Scoring the Index Items

According to Cooke (1989c), there are two approaches for developing scoring methods. In the first approach, researchers use the number of words to describe the disclosed items in which the score of this item varies between one and zero (Copeland & Fredericks, 1968). This approach was criticised by Cooke (1989c) based on subjectivity in the allocation of scores. In the second approach, a required information item takes the value of one if it is disclosed and zero otherwise. It was argued that in order to avoid any negative impact on the reliability, as well as the validity of the disclosure instrument, two scoring approaches should be taken into consideration: weighting or un-weighting the score of the included items in the disclosure index.

There is an argument regarding weighting the score of the disclosure index items. In the weighted approach disclosure items have a different level of importance varying between user groups, while in the un-weighted approach all disclosure items have an equal level of importance. Approaches advocating the use of a weighted score argue that the weighted scores assist researchers in measuring the quality of disclosure not only the extent of the disclosure, which may in turn contribute to mitigating the issue of subjectivity (Botosan, 1997). Conversely, those who support the use of the un-weighted scores argue that the issue of subjectivity in weights of user groups will average each other out; certain disclosure items will be valued less and some will be valued more, resulting in an averaging out of their subjective weight. Also, constructing the un-weighted index is more

practical because it does not require the included items to be weighted by the targeted groups (Cooke, 1989c; Hodgdon et al., 2008).

Consistent with the majority of disclosure studies, this study adopts the un-weighted approach. The rationale behind choosing the un-weighted approach consists of several reasons:

1. As this study investigates disclosure practices over five years (2006-2010), the importance of each item on the disclosure index might change over time (Hassan et al., 2006).

2. The un-weighted scores intend to avoid the subjectivity inherent in evaluating the relative importance of each item on the used index for all user-groups (Ferguson et al., 2002).

3. The weighted approach is often constructed based on the views of user groups such as financial analysts which might not reflect the real importance of the items to other user-groups. Thus, according to Cooke (1989c) and Wang Kun et al. (2008) the un-weighted approach is typically appropriate for studies that consider different stakeholders instead of a specific user group.

4. Cooke (1989a), Marston and Shrives (1991) and Santhosh et al. (2015) state that indices with a large number of items would be expected to provide the same score when applying a weighted and an un-weighted approach.

5. Empirical evidence was provided by Chow and Wong (1987), Adhikari and Tondkar (1992) and Olusegun and Naser (1995) showing that identical results were found when using both the weighted and un-weighted approaches for scoring the applied disclosure indices.

In addition, in line with using the un-weighted approach the current study uses the weighted approach based on the scores of the un-weighted index in order to provide robust results. The weighted approach is explained in the next section.

For the un-weighted index, this study employs a dichotomous approach, scoring a value of one if the item is disclosed and zero if the item is not (Adelopo, 2011; Aljifri, 2008; Barako et al., 2006; Cooke, 1991; Ghazali & Weetman, 2006; Gisbert & Navallas, 2013; Haniffa & Cooke, 2002; Leventis & Weetman, 2004; Olusegun & Naser, 1995; Omar & Simon, 2011). However, there are some cases where some disclosure items are not relevant

to some firms. The issue of scoring inapplicable items leads to penalising firms for not disclosing such items, and this could affect the reliability of the index instrument. To avoid such problems, it is suggested that reading the entire annual report to determine whether the items are applicable for a firm or not is essential for researchers to avoid penalising firms for non-disclosing inapplicable items (Cooke, 1989c, 1991). Therefore, following relevant disclosure studies to avoid any potential bias, annual reports were read in advance to identify any possible inapplicable items. This has contributed significantly to the construction of the disclosure index and enhancing its reliability and validity.

Since this study focuses on the comprehensive level of disclosure, a disclosure index was developed as explained in the former section (5.5.2.1). The actual disclosure score of applicable items for a firm is calculated as follows:

Where:

ADS = actual disclosure score for a firm,

dj = 1 if the j information item is disclosed in the annual reports. dj = 0 if the j information item is not disclosed in the annual reports.

n = the total number of information items which a firm is expected to disclose.

Therefore, the total disclosure index score (TDIS) for a firm is calculated as follows: The total disclosure index is the ratio of the actual scores awarded to a firm (ADS) to the maximum applicable disclosure score for a firm (M).

TDIS = ADS / M

M = the maximum applicable disclosure score = number of applicable items (≤144).