Studies of Users’ Perceptions

Several previous studies in developed and developing countries have examined the link between corporate disclosure and issues such as international accounting standard-setting, users’ opinions and investors’ needs (e.g. Baker and Haslem,1973; McNally et al.,1982;

Abu- Naser et al, 1993; Al-Khater, 2007 and Alzarouni et al., 2011). The key studies that

46 The preparers’ response rate was 38%, while for users it was 17%.

investigate users’ opinions about disclosure practices in developed and developing countries are summarised in Tables 3.11 and 3.12 respectively.

Table 3.11: Studies of Users’ Perceptions in Developed countries Authors Country Time

Baker and Haslem (1973) were among the first authors who studied the information needs of individual equity investors. The authors conducted their study in the US in 1970 using a sample of 1623 questionnaires that related to 33 information items. Based on a 52%

response rate they found that investors ranked future expectations of the company, future economic performance of the industry and quality of management as the most important factors. ⁴⁷ The researchers also examined respondents’ perceptions regarding the information sources which they rely on when making their investment decisions and found that investors considered stockbrokers and advisory services as the most important, with financial statements of only limited value.

Most and Chang (1979) investigated the usefulness of annual reports to investors in the US in 1976. The authors administered 2034 questionnaires to highlight the perceptions of three

47 851 questionnaire responses were received from 1623 distributed.

types of users: individual investors, institutional investors and financial analysts.⁴⁸ Based on an overall response rate of 27.7%, the study found that all three user groups ranked corporate annual reports as the most important information source, with this preference strongest amongst the financial analysts. The authors also reported that financial statements and related information were the most important sections in annual reports for all three user groups. At a more detailed level, the income statement was ranked as the most important section by all the groups, although financial analysts and institutional investors also rated the balance sheet and accounting policies as very important.

McNally et al. (1982) analysed the perceptions of two user groups (financial auditors and stockbrokers) in New Zealand during the year 1979. Based on a response rate of 44% for 187 questionnaires⁴⁹ and 41 voluntary information items, they found that both groups perceived the voluntary disclosure of a wide variety of information items as important. The investigation also revealed that there was difference between the level of disclosure provided in corporate annual reports and the degree of disclosure perceived by external user groups. Finally, the researchers reported significant association between the level of disclosure and company size.

48 1034 questionnaires were sent to individual investors with a response rate of 21.5%; 500 went to institutional investors with a response rate of 34.5% and 500 to financial analysts with a response rate of 33.3%.

49 12 questionnaires were sent to financial auditors (with response rate a 75% and 175) questionnaires were sent to stockbrokers (with a response rate of 42%).

Table 3.12: Studies of Users’ Perceptions in Developing Countries

Lack of consensus among accountants and other user groups. Nigerian users did not view the information items as important as did users in developed countries. twenty-three financial items among investors in both nations.

The users preferred to get information from company or auditor reports because of the lack of reliability of information in annual report Naser et al where companies are often found in small population centres. Users believe that annual

The balance sheet and income statements were rated most highly by Saudi users. The board of directors’ report was found to be the least popular.

Annual reports were rated as the most important source of information. The income statement was ranked as the most important section of annual reports. All user groups believe a delay in publishing annual reports is the most

significant factor restricting the effective use of annual reports.

Annual reports are important and useful and are the main source of information for investment decisions.

Sri Lankan users depend more on annual report information than on information provided by the other sources. The majority of users also indicated the important role annual reports play in their decision-making functions

External users view corporate’ annual reports as the most important source of information. 56%

of users perceived the disclosure level in annual reports as not sufficient.

Note: This table summarises the key existing literature on users’ perceptions regarding disclosure practices in developing countries.

Wallace (1988) was one of the first authors to investigate the perceptions of users of annual reports in developing countries. The research compared the information needs of six groups of users in Nigeria with those of similar groups in developed countries, during the year

1986. The study employed a questionnaire survey sent to a sample of 1200 users; including chartered accountants, investors, senior civil servants, managers, financial analysts and other professionals.⁵⁰ The results revealed a lack of consensus between accountants and the other user groups, and more generally, that Nigerian users did not view the relative importance of information items in the same way that users of developed countries did.

Solas and Ibrahim (1992) examined the usefulness and reliability of disclosure items in corporate annual reports in Jordan and Kuwait during the year 1988, examining the importance of five sources of information for investment decisions: financial statements;

specialised professionals; financial news media; personal contacts and financial markets. A questionnaire survey was employed to collect the perceptions of two group of users -institutional and individual investors. Based on a response rate was 44%,⁵¹ the authors concluded that significance differences exist among institutions and individuals regarding the importance of information sources in both countries. The study also found significant variability in the perceived usefulness of seven of twenty-three financial items among investors and in nine cases regarding reliability items.

Abu-Nassar and Rutherford (1996) investigated the perceptions of five groups of users of corporate annual reports in Jordan in 1991. The author carried out a questionnaire survey to collect the opinions of individual shareholders, institutional shareholders, bank loan officers, stockbrokers and academics. The response rate was 48.38% (of 463 questionnaires distributed) and most users - except bank loan officers - ranked annual reports as the most important information when taking investment decisions. In contrast, bank loan officers rated visits to companies and communication with management as most significant.

Individual shareholders and academics were found to make less use of financial reports as a whole, but the income statement and balance sheet were the most important sections therein

50 Twenty five questionnaires were sent to non-Nigerian IASC Board members.

51 96 out of 218 distributed

according to all five groups of users. Regarding the understanding of information presented in annual reports, the authors found that the auditors’ report was the easiest section for respondents to understand, whereas the most difficult section was the statement of accounting policies. In addition, respondents rated all sections of annual reports as more relevant than reliable, with the comparability of reports being a relatively minor concern.

Naser et al. (2003) examined the perceptions of various groups of users of annual reports in Kuwait in the year 2000. As in previous studies, a questionnaire was conducted to collect opinions of different groups of users, in this case institutional investors, individual investors, bank loan officers, government officials, financial analysts, academics, auditors and stockbrokers. Based on an overall response rate of 77% of the 400 questionnaires distributed, the authors found that all groups viewed annual reports as the main source of information, followed by information which is directly obtained from the company and specialist advice. Regarding the characteristics of useful information, the respondents rated credibility and timeliness as the most important. The study also reported that users believe information contained in annual reports to be useful in making investment decisions, with the financial statements and notes to the accounts the most difficult to understand and the auditor’s report was the easiest. In addition, the researchers noted that users groups assigned a high degree of importance to all disclosure items expected to be reported in annual reports under IAS, but acknowledged that the list of voluntary items presented in questionnaire is important in a non-mandatory context.

In Saudi Arabia, Al-Razeen and Karbhri (2004a) investigated the perceptions of users of corporate annual reports using 636 questionnaires distributed to five user groups: individual investors; institutional investors; creditors; government officials; and financial analysts.

The respondents were asked about the use and importance of seven different sections in the annual reports; most respondents rated the balance sheet and income statement as most

essential, whereas the least significant was the board of directors’ report; the study also reported that cash flow statements were of relatively low importance.

Mirshekary and Saudagaran (2005) examined the perceptions of user groups regarding corporate annual reports in Iran, measuring the degree of consensus among seven groups:

bank loan officers; academics; stockbrokers; bank investment officers; institutional investors; auditors; and tax officers. Based on a 49% response rate from a sample of 500, the authors found that most users in Iran regarded the annual report as the most important source of information for making economic decisions, depending more heavily on this than on advice from stockbrokers, acquaintances or tips and rumours. The study also found that users ranked the income statement, the auditors’ report and the balance sheet as the three most important parts of the reports, but there was only a weak level of consensus among bank loan officers, tax officers and auditors about the importance of particular information items. Most users believed that a delay in publishing annual reports, a lack of reliability of the information and a lack of adequate disclosure are serious concerns with the nation’s corporate financial reports.

Al-Khater (2007) analysed users’ views on corporate annual reports in Qatar. As in most prior studies, the researcher carried out a questionnaire survey, in this case with a sample of 220 individuals across five groups: individual investors; institutional investors; financial analysts; bank credit officers; and government officers.⁵² Based on a response rate of 68%

he found that respondents consider annual reports to be the main source of information, as it is useful and important for their investment decisions. Regarding its important sections and their understandability, the study found that respondents rated the balance sheet, auditor’s report, cash flow statement, income statement and notes to the accounts most highly.

52 The questionnaire was distributed to 80 individual investors, 40 institutional investors, 30 financial analysts, 30 bank credit officers and 40 government officers.

Zoysa and Rudkin (2010) investigated perceptions regarding the usefulness of corporate annual reports in Sri Lanka. To collect users’ views, a questionnaire survey was sent to 575 individuals from seven user groups: accountants, executives, banks, tax officers, academics, financial analysts and investors.⁵³ The response rate was 45.9% and, based on this, the authors suggest four main findings. First, that respondents view the main purpose of using corporate annual reports as being to obtain information relating to equity buy, hold or sell decisions, despite the long delay in publishing annual reports in the country. Second, regarding the importance of information sources, the majority of users see annual reports in the primary role. Third, most respondents believed that the information presented in annual reports is either only partially adequate or not adequate at all. Finally, the study found that the importance of each section of the annual report and the frequency of their use varied significantly among user groups; however, the balance sheet and profit and loss account were the most important, with the most frequent users of annual reports being financial analysts.

More recently, Alzarouni et al. (2011) examined the usefulness of corporate annual reports to users in United Arab Emirates (UAE). Using a questionnaire survey sent to a sample of 404 external users in eight user groups (individual investors, institutional investors, governmental investors, government representatives, fund managers, bank credit officers, stock market brokers and professional accountants/auditors). The study found that corporate annual reports were ranked as the most important information source by users, followed by stock market pronouncements and contact with company managers; in contrast, tips and rumours were ranked the least important. However, the information disclosed in these annual reports only meets with 61% of users’ needs, while, the lack of

53 The questionnaire was distributed to 150 accountants, 100 executives and managers, 50 banks, 35 tax officers and assessors, 50 academics, 40 financial analysts, and 150 investors.

creditability of financial information, delays and non-accessibility were all important difficulties facing users.

In summary, the studies that have focused on users’ perceptions have indicated that respondents view corporate annual reports as the most important source of information in developing countries, more so than in developed ones. A possible explanation for this is that in developed countries there are more credible sources of company information such as media and financial newspaper; where these sources exist, if they exist at all, in developing countries they are often irregular and/or of dubious quality. However, users in developing countries still worry significantly about the reliability of information presented in corporate annual reports.

3.7 Conclusion

3.7.1 Summary

Existing academic literature related to disclosure practices in corporate annual reports has been reviewed in this chapter. In particular, the chapter discussed prior studies that have examined the extent of both voluntary financial disclosure in corporate annual reports and the degree of compliance with mandatory requirements. Evidence on the perceptions of both preparers and users of annual reports was also covered. This review suggests that the extent of compliance with IAS/IFRS is not satisfactory and somewhat selective. No full compliance with IAS/IFRS disclosure requirements was evident, although low compliance levels are not exclusive to developing countries. The studies reviewed indicate the wide variety of practices, although the extensiveness of disclosure item lists is an important factor.

A number of studies have investigated the association between the level of mandatory and/or voluntary disclosure and company specific characteristics. The evidence is not

consistent however; for example, while firm size appears to have a significant influence on the extent of disclosure by companies in most developed and developing countries, a small number of studies document that firm size is not influential in this regard (e.g. Akhtaruddin, 2005; and Aljifri, 2008). The relevant disclosure literature reviewed here also documents mixed evidence regarding the significance of the relationship between the extent of disclosure and the other explanatory variables examined in both developed and developing countries. This thesis therefore examines variables chosen deliberately to be relevant to the Kuwaiti environment.

Regarding preparers’ and users’ perceptions about disclosure in corporate annual reports, the previous studies reviewed here indicate that in developed countries preparers do not evaluate the information presented in annual reports in the same way as do users primarily because of a gap between how management (as preparers) and investors (as users) see the reports of companies being employed in practice (Chandra and Greesball, 1977). Preparers in developing countries suggested that the primary users of annual reports were shareholders and users suggested that corporate annual reports are indeed their main information source, more than other outlets such as public media, interim reporting and employee reports. However, not all sections of annual reports are assigned the same importance by users. For instance, the balance sheet and cash flow statement are the most important section for creditors, whereas the income statement is the most important for investors; also, auditor reports, director reports and accounting policies are ranked differently by different group of users. In general, from reviewing previous studies it is clear that different users’ needs vary markedly in terms of their needs and expectations.

Regarding the international dimension, there is a limited literature on measuring the level of financial disclosure in the light of IAS/IFRS requirements, in developing country contexts in general and in Kuwait in particular. The level of disclosure of financial

information in corporate annual reports and their determinants has attracted extensive attention in developed countries, but there has been much less focus on developing countries (Kribat et al., 2013).

In the context of developing or emerging markets, the most prominent studies examining the level of disclosure are those of: Naser et al. (2002) on Jordan; Naser and Nuseibeh (2003) on Sudi Arabia; Abd-Elsalam and Weetman (2003) on Egypt; Leventis and Weetman (2004) on Greek; Alsaeed (2006) on Saudia Arabia; Hassan et al. (2006) on Egypt; Naser et al. (2006) on Qatar Abd-Elsalam (2007) on Egypt, Al-Shammari (2008) and Al Mutawaa and Hewaidy (2010) on Kuwait; Al-Akra et al (2010) and Omar and Simon (2011) on Jordan. All these studies are particularly relevant to the present study in two ways; firstly these studies examined the level of financial disclosure (mandatory, voluntary and aggregate) attained by companies in developing countries with a similar context to Kuwait. Secondly, these studies applied the same approaches that will be used in this study (index and questionnaire method).

This chapter has reviewed literature relevant to each objective of the present study.

Specifically, the single nation and multi-national studies which evaluate the extent of aggregate, mandatory and voluntary disclosure in developed and developing country contexts were outlined. Previous empirical evidence on the nature and extent of corporate financial disclosure was highlighted. Existing disclosure studies on Kuwait were discussed in detail and gaps in the literature identified. Regarding the latter, the majority of studies that assess the extent of disclosure in corporate annual reports concern developed and developing Asian countries. As a result, there is a lack of knowledge regarding disclosure practice amongst Middle East countries despite the economic strength and potential in the region. Even those studies that do focus on these nations tend to use limited disclosure

index lists, fail to separately examine mandatory and voluntary practices or user/preparer perceptions simultaneously

The remaining chapters of this thesis aim to enhance knowledge in these areas by first setting out the theoretical and methodological issues underpinning research of this type before presenting detailed contemporary evidence regarding disclosure practices and views thereon in Kuwait. To this end the thesis now turns to the theoretical framework underpinning the current study.

Chapter 4