OBPE Inputs

information asymmetry theory, re-enforcement theory, signaling theory and capture theory among others. The review of literature in this study revealed that none of these theories provided all explanations to the relationship between various corporate attributes and accounting disclosures, because each theory, based on specific assumptions, explained the relationship between the causal factor(s) and disclosure practices through a particular perspective. For instance, Gernon & Wallance (1995) used stewardship theory to explain the effect of environmental factors on accounting standards and disclosure practices in listed firms. Ramil, et al., (2013) used agency theory to assess the effects of corporate governance attributes on quality of information disclosures. Jensen & Meckling (1976) also used agency theory to explain the association between leverage and level of disclosures. Jensen &

Meckling (1976) argued that agency costs were higher for companies with more debt in their capital structure. Salteh, Nahandi & Khoshbakt (2011) used stakeholder theory to evaluate influence of corporate governance on voluntary disclosures in Iran. Gordon (1964) used positive accounting theory to relate senior management with information disclosures. Ullman (1985) used stakeholder theory to resolve disclosure problems.

The theories adopted in this study were based on the relevance of the theories to the relationship between disclosure and corporate attributes hypothesized to affect compliance with accounting standards disclosure requirements by commercialized Federal Government enterprises in Nigeria. They include agency theory, stewardship theory, stakeholder theory, and resource dependency theory.

The next subsections look at the development of the selected theories and how they were applied in previous studies to relate corporate attributes with accounting disclosures in financial reporting. There is also a discussion of how these theories provided theoretical bases for linking the selected corporate attributes with level of compliance and accounting

standards disclosure requirements in the preparation of financial reports by commercialised enterprises.

2.12.2 Agency Theory

Agency theory originated from the culture of separation of organizations‟

management from owners. This separation creates what is known as principal-agent relationship. It emanated from the understanding that owners of today‟s organizations who contributed capital (shareholders) are different significantly from the management (operators) of such organizations. The shareholders theoretically engaged the members of management team to run the organization on their behalf. The underlying assumption is that the interest of the principal and the agent is the same. However, this is not always the case. In some cases, the interests of these two groups are not in agreement with one another. The implication of this for sound corporate governance is how the principal can limit divergent actions of the agent by establishing appropriate punishments, rewards or incentives for the agents to bring about appropriate outcomes (Luthans, 1998).

Agency theory offers assistance in understanding the complex motivations of managers towards compliance with accounting standards in financial reporting (Hendriksen

& van Breda, 2001). Agency theory concerns itself with resolving the problems that can occur in agency relationships (Jensen & Meckling, 1976:306). They defined agency relationship as a contract under which the owners of the organization (principal(s)) engage the managers (agents) to perform some services on their behalf. Under this arrangement, the owners delegated some decision making authorities to the managers.

However, both parties are utility maximizers, with varying philosophies and this could result in divergent and misaligned interests between them. Owners‟ would want to maximize net present value of firm; while the managers would want to maximize their own

utility of which income is a part. In most cases, the agent will not always act in the best interests of the principal. The agents could also hide information for selfish purpose (s) by not disclosing important facts about the organization, if the implication of such disclosure will hurt their interest (Barako, Hancock & Izan, 2006). Owners face moral dilemma because most times they cannot ascertain or evaluate the decision made by their agents. This conflict of interest results in agency problem whose resolution incurs agency costs (Al-Shammari, 2005).

Several studies built their work on agency theory. For example Ali, Ahmed and Henry (2004) stated that larger organizations have a greater tendency to disclose more financial information in their annual reports than smaller ones. This will reduce their agency costs, government intervention and enhances their reputation and public image. This is consistent with the findings of Watts and Zimmerman (1986) and Chow and Wong-Boren (1987). Watts and Zimmerman (1986) and Chow and Wong-Boren (1987) also argued that organizations with higher debts ratios disclosed less information in order to disguise the level of the organization‟s risk.

2.12.3 Stewardship theory

This theory requires that directors show a fiduciary duty towards the owners of the company. The theory implies that the power of directors to manage the enterprise is derived from their appointment by owners. This means that the managers are required to be accountable to the owners. Stewardship theory thus suggests a collaborative approach between directors and managers. Such an approach, according to Stephen (2012) stresses service, calling for boards to advice the managers and the managers providing stewardship/accountability reports in line with the requirements of accounting standards to the owners, as is required by statutes. Stewardship and agency theories have garnered

attention both as a compliment and as a contrast. Davies, Schoorman and Donaldson (1997) argued that whereas agency theory views executives and directors as self-serving and opportunistic, stewardship theory describes them as frequently having interests that are isomorphic (identical) with those of shareholders (Dalton, Daily & Cannella, 2003), particularly, when financial reports disclose information required by shareholders.

Stewardship theory helped to explain the importance that is attached to the board/management to disclose relevant information in financial statements.

2.12.4 Stakeholder Theory

The stakeholder approach to disclosure has been applied and relied upon in many management and accounting literatures to resolve disclosure problems (Ullman, 1985;

Roberts; 1992 & Gray, 1997). Stakeholder theory asserts that:

…the corporations‟ continued existence requires the support of the stakeholders and their approval must be sought and the activities of the corporation adjusted to gain that approval. The more powerful the stakeholders, the more company must adapt (Gray, 1997, p. 253).

Disclosure is thus seen as part of the dialogue between the company and its stakeholders. The stakeholders include: creditors, employees, suppliers, analysts, government, potential investors, credit rating agencies and the general public. Stakeholder theory asserts that stakeholders have the right to specific information for certain decisions and they should be provided with relevant information including mandatory and environmental information (Gray, 1995). In addition, stakeholders have the ability to control or affect the resources of the corporations. They exhibit their power through the level of control they have over the resources (Deegan, 2004).

Stakeholder theory has been considered important because the fiduciary relationship between the board and owners places the board in a position to produce stewardship/accountability financial reports to meet the requirements of the owners.

However, the stakeholder theory draws the attention of the board to the needs of stakeholders, which include resource allocation decision-usefulness information that aids resource allocation decisions, such as investment, and credit and risk analysis of the stakeholders.

Jawahar and McLauglin (2001) have written that organizations are likely to use different strategies to deal with different stakeholders and these strategies can change overtime. This means that certain stakeholder group can be more effective than others in demanding for accounting disclosure. Neu, Warsame and Pedwell (1998) confirmed that this enables corporations to concentrate on the stronger group of stakeholders‟ information needs and demands, more than the weaker group‟s information needs. Ullman (1985) argued that it depends on corporate strategic approach, which was defined as “the mode of response of an organization‟s key decision makers towards social demands” (p. 552) from the stakeholders.

Therefore, the actions of the stronger group of stakeholders decide on how such demands affect the organisation if not attended to by management as the situation permits.

2.12.5 Resource Dependence Theory

Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behaviour of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any company.

Organizations depend on many external resources, including labour, capital and raw materials. Organizations may not be able to come out with countervailing initiatives for all these multiple resources if the management is not able to harness the sources of these

resources. Therefore, organizations should move through the principle of scarcity of critical resources (Drees & Heugens, 2013) to ensure that the sources of resources it depends on are not thwarted by the management insensitivity to recognise the dangers of losing such resources. Critical resources are those the organization must have to function, for example, capital. In this case, the providers of capital and management are a critical aspect of the organisation.

Hillman, Withers and Collins (2009), Davis and Cobb (2010), Drees & Heugens (2013), Sharif & Yeoh (2014) discussed the importance of this theory in explaining the actions of organizations. Managers of organizations should understand that their successes are tied to owners who appointed them and they also provided the needed resources (capital) (Davis & Cobb, 2010). Managers' careers can only thrive if the owners‟ demands are met (Hillman et al., 2009).

Resource dependence theory has implications also regarding the suppliers of other resources like labour, raw materials, credits, and other financial instruments. Therefore, financial statements need to consider the interests of resource providers, if the organisation should continue to enjoy their support.