Firm characteristics as control variables

It is worth noting that the study has to control for firm characteristics that have been suggested in previous research as determinants of corporate disclosure (e.g. Cooke, 1989; Malone et al., 1993; Wallace et al., 1994; Ahmed and Courtis, 1999; Watson et al., 2002, Mangena and Pike, 2005; Hussainey and Al-Najjar, 2011). Control variables include: firm size, profitability, liquidity, leverage, dividend yield, cross listing and industry.

Firm size is the most common variable that is used in exploring corporate disclosure determinants. Large firms have more incentives to increase their voluntary disclosure levels. The size effect can be explained by agency theory (Watts and Zimmerman, 1983, Inchausti, 1997), signalling theory (Wang and Hussainey, 2013), and political

relationship between a firm’s size and its level of disclosure (e.g. Hossain et al., 1995; Mangena and Pike, 2005).

Ahmed and Courtis (1999) showed that previous study results have provided mixed evidence on the association between a firm’s profitability and the level of corporate disclosure. According to signalling theory, a positive association between disclosure and profitability is expected. Managers of highly profitable companies tend to signal their quality to interested parties. Hence, they also could get better rewards and compensation arrangements (Singhvi and Desai, 1971; Wallace et al., 1994). Moreover, to avoid external regulations, high profit firms will be motivated to provide more KPIs that are related to corporate social responsibility.

There are a few studies that have provided mixed findings regarding the relationship between liquidity and corporate disclosure. The relationship between liquidity and reporting practices can be explained by agency theory and signalling theory. However, Watson et al. (2002) claimed that these theories provide mixed predictions in terms of this relationship. Companies with weak liquidity may increase their disclosure in order to reduce agency costs and reassure shareholders (Wallace et al., 1994). On the other hand, according to signalling theory, company managers will have an incentive to disclose more information if their liquidity is high, to showcase their skills in managing liquidity risks compared with other managers in companies with lower liquidity ratios.

Furthermore, many empirical studies have denoted leverage (gearing) to be an important factor that may affect disclosure practices (e.g. Ho and Wong, 2001; Oyelere et al., 2003; Abraham and Cox, 2007; Hussainey and Al-Najjar, 2011). Based on agency theory, monitoring costs are higher in highly leveraged firms. To reduce these costs, they have to disclose more information in order to show their ability to meet any obligations for the sake of creditors (Jensen and Meckling, 1976). However, empirical

evidence on the association between gearing and disclosure is not conclusive.

Additionally, several empirical studies have considered dividend propensity as one of the key determinants of corporate disclosure (e.g. Archambault and Archambault, 2003; Hussainey and Al-Najjar, 2011; Wang and Hussainey, 2013). Signalling theory can be used to explain the impact of dividend propensity on corporate disclosure in the annual report. Companies with a high tendency to pay more dividends may have fewer incentives to disclose more information (Naser et al., 2006).

Previous literature has suggested that listing in foreign stock exchanges has a positive association with corporate disclosure levels (Wallace et al., 1994; Gray et al., 1995; Mangena and Pike, 2005; Aly et al., 2010). Cross listing, or listing in a foreign market, gives firms many chances to have access to several alternative sources of finance. The impact of cross listing can be explained by capital need theory. Participation in international capital markets offers the opportunity to increase the liquidity of a firm’s shares (Hope, 2003). Firms with a foreign listing have an incentive to make additional disclosures to reduce investors’ uncertainty about the performance of the firm (Gray et al., 1995).

Finally, previous disclosure studies have investigated the relationship between the level of corporate disclosure and sector type (e.g. Cooke, 1989; Wallace et al., 1994). The relationship between type of business and reporting practices can be explained by signalling theory and political cost theory. Signalling theory suggests that the more homogeneous the industry, the more likely it is that firms will adopt similar reporting practices (Malone et al., 1993; Wallace et al., 1994; Aly et al., 2010). If a company within an industry fails to follow the same disclosure practices as others in the same industry, then it may be interpreted as a signal that it is hiding bad news (Craven and

Marston, 1999; Oyelere et al., 2003).

On the other hand, within the framework of political cost theory, different industries are subject to different political costs (Ball and Foster, 1982). Thus, companies with vulnerable activities will employ voluntary disclosure to alleviate the political costs related to their activities (Oyelere et al., 2003).

Some studies found an insignificant relationship between the two variables such as Wallace et al. (1994). However, the majority of the previous studies found a significant relationship between sector type and corporate disclosure (Cooke 1992; Craven and Marston, 1999; Mangena and Pike, 2005; Beretta and Bozzolan, 2004). It is predicted that KPI reporting would be affected by the type of businesses. Different industries would be influenced by different and unique value creation activities. The findings discussed in the previous chapter show that there is a variation between industries in terms of the quantity and quality of KPI reporting. For instance, Utilities sector companies have disclosed the largest amount of KPI. This might be explained - in line with stakeholder theory - by their aim to meet the different needs of their stakeholders (e.g. creditors, customers, and suppliers). In turn, Oil & Gas firms have provided the lowest level of KPI reporting quality. Apparently, these companies have avoided the negative consequences of high quality KPI disclosure. Hence, they control their disclosures to alleviate the political costs related to their activities. Therefore, the type of industry should be considered when analysing the determinants of KPI disclosure.

Table 18 summarises the expected signs between KPI reporting and the various control variables to be used in this study, based on the findings of the previous literature.

Table 18 Explanatory variables and their expected relationship with KPI disclosure based on previous studies

Variables Expected

sign

Examples for previous studies

Directors’ compensations

+ Aboody and Kasznic (2000); Nagar et al. (2003); Grey et al.(2012)

Managerial ownership

+ Forker (1992) ; Chau and Gray (2002); Jaing and Habib (2009); Wang and Hussainey( 2013)

Board size + Singh et al. (2004); Lakhal (2005); Cheng and Courtenay (2006); Abdel-Fattah et al. (2007); Laksamana (2008); Wang and Hussainey( 2013)

Board composition

+ Forker (1992); Ho and Wong (2001); Haniffa and Cooke (2002); Ajinkya et al. (2005); Tauringana and Mangena (2009); Hussainey and Al-Najjar (2011)

Board meetings + Laksamana (2008)

Role duality - Forker (1992); Haniffa and Cooke (2002); Ho and Wong (2001); Cheng and Courtenay (2006); Ghazali and Weetman (2006); Abdelsalam and Street (2007); Wang and Hussainey (2013)

AC size + Felo et al. (2003); Mangena and Pike (2005); Tauringana and Mangena ( 2009); Li et al. (2012)

AC meetings + Kelton and Yang (2008); Li et al. ( 2012)

Major shareholding

+ Schadewitz and Blevins (1998); Eng and Mak (2003); Mangena and Pike (2005); Lakhal (2005); Wang and Hussainey( 2013)

The issuance of shares, bonds and loans

+ Lang and Lundholm (1993); Boubaker et al. (2011); Dhaliwal et al. (2011)

Firm size + Hossain et al. (1995); Watson et al. (2002); Boesso and Kumar (2007); Tauringana and Mangena; (2009); Wang and Hussainey (2013).

Profitability +/- Wallace et al. (1994); Ahmed and Courtis (1999); Tauringana and Mangena (2009); Hussainey and Al- Najjar (2011).

Leverage +/- Malone et al. (1993); Ahmed and Courtis (1999); Tauringana and Mangena, (2009); Hussainey and Al- Najjar (2011); Boubaker et al. (2011).

Cross listing + Cooke (1992); Wallace et al. (1994); Gray et al. (1995); Mangena and Pike (2005); Aly et al. (2010); Elzahar and Hussainey, 2012).

Dividends + Naser et al. (2006); Wang, and Hussainey (2012); Hussainey and Al-Najjar (2011).

Industry +/- Cooke (1992); Craven and Marston (1999); Mangena and Pike (2005); Beretta and Bozzolan (2004); Boesso and Kumar (2007); Boubaker et al. (2011); Elzahar and Hussainey (2012).