 2012pp. 73-94

q Emerald Group Publishing Limited1985-2517

DOI 10.1108/19852511211237453

explained the variations in the corporate disclosure practices among countries, byexplaining the environmental factors behind financial disclosure differences (Cooke andWallace, 1990; Radebaugh and Gray, 2002). Recently, technological factors influencedthe form and content of corporate reporting, transforming printed to internet corporatereporting practices (Xiao et al., 1996, 2002; Lymer, 1999).

The purpose of our paper is considered as a step towards building a comprehensivemap integrating both mandatory and voluntary disclosure theories, which specificallyaddress economic market aspects. This study seeks to contribute a frame of reference forlearners and researchers, when studying and researching accounting theory andcorporate disclosure. It gives an overview of all relevant economic theories relevant tofinancial disclosure, their main aspects, how they interrelate, and how they can helpexplain current levels of financial disclosure. It also determines relationships among thosetheories, and how these relationships can remedy theories’ weaknesses. Furthermore, itserves as an explanatory tool regarding companies’ disclosure levels, and generaldisclosure practices. It identifies the strong theoretical arguments each theory provides,and combines those into a framework, that contributes a starting point for a normativedisclosure framework. Functionalist-normative disclosure, and accountants’ andauditors’ attitude towards such disclosures, is rooted in the ethics of accounting(Sisaye, 2011). In order to achieve the optimal level of disclosure, accountants and auditorshave to adhere to principles, such as conservatism, independence, and basic rules ofaccounting and financial reporting (Sisaye, 2011). Knowing the theoretical explanationsof existing disclosure levels serves as a starting point to integrating existing standards,existing best practice and ethical rules of accounting in a normative framework, with thepurpose to guiding accountants and auditors to on-going best practice.

First, the paper discusses disclosure theories based on actual market features.Following Healy and Palepu’s (2001) work, information asymmetry, the agencyproblem and the adverse selection problem provide a fundamental aspect of theframework for corporate disclosure. A critical review of the proposed theories will beundertaken, and then the strongest points of each theory will be integrated into themap, as a possible explanatory tool for future researchers and possibly to account fordifferences in financial disclosure. Finally, this paper connects the discussed theoriesby developing a map of corporate disclosure theories. By encompassing existingcorporate disclosure theories in one scope this paper will show the developments ofinternet disclosure as a new way of corporate information provision by companies andas a new corporate information communication medium. The following will discuss theresearch methodology applied for mapping the theories, then disclosure theories will beillustrated, and finally the map of theories will be outlined and discussed.

2. Research approachThe research approach to integrating the existing disclosure theories is deductive andinductive at the same time. Deductive gap recognition and problem identification is donethrough identifying apparent gaps in the literature (Nielsen, 2010). The literature reviewdenotes the deductive aspect of a study, as it serves to identify apparent gaps. Once thegap has been identified, the inductive approach takes over (Carlile and Christensen,2005) by observing a particular phenomenon, in this case the existing literature oncorporate disclosure, seeking to categorise, based on existing classifications and newly

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developed ones, and finally establishing relationships, which will be addressed in thelast part of the paper when discussing the map of theories.

Carlile and Christensen (2005) discuss the stages of descriptive theory building,which they classify into observing, categorising and establishing relationships (Hevnerand Chatterjee, 2010). This reflects an inductive approach to theory building. In the firststage, the identified phenomenon is observed, which in this study means that theexisting literature is considered as the phenomenon under study as it is the basis for theintegrated corporate disclosure theories. Categorising refers to identifying the theoriesthat are grouped under a particular heading, based on the attributes of each theory(Carlile and Christensen, 2005). Finally, defined relationships are shown in Figure 2. Inthis step, researchers have to define the association between the defined categories,resulting in the study’s output: the corporate disclosure map of theories model.

In the practical context, the first stepping stone is reading of prior literature publishedin the particular area, which is in the case disclosure theories. In the first instance, theliterature was investigated in order to establish any previously-developed disclosureframeworks. In this case economic theories were focussed on to establish acomprehensive association of these, which can be expanded on in the future. In thepublished literature no attempt of such a comprehensive mapping was found, thusdeductively the gap was recognised. This denotes the deductive aspect of theorybuilding. In the next stage, the researcher seeks to associate the existing theoriesinductively through categorising existing classifications. Practically, the first categoryto be identified was market features, as all economically-driven theories incorporatemarket features. This led to two further categories: perfect and imperfect marketconditions, i.e. in simple terms what if all is good and what if not? This approach to theliterature led to around 20 categories, which were rationalised into broader categories bydefining further relationships among theories. Identifying shared characteristicsthrough coding for similar explanations, terms and characteristic features of theories,the relationships among them transpired. This would also explain the inclusion ofinternet disclosure theories, as these were relevant in the context of voluntary disclosure.

The next sections illustrate the first stage of inductive theory building, afterthe deductive stage was completed – “observing”, i.e. describing and discussingcorporate disclosure theories. The categorisation of theories taking place during andafter the observation, and during the defining of relationships.

3. Corporate disclosure theoriesCorporate disclosure represents the most holistic picture of information provision bycorporations to the external world. This includes financial information, narratives,mandatory provision required by the law and accounting standards, and voluntarilyshared insights due to the external pressures or internal decision-making (Ali et al.,2007). Thus, corporate disclosure spans a great range of information and addressesvarious reasons and dynamics for providing such information. Scholars haveaddressed these dynamics and their results in a great number of prior studies (Cooke,1989, 1991, 1992; Wallace and Naser, 1995; Inchausti, 1997; Suwaidan, 1997;Owusu-Ansah, 1998; Watson et al., 2002; Haniffa and Cooke, 2002; Allam and Lymer,2002; Bonson and Escobar, 2002; Ettredge et al., 2002; Debreceny et al., 2002; Oyelere et al.,2003; Marston and Polei, 2004).

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The next sections give an overview of and discuss these disclosure theories, whichare then integrated in the map of disclosure theories.

3.1 Corporate disclosure under the corporate market ideal condition, free markets theoryThe free markets theory (FMT) is based on two fundamental concepts, first capital marketfunctions under ideal conditions and second financial information as a public good (Cooperand Keim, 1983). The notion of the efficient market is based on the market capability ofallocating the resources in effective and efficient ways (Taylor and Turley, 1986). Ingeneral terms, Fama (1970), Bromwich (1992) and Adelegan (2003) defined an efficientmarket as a market in which prices fully reflect available information.

Riahi-Belkaoui (2004) argued that the basic assumption of FMT is that accountingfinancial information is an economic public good, the same as other services and goodsin the market. The essence of this concept is that the provision of information to a singleuser is equally and costlessly available to another user (Cooper and Keim, 1983; Scott,2003). Under the ideal financial market conditions, financial reporting is the source ofaccounting information, and by considering the users of accounting information as thedemand force and companies as the supply force, the forces of demand and supply play amajor role in determining the quantity of financial information produced by acorporation to meet demand at a level consistent with the equation of marginal costs andbenefits (Cooper and Keim, 1983; Bromwich, 1992; Riahi-Belkaoui, 2004).

The above-mentioned conditions are applicable to the perfect and complete worldbut are inapplicable to the world’s actual conditions. In this context, Cooper and Keim(1983), Taylor and Turley (1986) and Riahi-Belkaoui (2004) argued that the idealconditions of the unregulated accounting information market are not met when theachievement of Pareto efficient resources allocation fails. A complex situation iscreated for demand and supply forces to allocate the resources in effective and efficientways through the market price system, which is referred to as market failure.

3.2 Financial disclosure under the financial market actual condition, market failureUnregulated markets fail to produce efficient allocation of resources. Riahi-Belkaoui(2004) argued that there is implicit and explicit market failure. Implicit market failurefocuses on at least one of the following claims that present defects of the accountinginformation market and can lead to wrong investment decision-making: first, the claimof accountants’ monopolistic control over management and accounting information.Second, the hypothesis of naı̈ve investors, which claims that there are investors in themarket who are unfamiliar with some of the complex accounting techniques andtransformations. Third, the claim of investor failure where, under certain conditions, thedecision-making processes change in response to a change in the underlying accountingmethods. Explicit market failure is assumed to happen in the market of accountinginformation when either the quality or the quantity of accounting information produceddiffers from the private cost and benefits of that information (Riahi-Belkaoui, 2004).There are three main sources of explicit market failure, the public good, informationasymmetry and adverse selection problems (Cooper and Keim, 1983).

The public good problem encompasses the joint consumption problem, externalitiesproblem and inability to exclude free riders or non-purchasers (Cooper and Keim, 1983;Taylor and Turley, 1986; Scott, 2003; Riahi-Belkaoui, 2004). Corporate information

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is proprietary or private before it is disclosed (Xiao et al., 1996), however becomesavailable for free to the user after its disclosure, thus not equally distributed.

The information asymmetry problem is based on the fact that some partiesundertaking business transactions may have more information than other partiesundertaking the same transactions (Cooper and Keim, 1983). Information asymmetryoccurs out of differences and clashing incentives of providers and investors (Healy andPalepu, 2001) in the form of a relationship between better informed, the former, and lessinformed, the latter (Fields et al., 2001). Two major parts are included: the first is adverseselection, which refers to insiders such as a corporate manager and employees, havingmore information about the corporation’s current situation and its future plans thaninterested outsiders (Akerlof, 1970). The second is moral hazard, which is related to theproblem that arises from the separation of ownership and control of the public shareholdercompanies, and how bondholders will manage to measure managerial performance(Cooper and Keim, 1983). Adverse selection refers to unfavourable characteristics,whereas moral hazard refers to unfavourable actions. In the context of disclosure, both canbe reduced by disclosing financial, both positive and negative, information about acorporation. Adverse selection suggests that sellers have superior information to buyers,thus accept offers reflecting the quality of their goods (Lewis, 2009). Low quality goodswill be sold at low prices, whereas high quality goods will be sold at high prices (Lewis,2009). However, due to information asymmetry, buyers might agree to the seller with thelowest price, unaware that they might be buying a low quality product that otherwise theywould be paying less for (Lewis, 2009). On the other hand, they might choose to not buy,being suspicious of the low offer, as they fear buying low quality. Considering theseproblems, imperfect market due to adverse selection and information asymmetry ingeneral, increasing disclosure regarding a firm’s financial status through regulation andon a voluntary basis seems to answer to overcoming these.

The next section addresses a variety of factors determining the above pathways inaccounting systems and influencing the developments of corporate reporting systemsand practice in countries around the world by referring to the main factors impactingon accounting systems and practice in a country over time, incorporated intoenvironmental-cause theory (ECT) (Gray, 1988; Cooke and Wallace, 1990; Roberts et al.,1998; Nobes, 1998; Radebaugh and Gray, 2002).

3.3 Environmental-cause theoryCooke and Wallace (1990) suggest that accounting is a function of its environment. Inthis context, many studies have sought to explain the environmental and thetechnological factors that may have impacted on the developments of corporatedisclosure in a country (Gray, 1988; Cooke and Wallace, 1990; Xiao et al., 1996;Nobes, 1998; Roberts et al., 1998; Radebaugh and Gray, 2002). Corporate disclosureand accounting information practices are subject to a variety of environmental andtechnological factors such as, e.g. social, economic, culture, political, regulation,international trade and new technology developments, such as digital communication,internet, mobile phones and other computer software technological developments(Xiao et al., 1996; Nobes, 1998; Roberts et al., 1998; Radebaugh and Gray, 2002; Xiao et al.,2002). Cooke and Wallace (1990) combined several of these factors in ECT to explain therelationship between disclosure practices and environmental factors.

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In particular, prior scholars described the relationship between the variation inaccounting systems and a variety of factors causing such variation on national andinternational levels, as can be seen in Figure 1.

As transpiring from this figure, both internal and external factors interact with eachother to influence the accounting system and corporate disclosure regulation in acountry directly and indirectly. For instance, Cooke and Wallace (1990) explained thatinternal variables, such as increasing people’s education in a country, drive to improvepolitical awareness and demand for corporate accountability. On the other handexternal variables such as international trade and investments also have an impactthrough requiring a global standardised accounting system, as for instance the drive toharmonise/standardise accounting in the EU (Roberts et al., 1998).

Furthermore, Cooke and Wallace (1990) summarised the intensity and effectivenessof corporate disclosure regulation in a country as a function of both regulatoryrequirements and the degree of enforcement of such regulation. Environmental factorscause the differences in the corporate reporting environment from one country toanother, and subsequently corporate disclosure and the application of its theories willdiffer among countries. The following sections will discuss the theories on the twofoldaccountants’ reactions in a bid to reduce the information asymmetry and adverseselection problems: the first being regulatory theory in which mandatory disclosurerequirements are considered as one part of the remedy and the second managers’incentive theories, in which voluntary corporate disclosure is considered as the secondpart.

Figure 1.Factors influencingaccounting’s mandatoryand voluntary practices

External influences include:• Trade

• Voluntary practices• Mandatory practices

• Investment

Society andculture

Accountingsubculture

Accountingregulation

Accounting system:

• Political and economic• Taxation

• Demograpic factors• Geograpic factors

• Corporate financing• Accounting profession

Institutions:

Domestic/ecologicalinfluences include:

• Conquest

Source: Adopted from Roberts et al. (1998, p.9) which has been adapted from Gray (1988)

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3.4 Regulatory theoryIn the imperfect and incomplete market the demand for accounting regulation impliesthat this is the efficient way of tackling market imperfections (Taylor and Turley, 1986;Fields et al., 2001). Ogus (2002) argued that accounting regulation should only existwhen the unregulated market fails to reach the desired outcome. Scott (2003) arguedthat market failure leads to the accounting regulations’ setting as a reaction to theasymmetry problem, which is frequently used to justify the existence of regulations toprotect the ordinary investor as well as to improve capital market operations.Furthermore, Cooper and Keim (1983) argued that reporting regulation exists as aresult of market failure to ensure equitable and efficient production and disseminationof companies’ corporate disclosure (the problems of public goods). The existence ofdisclosure regulation influences the credibility of corporate information and as a resultpublic confidence in the capital market increases (Scott, 2003). Ultimately, reportingregulation exists as a result of market failure and is regarded as the way to makecompanies disclose their information to interested users according to a uniform set ofaccounting standards and requirements. Two main sub-theories are part of regulatorytheory, which are:

(1) public interest theory; and

(2) interest group theory.

Public interest theory asserts that accounting regulations are a consequence of publicdemand for correction of market failures (Posner, 1974), which poses the fundamentalpoint of PIT. Hence, there is public demand to form accounting regulations to reduce thegeneral public information disadvantage to maximize social welfare (Riahi-Belkaoui,2004). The theory assumes that regulation is thought of as a cost-benefit analysis mainlybetween the cost of regulation and its social benefits in the form of improved markets’operation (Scott, 2003). The central authority under this theory is called the regulatorybody or regulator, which is assumed to have the best interest of society at heart.However, it is very complicated to decide on the right amount of regulation due to thenature of the information and the differences in users’ needs (Scott, 2003).

Interest group theory or capture theory (Posner, 1974) is the second part of regulatorytheory and is complementary to PIT. This theory suggests that individuals compose agroup, referred to as interest group, to protect and maximise their own interest byconstituting a lobby for various amounts and types of regulation (Riahi-Belkaoui, 2004).There are two versions of this theory, the economic and the political version(Stigler, 1971; Posner, 1974; Riahi-Belkaoui, 2004). The political interest groups use theirpolitical power to gain regulatory control (Riahi-Belkaoui, 2004), i.e. authority could beconsidered as an interest group because it has the ability to provide regulation and itsmain interest lies in retaining power. Therefore, regulation will be provided to thoseconstituencies that are considered to be most helpful and useful to retain power(Scott, 2003). The political cost theory regards regulation as a commodity subject toforces of demand and supply. This commodity will be allocated to the group predictedto be the most politically-effective group to maximise its own welfare (Scott, 2003).With regard to the economic aspect of interest group theory, economic interest groupsuse economic power to gain regulation, such as the manufacturing industry maydemand special regulation to protect, and promote, their own industry from foreigncompetition (Stigler, 1971). These are called demanders of regulation. Stigler (1971)

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suggests that regulation is introduced not to preserve public interests but to create anintermediary between consumer and industry, for instance, to administer tax paymentsand the distribution of such payments.

To conclude the above, disclosure regulations provide valuable and relevantinformation to accounting users in order to reduce information asymmetry betweeninformed and uninformed people (Healy and Palepu, 2001). The absence of marketperfection provides the choices and the room to managers’ incentives to exceedmandated disclosure and provides additional information to disclose the optimal levelof information for investors to reduce information asymmetry, i.e. moral hazard andadverse selection, in order to satisfy their desires.

3.5 Manager incentives theoriesCore (2001) explained that mandatory disclosure might be of sufficiently high qualityto produce low information asymmetry when the corporation does not have any needfor external finance, subsequently has little need for voluntary disclosure. On the otherhand, for a corporation with high growth opportunities, mandatory disclosure becomessufficiently low and information asymmetry is high. In the context of mandatory andvoluntary disclosure, Dye (1986) suggested that there is a positive relationship betweenthe increase in mandatory disclosure requirements and a subsequent increase in theincentives to provide voluntary disclosure at the same time.

The incentives for providing voluntary disclosure are presented in the literature aspart of explanatory theories for the relationship between managers’ incentives andusers’ satisfaction with regard to voluntary corporate disclosure. These theories suggestthat managers would like to reduce information asymmetry by disclosing moreinformation via corporate reporting, which includes printed and internet corporatereporting formats for several reasons, which are discussed below. These theories includeagency theory, signalling theory, political cost theory, capital needs theory, signallingtheory and cost-benefits analysis.

Agency theory is a common theory in accounting and auditing research and waschosen with regard to managers’ incentives for voluntary disclosure. This theory isbased on the separation between corporate ownership from control, and is used byresearchers to explain the relationship between the owners and the managers of publicshareholder companies. According to Jensen and Meckling (1976) the agency relation isregarded as follows: the separation of ownership from control in public shareholdercompanies could create a conflict between the stakeholders’ welfare and the managers’welfare. Agency theory suggests owners, referred to as principals, can reduce anypotential conflict with managers, referred to as agents acting on principals’ behalf, bygiving the agent an incentive to act in the principal’s interest, and by incurringmonitoring costs designed to limit the aberrant activities of the agent (monitoring costs).Jensen and Meckling (1976) added also other costs as agency cost (residual loss), which isaccrued by reduction in welfare experienced by the principal. The absence of marketperfection and the development of agency theory provided the platform for positiveaccounting theory (PAT) in the late 1970s. The precursors Watts and Zimmerman (1978)sought to explain and predict accounting practices with regard to managers’ choices,and PAT has since been used as a basis to explain the factors behind managers’ choicesto disclose voluntary information in many studies (Milne, 2002). Basically, Watts andZimmerman (1978) assumed that individuals work to maximize their own utility,

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e.g. corporate managers act to increase their wealth. Therefore, managers haveincentives to choose certain accounting procedures or methods which render lowerrather than higher earnings to reduce the real economic value of the corporate in order toavoid among others the political cost.

Political cost theory refers to political costs that may arise due to attention fromparticular groups, such as government or lobby groups (Deegan, 2009). Such attentionmay result in increased taxes, wage payments and also product boycotts so that firmsmight adopt accounting policies that lead to a reduced profit, in order to avoid suchattention (Deegan, 2009). The political cost theory is usually discussed in relation to thecorporate size hypothesis, in which the manager of a big corporation is more likely toselect accounting procedures that defer reported earnings from current to future periods(Milne, 2002). In terms of accounting disclosure, this means that the managers of large orvery profitable companies are more in the public eye than those of smaller or lessprofitable companies, thus they have more incentive to disclose voluntary information toreduce political cost. Political cost theory was used in several disclosure studies toexplain the disclosure variation in the level of corporate disclosure among sampledcompanies through the size hypothesis (Al-Modahki, 1996; Curuk, 1999). In terms ofaccounting disclosure, political cost theory suggests that the managers of large or veryprofitable companies are more in the public eye than those of smaller or less profitablecompanies, thus they have more incentive to disclose voluntary information to reducepolitical cost, such as tax and other costs, that companies are required by thegovernment to provide in annual reports.

Capital needs theory suggests that companies with a varied range of growthopportunities in the capital market look for external finance to support their operationsin order to increase capital, either by issuing new shares or by borrowing new loans. Inthis situation mandated disclosure is considered not sufficient enough to acquire capitalas cheaply as possible (Core, 2001). Therefore, such finance requires some kind ofcompetition among these companies in order to obtain corporate capital ascost-effectively as possible under the conditions of uncertainty by disclosing moreinformation to outside investors in order to inform them about the corporate position andto increase the certainty of their future cash flow (Choi, 1973). Companies disclose extrainformation to reduce uncertainty about the timing and expected future cash flow thatenable investors to make investment decisions, and by doing so enable companies toraise capital in the best way, i.e. as cost-effectively as possible (Core, 2001; Meek et al.,1995; Suwaidan, 1997). Accounting information is supplied automatically as thecompanies look for external finance on the market, and corporate disclosure leads toreducing the cost of capital (Firth, 1980; Healy and Palepu, 2001).

Signalling theory is a further explanatory theory of information asymmetry. Akerlof(1970) was the first to explain signalling theory in a general product market setting.Strong and Walker (1987) argued that the differences in information between theinsiders and outsiders of a corporate can cause market breakdown. The problem wasoutlined as follows: buyers in the market are unable to distinguish between the quality ofdifferent products, because the products’ sellers have not informed the buyers of theirproducts’ quality in a perfect way. Thus, there is not any difference in price between theproduct with high quality and the product with lower quality. Sellers can either choose towithdraw their product, and subsequently force the market to adapt prices according toaverage quality or more information can be provided about the product

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(Strong and Walker, 1987). Signalling theory was used in prior empirical research toexplain why managers in the corporate have the incentive to disclose more informationin the annual report (Suwaidan, 1997; Haniffa and Cooke, 2002; Watson et al., 2002).

Finally, managers’ decisions to provide voluntary disclosure are based on acost-benefit analysis, i.e. a comparison between the costs of information that will beprovided and the benefits that might arise from disclosing such information (Cooke,1992). Cooke (1992) argued that companies’ disclosure is a costly issue involvinginformation collection costs, supervision costs, auditing costs and legal fees.Consequently, managers are willing to disclose when benefits exceed total costs ofsuch disclosure. In this context, Meek et al. (1995) argued that managers have to createa balance between the benefit of lower capital cost, extra information and the costsassociated with such disclosure. Corporate disclosure can take place via printed andinternet corporate reporting, and the latter has several special features, which allow forcorporate disclosure at as little cost as possible. Since managerial incentives are basedon the costs-benefits calculation, the influence of voluntary disclosure is not onlyreflected in the printed form of annual reports, but also in the internet form of corporatevoluntary practices (Marston and Polei, 2004; Xiao et al., 2004).

As seen above, several corporate disclosure theories exist, of which each explainsdifferent sub-points of the corporate disclosure phenomenon, supporting the divide inthe explanation of mandatory and voluntary disclosure practices. Mandatory andvoluntary corporate disclosure may correlate in practice. The following sections willpresent two theories, codification and Dye’s (1986) theories, which explain suchintegration of mandatory and voluntary disclosure practices.

3.6 Codification theoryThe emphasis in this theory is entirely based on voluntary practice forming accountingstandards, i.e. mandatory disclosure requirements. It is argued that (prepares?) andauditors of corporate disclosure provide an optimal level of corporate disclosure to meetusers’ needs, which will then be codified by regulatory bodies as a mandatory disclosurerequirements. Taylor and Turley (1986) suggest an influence of existing practice on thestandard-setting process and Dye (1986) states that in practice mandatory corporatedisclosure requirements and standards do not develop due to exogenous reasons.The existence of these requirements depends upon companies’ voluntary disclosurepractices, which lead to changes in mandatory corporate disclosure practices bycodifying existing voluntary disclosure practices. Mandatory corporate disclosurerequirement setters might depend upon companies’ voluntary disclosure practices,which can be seen in the first main function of the Accounting Standards Committee(ASC) of formulating a series of Statements of Standard Accounting Practices (SSAPs)from 1970s to early 1990s comprising submissions of current practice and simplyrequirements of standard formats (Taylor and Turley, 1986). Recently, in 2002 and early2004, the FASB (2004) commenced projects to codify the entire generally acceptedaccounting practice literature into a single authoritative source.

3.7 Dye’s theory (1986)Generally, it is assumed that increasing mandatory disclosure requirements will lead toa decline in the level of voluntary disclosure (Dye, 1986). Contrary to this assumption,Dye (1986) proposed that increasing mandatory disclosure leads to an increase

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in managerial incentives to disclose voluntary information for value maximisationexpressed in a corporate share price, which subsequently attracts investors. In otherwords, there is a positive relationship between increasing mandatory disclosurerequirements and a subsequent increase in managerial incentives for voluntarydisclosure, represented by the return link from mandatory theories to the box of Dye’stheory, and for the latter to the box of managerial incentives theory. Based on this theoryit can be stated that in practice voluntary corporate disclosure develops as a result ofhomogenous reasons. For instance, the existence of new mandatory disclosurerequirements enhances managers’ incentives to voluntarily disclose more information todistinguish their companies in the market from others in order to increase their marketvalue so as to increase wealth. In the context, Abayo et al. (1993) and Alrazeen andKarbhari (2004) provided empirical evidence supporting this positive associationbetween mandatory and voluntary disclosure. Recently, Einhorn (2005) established amodel for analysing how corporate voluntary disclosure strategies are affected by theirown mandatory disclosures. The model shows that voluntary disclosure can besignificantly affected by the scope of mandatory disclosure.

A further association in the form of internet disclosure theories is made in theproposed framework to explain how the form of corporate disclosure is transformingfrom printed to electronic formats as a result of environmental factors such as thetechnological innovations and the emergence of network communication. This will bethe focus in the following.

3.8 Internet disclosure theoriesIn light of recent technological innovations and the emergence of networkcommunication, the traditional corporate disclosure communication system hasbecome less able to satisfy users’ needs as it is not as timely, interactive, accessible ordetailed enough (Lodhia et al., 2004). The internet is regarded as a powerful force toevolve traditional disclosure forward, as it is expected to provide a ground-breakingmethod of corporate communication (Jones and Xiao, 2003). It is considered to provide anew remedy for one of the recent principal problems of printed corporate reporting,which is the ability to satisfy users’ needs (Xiao et al., 2002; Lodhia et al., 2004). In thiscontext, Ettredge et al. (2002) used managerial incentive theory with regard to voluntarydisclosure in order to examine the relationship between companies’ traditionaldisclosure reputation, in other words the overall quantity of companies’ reportingpractices, and the level of internet corporate disclosure. They concluded that theincentives, which motivate traditional voluntary disclosure, can also explain thesubsequent dissemination of voluntary material on the internet.

Mandatory disclosure also has an impact on the level of internet voluntarydisclosure, as the one spurs the other and limited financial means would be necessary toshare existing information on the internet (Xiao et al., 2004). Consequently, a positiveassociation between the increase in mandatory and the increased incentive to follow thenew technological developments in corporate reporting can be assumed, reflecting Dye’stheory (1986). Xiao et al. (1996, 2002) and Jones and Xiao (2003) reasoned that printedcorporate reporting is influenced by technological and non-technological factors,which cause new developments in the printed corporate reporting system, i.e. theinternet corporate reporting system. Thus, it is possible to establish a theoreticalrelationship between companies’ attitude towards printed corporate disclosure and

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internet disclosure. Companies with a high level of mandatory and voluntary disclosurein printed annual reports are more likely to use the internet for corporate disclosure byestablishing their own web site to disclose corporate information to their users. Thisrelationship between printed and internet disclosure is referred to in this study asdisclosure transformation theory.

Two further theoretical developments are taken into account regarding internetcorporate disclosure – institutional theories and innovation diffusion theory (Aly andSimon, 2008; Victoria et al., 2007). Meyer and Rowan (1977) and later DiMaggio andPowell (1991) sought to explain behaviour patterns and phenomena relating tocompanies seeking legitimisation. Companies provide information on themselves, in theform of corporate disclosure, in order to be legitimate, driven by a variety of factors, suchas legal, cultural and societal (DiMaggio and Powell, 1991). Xiao et al. (2004) discuss thatlegitimisation is one reason for companies to make disclosure of corporate informationvoluntarily on the internet. Innovation diffusion theory seeks to explain how a newinvention, in this case internet corporate disclosure, is adopted and subsequentlybecomes successful (Clarke, 1999). Clarke (1999) discussed a variety of stages throughwhich an innovation is diffused, suggesting that it takes some time before the adoptionof an innovation is complete (Sevcik, 2004). Thus, internet corporate disclosure is stillevolving with new developments in information technology consistently influencingthe progress.

Having discussed various theories seeking to establish how and why companiesundertake corporate disclosure, it is necessary to incorporate also an explanation as towhy companies continue to have variations in the levels of their corporate disclosure.

3.9 Variations in companies’ corporate disclosure levelsIn practice, there are variations in the levels of corporate disclosure among companies, asnot all companies comply fully with disclosure requirements and as degrees of printedand voluntary disclosure levels vary. Generally, the variation in the level of compliancewith mandatory disclosure is hypothesised, based on the four managers’ incentivedisclosure theories, to be influenced by several corporate characteristics, such as size,profitability, industry type and others (Abayo et al., 1993; Inchausti, 1997;Owusu-Ansah, 1998; Ahmed and Courtis, 1999; Alrazeen and Karbhari, 2004; Streetand Gray, 2002), of which each explains different reasons behind the manager’s choice ofcomplying with the mandatory requirements. Corporate familiarity is a further variablesuggested by Abd-Elsalam and Weetman (2003), who found that non-compliance withIASs in emerging markets took place due to less familiarity with these requirements.

Prior studies examined the relationship between the company characteristics and thevariation of corporate disclosure based on one question (Elsayed and Hoque, 2010): whydo some companies disclose more information than other companies? Scholars justifiedthis question by using managerial incentives’ theories to explain the differences amongcompanies in their structure-related variables, managerial performance andmarket-related variables, in which the companies will follow different paths ondifferent levels to provide corporate information. The number and choice of companycharacteristics, i.e. company structure, company performance and company ownershipstructure variables, varies among prior studies, reflecting the absence of a clear overalltheory as to which company characteristics are likely to determine levels of corporatedisclosure. The number of independent company characteristics in the prior studies

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range from one variable (ownership form, that is, whether or not family owners aredominant (Chau and Gray, 2002) to 14 variables (company size, assets in place, industrytype, listing age, complexity of business, level of diversification, multiple listing status,foreign activities, gearing, top ten shareholders, foreign ownership, institutionalinvestors, profitability, and type of auditors (Haniffa and Cooke, 2002). Moreover, priorscholars have applied different proxies of measurements for these variables (Ahmed andCourtis, 1999).

None of the above-discussed theories are free of critique and provide a perfectsolution to an existing problem. Prior to integrating the theories into the map oftheories, relevant criticism needs to be addressed.

4. Critical review of disclosure theoriesThe above discussion has outlined the primary economic theories in relation tofinancial disclosure. This section seeks to identify the critical aspects of the varioustheoretical assumptions and theories, and how these are sought to be overcome in themap. Critiques of the different theoretical assumptions are abundant, in particular withregard to the economic viewpoint. First, the primary assumption that the perfect marketexists is considered to be impossible (Riahi-Belkaoui, 2004). Therefore, it isrejected as hypothetical starting point, and the disclosure map addresses the firstrealistic disclosure theoretical viewpoint, market failure, as suggested by Healy andPalepu (2001). The map of theories considers the market failure assumption as a startingpoint, which incorporates information asymmetry, adverse selection and unequal accessto information (Healy and Palepu, 2001).

In response to these problem factors, two major theoretical fields have beendeveloped: regulatory theories and manager incentives theories. Regulatory theoriesseek to explain the need for accounting regulation, which exists to correct and preventaccounting failures and protect society and particular interest groups. However, thesetheories cannot yet claim that having regulation is superior to a free market approach(Healy and Palepu, 2001). Such theories are not able to suggest the ultimate level offinancial disclosure, as regulation is viewed as a remedy rather than predictor(Kaplan and Ruland, 1991; Whittington, 2004). They can also not account for whycompanies comply with regulation at varying levels (Healy and Palepu, 2001). This isusually explained by the various factors that influence companies’ levels of corporatedisclosure. Furthermore, they do not consider all types of disclosure items, such asintangible assets, which are then provided for through voluntary disclosure (Arvidsson,2011). Similarly, Healy and Palepu (2001) state that it is not always clear what regulationseeks to solve, for instance issues such as major market failures. In the framework, this isaddressed by referring to the public interest and the interest of specific groupings.Furthermore, Healy and Palepu (2001) conclude their review by opening the debateregarding the usefulness of global standards, given that economic environments differso vastly. The framework recognises such differences by including ECT, which outlinesthe factors to be considered for global standardisation.

Finally, regulatory theories can also not explain why companies voluntarily provideinformation. The latter point is addressed by manager incentive theories (Dye, 1986),which consider managers’ strive for personal gain one of the main reasons whycompanies disclose information voluntarily. However, this has been criticised for itssimplistic approach towards the principal-agent conflict, reducing the principal to purely

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being incentive-driven and forgetting to include more complex objectives in individuals’behaviours (Tinker and Okcabol, 1991; Ogden, 1993). Ideally, companies discloseinformation that provides more benefits than its disclosure creates costs. Nevertheless,Core (2001) states that in fact voluntary disclosure is often too costly, especially if firmswant to reach the optimal level of disclosure, the pay-off is not sufficient. However, noneof these guarantees that all relevant and important information that is not required byregulation is actually disclosed, meaning that their voluntary nature allows companiesto disclose selectively. Neither do any of the discussed theories explain why companiesoperating in a country with a high level of accounting requirements still discloseadditional information voluntarily, and why new internet technologies haveincreasingly gained momentum as a disclosure tool. Two theoretical approachesaddress some of these issues, each on the opposite end of the spectrum. Codificationtheory suggests that voluntary disclosure leads to a mandatory requirement throughcodifying existing practice (Dye, 1986; FASB, 2004), whereas Dye’s theory (1986) isbased on the assumption that more mandatory disclosure leads to more voluntarydisclosure, as companies seek to affect their share price positively. Dye (1986) suggests apositive relationship between high mandatory and voluntary disclosure levels, which isincorporated in the framework to link both types of disclosure.

A final critique point to mention is that the framework accounts for economictheories only, which is addressed in the recommendations for future research. Othertheories, such as organisational and legitimacy theories could be considered to addressfurther factors explaining corporate disclosure. However, this is beyond the scope ofthis study, thus should be considered in future research studies.

The next section illustrates the proposed corporate disclosure framework and seeksto explain the relationships based on the above review of corporate disclosure theories.

5. A map of theories of corporate disclosureThe map of theories that results from this inductive approach of theory building isshown in Figure 2.

The previous sections outlined the discussion (observation) stage and thecategorisation stage, based on the prior literature of the inductive theory-buildingprocess, after the deductive aspect identified the gap in the literature. This sectiondiscusses the defining of relationships among the categories of corporate disclosure, inorder to provide an integrated approach to describing and explaining corporatedisclosure. The map provides useful insights into the existing disclosure theories, whichmay explain the prior empirical results being inconsistent with the arguments of thesetheories, as exist in the literature. Its rationale in the authors’ opinion is that there is agreat advantage to encompass the theories related to financial disclosure within onescope to simplify the complex relationships between different notions of the financialdisclosure phenomenon, supporting the new researcher’s familiarisation process.

As can be seen in Figure 2, the map first serves to integrate theories explainingfinancial disclosure under the assumption of the ideal conditions of the financial marketin which demand and supply forces of financial information are considered as anefficient tool to determine the optimal level of financial information in order to allocateeconomic resources (Taylor and Turley, 1986; Riahi-Belkaoui, 2004). To disclose theoptimal level of financial information identifies the ultimate user need. There is a directlink between market efficiency and the optimal level of financial disclosure,

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which proves that in a complete and perfect market situation quantity of accountinginformation is subject to users’ needs and subject to managers’ incentives to meet theseneeds. Market forces alone fail to meet all the users’ needs because the market isinadequate to control and organise the information demanding and supplying process.In Figure 2, there is a direct link between market efficiency under ideal conditions andmarket failure under actual conditions. Since the user’s needs cannot be satisfiedthrough the market alone, disclosure theories incorporate actual features of the market,in order to achieve a maximum level of quality of financial information in order to beuseful for decision-making.

Thus, the map integrates theories that recognise actual features of thefinancial market – market failure, i.e. the imperfect balance of demand and supply(Healy and Palepu, 2001), and information asymmetry and adverse selection, i.e. theinefficient and unequal distribution of information (Cooper and Keim, 1983). Within thismap information asymmetry and adverse selection are regarded as a root cause,and are regarded to cause a twofold accountants’ reaction, as can be seen in Figure 2,

Figure 2.A theoretical roadmapof corporate disclosure

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in a bid to reduce this problem: the first being regulatory theory and the secondmanagers’ incentive theories. The first categorises mandatory disclosure theories,sustaining quality of disclosed information through “force”, the second voluntary onesincluding the willingness to engage in voluntary internet corporate disclosure, whichreflects the recognition on corporations’ part that investors’ decision-making needs to besupported through high-in-quality reported information. Quality of reported financialinformation is determined through its usefulness for decision-making, which is soughtto be achieved through high levels of disclosing relevant information, so that investorscan get a full picture. Whether that is indeed achieved, can only be determined in asurvey of investors’ perceived usefulness of disclosed information.

Environmental factors, as illustrated by ECT, determine the context of the financialreporting environment, and consequently are seen to instigate changes in financialdisclosure practice within one country over time and serve to explain differences amongcountries. Environmental factors set the general context of corporate disclosure systems,both within an individual country and among countries. The external environmentalfactors lead to mandatory disclosure. Regulatory theories determine the level ofmandatory disclosure required. Internal factors lead to managers’ incentives to providevoluntary disclosure, based on the various theories that represent these incentives.

In a bid to integrate theories of mandatory and voluntary disclosure practices,codification theory and Dye’s (1986) theory are included. This relationship betweenvoluntary disclosure practice and mandatory disclosure requirements is integrated bya link launched from the managerial incentives to codification theory and a linklaunched from the latter to the regulatory theory. The former refers to the argumentthat new mandatory disclosure requirements may indeed represent codified bestpractice, i.e. embody former voluntary disclosure. The latter implies Dye’s (1986)argument of a positive relationship between increasing mandatory requirements and asubsequent increase in voluntary disclosure. In the same vein, a positive relationshipbetween printed financial disclosure practices and internet usage for disclosingfinancial information will be shown in the form of disclosure transformation theory.

Figure 2 shows that there is a link between regulation and voluntary disclosuretheories and the optimal level of printed corporate disclosure, which represents the caseof compliance with mandatory requirements, and disclosing voluntary information inthe printed annual reports. This broken line explains also companies’ attitude towardscorporate disclosure. This link suggests that there is a positive association betweenhigher printed corporate disclosure, both mandatory and voluntary, and engaging involuntary disclosure on the internet. Increasing companies’ printed corporate disclosurepractice motivates companies’ attitude towards disclosing more corporate informationon the internet in order to take advantage of new technological developments, to reducethe agency problem arising from the separation between control and management. Thebroken line from the environmental factors, e.g. technological factors, to the printedcorporate disclosure, illustrates the technological developments impacting on printeddisclosure and the latter transforming into internet corporate disclosure. These factorshave not only an impact on the regulation of corporate disclosure but also on voluntarydisclosure practices regarding the same procedures. This explains the application of twopathways represented in the proposed map of theories in a country, where ECT affectsboth regulatory and managers’ incentive theories representing mandatory andvoluntary disclosure, respectively, including internet disclosure.

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Furthermore, there is a link from the optimal level of printed corporate disclosure tothe corporate disclosure variation, which explains the variation in the level of compliancewith mandatory disclosure requirements and the level of voluntary disclosure amongcompanies. Similarly, there is a link between the internet corporate disclosure and thecorporate disclosure variations, which provides an explanation for the differences in thelevel of the internet corporate disclosure among companies. Finally, this theoretical mapcomprises the fundamental factors used to explain the variation in the level of financialdisclosure practices, which consist of several well-discussed corporate characteristicsand as a newly developed variable, corporate familiarity.

6. Conclusion and future research suggestionsThis paper set out to propose a map of theories of corporate disclosure, both mandatoryand voluntary financial and narrative disclosure, by encompassing existing corporatedisclosure theories in one scope. This map was designed to provide guidance on atheoretical background, which could add significant value to the development ofcorporate disclosure research and accounting education. Furthermore, it provides astarting point for developing a normative disclosure framework, identifying the ideallevel of disclosure. Ultimately, this requires consideration of human factors, such aswhat keeps humans accountable, and what makes a person strive to do the right thing,e.g. ethical principles. However, the current framework outlines a coherent set ofexplanations of the actual state of corporate disclosure, which is a relevant and neededstarting point for continuing from “what-is” to determine “what-should-be”.

It is suggested that there is a theoretical scope with respect to corporate disclosure. Thisscope is assumed to start from the optimal level of corporate disclosure under the idealcondition of market efficiency and then to move to the situation under the actual conditions.It was explained that demand for corporate reporting regulations and managerialincentives arise from market failure, information asymmetry and adverse selection.Information asymmetry and adverse selection are regarded as a root cause and regulatoryas well as managerial incentive theories as a resulting reaction. It was shown how externaland internal factors have an impact to change the corporate reporting environmentwithin an individual country over time and to cause differences in corporate reportingpractices among countries. This map integrated further theoretical aspects of corporatedisclosure, such as codification theory, Dye’s (1986) theory and disclosure transformationtheory, in a bid to illustrate one complete picture of developments in corporate disclosurepractices. These theories were introduced as explanatory theories for the changes anddevelopments in the form and content of mandatory and voluntary disclosure practices.Furthermore, the map of theories emphasised that there are differences in the level ofcompliance with mandatory disclosure requirements and in the level of voluntarydisclosure among companies. This variation in the levels of corporate disclosure mayhappen due to characteristics inherent to an individual corporate influencing compliancewith mandatory requirements and disclosing voluntary information.

A limitation and future scope of this theoretical map is that currently it provides adescriptive context and ultimately it should move towards a normative frameworkfollowing the theory building approach of Carlile and Christensen (2005), possiblypredicting and explaining the ideal level of corporate disclosure. Furthermore, newtheoretical developments should be added to maintain the comprehensive character,through re-categorising and re-defining the relationships of the theoretical framework.

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A further limitation is that this map only emphasises theories that focus on economicaspects in particular. A focus for future research can be the addition of behavioural,organisational and legitimacy disclosure theories.

The proposed map of theories provides useful insights into particular existingdisclosure theories and seeks to simplify the complex relationships between variousdifferent notions of the corporate disclosure phenomenon, so as to offer futureresearchers a methodical approach to understand in depth each angle, and possibleexisting lacks, of comprehensive agreed theory. Finally, both for accounting educationand research the map of theories can be a useful and helpful tool in various ways. Theproposed map demonstrates the logical relation of these theories in a coherent way,which will help new researchers to understand how corporate disclosure theories arerelated and enforcing upon each other.

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Further reading

Al-Htaybat, K. and Napier, C. (2004), “Mandatory disclosure in the annual reports of Jordanianmanufacturing companies before and after 1998”, paper presented at the Eighth AnnualFinancial Reporting and Business Communication Research Conference, Cardiff BusinessSchool, Cardiff, 1-2 July.

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About the authorsLarissa von Alberti-Alhtaybat is an Assistant Professor of Accounting andcurrently holds the position of Chairperson of the International Accounting Department.Larissa von Alberti-Alhtaybat is the corresponding author and can be contacted at: larissa.vonalberti@gju.edu.jo

Khaled Hutaibat is an Assistant Professor of Accounting and currently holds the position ofAssistant Dean.

Khaldoon Al-Htaybat is an Associate Professor of Accounting.

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