Chapter 3 The determinants of KPI re porting in the UK
3.8 Further analysis
As mentioned before, the research instrument is designed to collect and score other KPIs that are disclosed in other parts of the annual report rather than in the KPI section. This procedure mainly affects the non-financial KPI reporting scores, and the total KPI reporting scores. As a result, new dependent variables are introduced. These variables are: QNNFKREP, which represents the number of non-financial KPIs disclosed in the whole report (those in the KPI section + those in other parts of the report), QNTKREP which represents the total number of financial and non-financial KPIs that are disclosed in the whole report, QLNFKREP which is the quality score of non-financial KPIs disclosed in the whole report, and QLTKREP which represents the aggregated quality score of financial and non-financial KPIs that are disclosed in the whole report.
In a further step of the analyses, the KPIs that are reported in other sections in the annual report are considered. These analyses add more depth to the study, as they show the extent to which the main findings are robust when considering these KPIs.28
3.8.1 The determinants of total non-financial KPI reporting
Table 63 Table 64 in Appendix (2) present the results with regard to the key determinants affecting reporting on non-financial KPIs disclosed in the whole report. The models proposed can explain 17.3% to 23.3% of the variation in QNNFKREP, and explain 10.8% to 21.6% of the total variation in QNNFKREP. Furthermore, there are no concerns
28
To check the robustness of these results, all models reported in Table 59, Table 60, Table 61, and Table 62 are re-estimated using different measurements for some of the firm characteristics variables. The results confirm the findings discussed in 3.6.2.1
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regarding multicollinearity between the determinants of QNNFKREP and QLNFKREP according to VIF values.
Regarding the results of these analyses, it seems that the majority of explanatory variables continue to have the same relationship with reporting on non-financial KPIs in the analyses that investigate the determinants of QNNFKSEC and QLNFKSEC.29 In addition, Table 63 reveals that executives’ compensation show a weak positive effect in terms of QNNFKREP, while major shareholding appears to have a negative influence on it at a significance level of 10%. On the other hand, a weak positive relationship is observed between AC meetings and QLNFKREP (as reported in model 4 in Table 64).
To conclude, these results are very close to the results in the analyses that investigate the determinants of QNNFKSEC and QLNFKSEC. Hence, they add to the robustness of the findings with regard to the determinants of non-financial KPI reporting.
3.8.2 The determinants of total KPI reporting
Table 65 and Table 66 in Appendix (2) report the analyses’ findings which indicate the main factors affecting reporting on KPIs disclosed in the whole report in terms of quantity (QNTKREP) and quality (QLTKREP). The findings show that the proposed explanatory variables explain a significant part of QNTKREP and QLTKREP. The adjusted R2 values indicate that the models proposed can explain 15.5% to 24.1% of the variation in QNTKREP, and explain 12.1% to 27.3% of the total variation in QLTKREP.
In short, the findings are consistent with the results produced in the main analyses which focus on the KPIs disclosed in the KPI section.30 Compared with the main analyses, it is observed that the executives’ compensation variable has become significant in its positive
29
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effect on KPI reporting quantity at a level of 5% (as reported in model 1 and model 7 of Table 65).
For KPI reporting quality, Table 66 illustrates the results are almost as the same as those produced in the main analyses. However, it is revealed that managerial ownership shows a weak positive effect on QLTKREP.
3.9 Conclusion
This study provides answers to research questions Q2 and Q3; it examines factors affecting the level of quantity and quality of KPI reporting in the UK (Q2). It also links the findings to question the validity of using the quantity of disclosure as a proxy for quality in accounting studies (Q4).
Arguably, KPI information is disclosed on voluntarily basis. Directors are able to control the level and the quality of KPI reporting thanks to the elastic nature of the regulations. The study draws upon different theories that explain directors’ motivations to disseminate more information. Consequently, the determinants of KPI reporting quantity and quality are proposed and sorted into six groups of variables. Panel data regressions are conducted to test the hypotheses of the study. Focusing on KPIs that are disclosed in the KPI section, the findings show that there is a significant relationship between board characteristics and KPI reporting. In particular, board size, board composition, non- executives’ compensation, and firm’s plans to acquire loans, have a significant and positive relationship with the quantity and quality of KPI reporting. In contrast, role duality has a negative influence on both of them.
Given the study objective to examine whether the quantity and quality of KPI reporting are derived from the same factors, it is observed that they are not identically derived from
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the same factors. The study reports that executives’ compensation and the number of AC meetings have a positive impact on the quality of KPI disclosures rather than their quantity. On the other hand, a firm intending to issue bonds is significantly and positively related with the quantity of KPIs disclosed in the KPI section, whereas board meetings have a negative association with it. These results question the proposition of using the quantity of disclosure as a proxy for its quality in most accounting studies.
Unlike previous research, it is documented that no firm characteristics have an influence on KPI disclosure with the exception of firm size which has a significant effect on KPI quality. These empirical results are confirmed by investigating the determinants of KPI subcategories. The findings of these analyses are consistent with the above results, suggesting that the factors proposed in the present study can explain the variation in quantity and quality of financial and non-financial KPI reporting.
To add to the robustness of the results, KPIs disclosed outside the KPI section are considered in further analyses. The findings of these further analyses are too close to those of the main analyses that investigate the determinants of KPI reporting for the KPIs disclosed in the KPI section.
In short, CG mechanisms and directors’ compensation appear as the key drivers towards higher levels of KPI reporting in terms of quantity and quality. This places a stress on the need to improve CG mechanisms in UK firms. Moreover, the findings provide strong evidence that shareholders could affect the quantity and quality of KPI reporting by offering higher compensation for non-executives.