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A Study of Factors Influencing Voluntary Disclosure of

Chinese Listed Companies

LI Huiyun, ZHAO Peng

School of Management and Economics, Beijing Institute of Technology, P.R. China, 100081 lihuiyun@bit.edu.cn

Abstract: According to the disclosure motivation, information disclosure of listed companies can be divided into mandatory and voluntary information disclosure. The mandatory information disclosure can no longer meet the information demand of investors, while voluntary information disclosure is getting more recognition. This paper introduces the relevant literature of voluntary information disclosure, and analyses the internal and external factors influencing voluntary disclosure of Chinese listed companies in detail. Internal factors contain financial condition and corporate governance of company, while external factors include regulatory penalties, audit opinion, the development of regional market and degree of industrial competition. Then we set the data of the year 2009 of 212 Chinese manufacturing companies listed at the Shanghai Stock Exchange for the sample, and use structural equation modeling to make an empirical analysis between these factors and the level of voluntary information disclosure, based on voluntary disclosure evaluation index system constructed by ourselves. Finally, we make several policy recommendations on how to improve the level of voluntary information disclosure.

Keywords: Voluntary information disclosure, Influencing factors, Structural equation modeling

1

Introduction

Disclose refers to the activities that listed companies provide investors with the information that directly or indirectly affects their decision making in the form of public reports. According to the disclosure motivation, information disclose of listed companies can be divided into mandatory disclosure and voluntary disclosure. Mandatory disclosure happens when listed companies reveal their basic financial information in accordance with generally accepted accounting principles and the regulations of securities regulatory authorities. Voluntary disclosure refers to the activity of voluntarily revealing information in addition to that required by regulators, and the motivation includes managing corporate image, maintaining investor relation and reducing litigation risk. Listed companies voluntarily disclose information such as management’s review on the company’s long-term strategy and competitiveness, environment protection, community responsibilities, operating results, performance forecasts and effect of corporate governance. In October 2003, Shenzhen Stock Exchange promulgated the Guidelines on the Investor Relations Management of Listed Companies, which introduces the concept of voluntary disclosure for the first time in China and incorporates voluntary disclosure into the information disclosure system of listed companies. In 2007, China Securities Regulatory Commission promulgated the Rules of Contents and Format of Information Disclosure by Companies Offering Securities which defines the content of information disclosure of listed companies. In regard to operating revenue, operating profits and equity change, the Rules uses the phrase “should be disclosed”, therefore disclosure of this information is considered as mandatory. In regard to market share, strengths and weakness, continuity and stability of operation and profitability, the Rules uses the phrase “may be disclosed” and therefore disclosure of this information are deemed as voluntary.

The promulgating of a series of laws and regulations regarding voluntary disclosure fully demonstrates the Chinese government’s emphasis on this issue. However, in practice, the role of information disclosure in alleviating information asymmetry and protecting investors is still underplayed. Currently in China, mandatory information disclosure is not fully enforced, let alone voluntary information disclosure. This paper analyzes the factors influencing voluntary disclosure of listed companies in China and also puts forward recommendations for improving information disclosure of listed companies.

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2

Literature Review

2.1 Factors influencing voluntary disclosure

According to studies of Chinese and international scholars, factors influencing voluntary disclosure can be categorized into internal and external ones.

2.1.1 Internal factors

2.1.1.1 Financial condition of the company

Financial condition of a company includes the size, financial leverage, profitability, etc. According to Elbert and Parker (1973), the size of a company and the level of its voluntary disclosure are significantly positively correlated. Larger companies are more willing to communicate with investors through voluntary disclosure, in order to increase “reputation capital” and reduce cost of governance. SUN Dongqing (2008) studies the 2006 financial reports of 115 companies listed on Shanghai Stock Exchange, and tests the correlation between those companies’ financial leverage and the level of voluntary disclosure. SUN finds that the higher the financial leverage, the more likely for voluntary disclosure.

2.1.1.2 Corporate governance structure

Corporate governance structure mainly includes ownership structure, characteristics of board of directors and strength of internal supervision.

Ownership structure includes ownership concentration, percentage of state-owned shares and management shareholding. Mitchell (1995) studies 1983-1987 data from 129 companies listed on Australia Stock Exchange and finds that a decrease in ownership concentration will moderately increase the level of voluntary disclosure. QIAO Xudong and SUN Meihua (2007)’s researches show that, the level of voluntary disclosure is significantly negatively correlated with the percentage of state-owned shares and with the percentage of directors holding shares, while significantly positively correlated with the percentage of supervisors holding shares.

Characteristics of board of directors include size, independence, etc. An overly large-sized board of directors has a negative effect on its functioning and on improving corporate governance. The size of 8 to 9 members is generally considered as optimal. The level of independence of board depends on the percentage of independent directors and on whether CEO also serves as chairman of board. SHI Jianliang (2010) makes an empirical study on the relationship of voluntary disclosure and characteristics of board of directors. The results show that the size of board and the percentage of independent directors are positively correlated with the level of voluntary disclosure, while the percentage of directors appointed by the largest shareholder and the CEO serving as chairman of board are negatively correlated with the level of voluntary disclosure.

Strength of internal supervision is indicated by the size of board of supervisors and the setting of audit committee. XUE Zuyun and HUANG Tong (2004) point out that large board of supervisors has members with finance experience and therefore are more effective in preventing earnings management and supervising accounting process and disclosure procedures. Forker (1992) points out that the setting of audit committee can strengthen internal control and effectively supervise information disclosure. He finds that the setting of audit committee in British companies is positively correlated with the disclosure of stock options.

2.1.2 External factors

Because the external factors influencing voluntary disclosure are relatively difficult to observe, few studies focus on this point.

Among international literature, Elsayed and Hoque (2010) test how international environment factors affect the level of voluntary disclosure. Those factors include level of global competition, international social and political system, international accounting standards and financial system. Using data of 100 non-financial companies in Egypt, multiple regression shows that the level of voluntary disclosure is significantly positively correlated with international social and political system, international accounting standards, and international financial system.

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In China, ZHANG Yan and GUAN Min (2009) use 111 A-share listed companies in heavily polluting industries as sample, and test the relationship between the level of voluntary disclosure of environment related information and the following factors: government’s investment in environment protection, general public’s environmental awareness, regional economic development level and level of social supervision. They find that in general the level of environment related information disclosure is negatively correlated with above external factors.

2.1.3 Summary

With regard to the research content, most of literature focuses on the study of internal factors, while the influence of external factors is not well studied. With regard to the research methodology, most of the literature uses regression to analyze the relationship between certain factors and the level of voluntary disclosure. This method is overly simplistic and does not cover the interaction between factors. This paper will analyze the internal and external factors influencing voluntary disclosure of Chinese listed companies in detail using structural equation model.

2.2 Methods of assessing voluntary disclosure

Two methods are usually employed in foreign countries to measure the voluntary disclosure: rating by authorities and voluntary disclosure index evaluation systems constructed by scholars.

2.2.1 Rating by authoritative agencies

2.2.1.1 Financial Accounting Foundation (FAF)’s disclosure ranking

Financial Accounting Foundation (FAF) provides detailed analysis on disclosure of listed companies in 27 industries every year based on the annual reports, quarterly reports, newspaper, magazines and other sources. Evaluation criteria include the timeliness, degree of detail and clarity of disclosure.

2.2.1.2 Association for Investment Management and Research (AIMR)’s disclosure ranking

The annual review on performance reporting practice of Association for Investment Management and Research (AIMR report) bases score on the following three aspects: annual disclosure and other mandatory disclosure, quarterly and voluntary disclosure, and other information (mainly communications between analysts and company managers).

2.2.1.3 Standard and Poor’s company transparency and disclosure ranking

Standard and Poor’s company transparency and disclosure score measures the transparency and modes of information disclosure of S&P 500 component companies. The ranking system includes three categories and 98 attributes, and subjectively evaluates the disclosure quality, thus further improving the ranking system on corporate governance.

2.2.2 Customized index of voluntary disclosure

Currently, customized index of voluntary disclosure constructed by scholars in their researches adopt the following two methods:

2.2.2.1 Meek voluntary disclosure index. According to Meek el at (1995), listed companies’ voluntary disclosure falls into three categories: strategic information, financial information and non-financial information. The index is constructed by scoring these three categories separately.

2.2.2.2 Botosan voluntary disclosure index. Botosan (1997) divides listed companies’ voluntary disclosure into five categories: background information, summary of historical results, key non-financial information, projected information and management’s discussion and analysis. These five categories are further divided into sub-categories and each one is scored using appropriate weights to construct the index.

2.2.3 Summary

Botosan voluntary disclosure index is more comprehensive with scientific classification criteria, which is more widely accepted by scholars. Botosan system includes items that facilitate investors’ and analysts’ decision making, such as operating environment, company’s main products and markets, and changes in sales and market share. Its reliability and effectiveness are superior to other systems.

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3

Assumptions and Model

3.1 Assumptions

Level of voluntary disclosure is affected by both internal factors and external factors. Internal factors contain financial condition and corporate governance of the company, while external factors include regulatory penalties, audit opinion, the development of regional market and degree of industry competition. This paper studies voluntary disclosure by focusing on these above factors.

3.1.1 Financial condition and level of voluntary disclosure

According to the signaling theory, voluntary disclosure, as an important decision making behavior, is an essential means of signaling sound financial condition and operating results to external stakeholders. Voluntary disclosure can therefore promote external stakeholders’ understanding of the company and help achieving best corporate image. This paper studies the relationship between level of voluntary disclosure and financial condition by examining three indicators: size of company, financial leverage and profitability.

3.1.1.1 Size of company. Companies of large size are confident of their development prospect, and therefore are willing to communicate with investors in the form of voluntary disclosure, which distinguishes themselves from other companies and increases the value of company.

3.1.1.2 Financial leverage. Higher financial leverage and higher level of debt increase conflicts of interest among creditors, shareholders and management. Creditors will try to protect their interests by means such as raising interest rate, and thus increase agency cost of the company. In response, the company will increase voluntary disclosure and improve information transparency to gain creditors’ trust and therefore to reduce agency cost.

3.1.1.3 Profitability. According to the signaling theory, companies with high profitability has the incentive to distinguish themselves from companies with low profitability through signaling, which helps them increase stock value and obtain more funding. As a result, companies with higher profitability are more likely to use voluntary disclosure.

In summary, we make the first assumption:

Assumption 1: Level of voluntary disclosure is positively correlated with the company’s financial condition. More favorable financial condition to the shareholder leads to higher level of voluntary disclosure.

3.1.2 Corporate governance and level of voluntary disclosure

According to principal-agent theory, in the presence of information asymmetry, shareholders will oversee managers to prevent them from hurting shareholder’s interests using their information advantage. Agency cost therefore arises. In order to minimize agency cost, the agent will voluntarily convey certain information to the principal, in the form of financial reports and accounting reports. The higher the agency cost, the higher the incentive for agent to convey information. In order to study the management’s influence on voluntary disclosure, we need to examine the internal structure of the company, namely its corporate governance structure. This paper analyzes corporate governance structure from three aspects: ownership structure, board independence and strength of internal supervision. 3.1.2.1 Ownership structure. Ownership structure is measured by the concentration of ownership. High concentration of ownership gives major shareholders absolute information advantage, which leads to severe information asymmetry. They have the incentive and are capable to “window dress” financial statements and to cover problems of the company. Therefore, high concentration of ownership, or low ownership dispersion, leads to low level of voluntary disclosure.

3.1.2.2 Board independence. Board independence is measured by the percentage of independent directors and whether CEO serves as chairman of board. High percentage of independent directors improves the quality of financial information disclosure, and reduces the chance of senior managers profiting from holding back information. In China, it is very common for CEO to serve as the chairman of board. Such a position arrangement undermines the supervisory function of board of directors, and reduces the company’s information transparency.

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3.1.2.3 Strength of internal supervision. Strength of internal supervision is indicated by the size of board of supervisors and the setting of audit committee. The board of supervisors is responsible for supervising the compliance of financial activities as well as the performance of directors, managers and other senior executives of the company, preventing earnings management and overseeing accounting and finance processes. Audit committee, as an internal supervision body, is in charge of oversight of information disclosure. Level of voluntary disclosure is usually high with the presence of audit committee.

In summary, we make the second assumption:

Assumption 2: Level of voluntary disclosure is positively correlated with structure of corporate governance. Better structure of corporate governance leads to higher level of voluntary disclosure. 3.1.3 External factors and level of voluntary disclosure

The level of voluntary disclosure of listed companies is also affected by external factors including punishment from regulatory authorities, audit opinion, regional market development and industrial competition.

3.1.3.1 Punishment from regulatory authorities. Skinner’s reinforcement theory states that individuals will take certain actions on their environment to achieve their objectives. The actions will be repeated if the outcome is favorable, and will reduce or disappear if the outcome is unfavorable. According to this theory, listed companies which have been punished by China Securities Regulatory Commission, the stock exchange or other regulators will increase their disclosure to avoid potential punishment for inaccurate or non-timely disclosure.

3.1.3.2 Audit opinion. External audits carried out by accounting firms are generally accepted as a means of regulating listed companies and ensuing reliability of financial reports. A standard audit opinion indirectly verifies the subjectivity and reliability of the company’s financial report. Therefore companies receiving a standard audit opinion are more confident and willing to voluntarily disclose information, and the level of voluntary disclosure is higher accordingly.

3.1.3.3 Regional market development. China has a vast territory. Differences in level of market development arise as different regions of China have different economic conditions, and regional governments adopt different regulations. Companies in more developed market place more emphasis on the signaling effect and market effect of information disclosure. In addition, sound market mechanism and legal regime effectively supervise the internal controller of companies, which reduces the agency cost and improves information transparency.

3.1.3.4 Industrial competition. In competitive industries, companies need to reveal favorable information to improve corporate image and increase share value. In less competitive industries, however, lack of competition leads to smaller external pressure. In such industries, companies have incentive to minimize disclosure in order to reduce negative impression of general public and to maintain monopoly profit. In summary, we make the third assumption:

Assumption 3: Level of voluntary disclosure is positively correlated with external factors. More effective external supervision leads to higher level of voluntary disclosure.

3.1.4 Corporate governance structure and financial conditions

When ownership and management are separated, shareholders may lose control of company due to ownership dispersion. The company is controlled by insiders (management) who may make decisions against stockholders’ interest. This leads to investors’ unwillingness to invest and shareholders’ voting with foot behavior, and undermines the company’s long-term development. A sound corporate governance system will not only mitigate the conflicts of interest between owners and managers, but also reduce the negative effects caused by senior managers’ decision-making errors. On this basis, we make the forth assumption:

Assumption 4: Quality of corporate governance is positively correlated with financial condition of companies. Better structure of corporate governance leads to better financial condition.

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3.2 Measure of level of information disclosure

Currently in China there are no authoritative agencies that evaluate the companies’ level of voluntary disclosure. Following the methodology of previous studies, we measure the level of voluntary disclosure by a voluntary disclosure evaluation index constructed by ourselves.

The following steps are taken to construct voluntary disclosure evaluation index. First, based on Botosan’s (1997) voluntary disclosure index, all of the voluntary disclosure items are listed, which fall in five categories: background information, summary of historical results, key non-financial information, projected information and management’s discussion and analysis. Second, we exclude the items that China Securities Regulatory Commission have deemed as mandatory in the Rules of Contents and Format of Information Disclosure by Companies Offering Securities No. 2: Contents and Format of Annual Reports (2007 Revision). Considering China’s situation, we also exclude several items that Chinese investors are less concerned with, and add certain items that investors place emphasis on. We then reach 24 voluntary disclosure items for Chinese listed companies (Table 1). Finally, we give each of the 24 items a score for the companies in our sample. The score is 1 if this item is disclosed and 0 if not. The sum of scores divided by 24 is the voluntary disclosure index for that company, which measures the level of voluntary disclosure.

Table 1 Voluntary Disclosure Index Category Voluntary disclosure index

Background information

Objective and strategy Main products and market

Historical results

Current operating environment and trends

Continuity and stability of operation and profitability Cash flows Dividend policy Main advantage Weaknesses Key non-financial information Employee training Employee benefits Labor protection policy Environmental protection policy Charity donations Projected information Projected sales Projected profitability Projected costs

Research & development plan Investment and financing plan

Management’s discussion and

analysis

Analysis on change of sales Analysis on change of market shares Analysis on equipment utilization Analysis on contracts obtained

Influence of exchange rate change on future operation Influence of price change on future operation

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3.3 Research model

3.3.1 Basic principles of structural equation modeling

Structural equation modeling (SEM) sets variables that cannot be measured directly as latent variables, and estimates them based on several observed variables. A relationship among the latent variables, namely the “structure” is then reached. SEM is a testing technique. It starts from a hypothesis and tests the hypothesis using data collected. It is an alternative for multivariable regression and factor analysis, and can analyze the influence of single factor on the whole system and the relationship among single factors.

SEM includes three matrix equations:

x=Λxξ+δ

y=Λyη+ε

η=+Γξ+ζ

Among which, ○1 and ○2 are called measurement equations and ○3 is called structural model. We use the following notations: x is observed variable; ξ is exogenous latent variable; Λx is the factor loading

matrix for observed variable to exogenous latentvariable; δ is the error term of observed variable x. y is observed variable; η is endogenous latent variable; Λy is the factor loading matrix for observed variable

to endogenous latent variable; ε is the error term of observed variable y. B and Γ are path coefficients. B represents the relationship among endogenous latent variables. Γ represents the relationship between endogenous latent variables and exogenous latentvariables. ζ is the error term of endogenous latent variable η.

There are usually four steps in SEM: specification, identification, estimation, and evaluation and modification.

3.3.2Model design and selection of variables

This paper researches voluntary disclosure using SEM. Based on theoretical analysis, we design the following model (Figure 1) and the definitions of variables are listed in table 2.

Figure 1 Framework of the Voluntary Disclosure Influencing Factors Model Financial condition Corporate governance structure Level of voluntary disclosure External environment Size of company Financial leverage Profitability Percentage of independent directors CEO servings as chairman of board Size of board of supervisors Setting of audit committee Punishment of regulators Audit opinion

Regional market development

Industrial competition Voluntary disclosure

index

Ownership concentration

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Table 2 Variables Selected and Definition

Variable types Variables Variable definition and description

Exogenous latent

variables External environment

Cannot be directly measured. Measured by punishment of regulators, audit opinion, regional market development, and industrial competition.

Financial condition Cannot be directly measured. Measured by size of company, financial leverage and profitability

Corporate governance structure

Cannot be directly measured. Measured by ownership concentration, percentage of independent directors, CEO serving as chairman of board, size of board of supervisors , and setting of audit committee

Endogenous latent variables

Level of voluntary disclosure

Cannot be directly measured. Measured by voluntary disclosure index

Size of company Measured by logarithm of total assets

Financial leverage Measured by asset-liability ratio

Profitability Measured by return on equity

Ownership concentration

Measured by CR_10 index (sum of the ownership of top 10 shareholders)

Percentage of independent directors

Number of independent directors as a percentage of number of directors other than independent ones

CEO serving as chairman of board

1 if CEO and chairman of board are the same person, 2 if deputy chairman of board and CEO are the same person, 3 in the case of complete separation

Size of board of

supervisors Number of supervisors Setting of audit

committee 1 if audit committee is established, 0 if not Punishment of

regulators 1 if the company is punished in the year, 0 if not

Audit opinion 1 if the company receives standard unqualified opinion, 0 if not

Regional market

development Regional market development index (FAN, 2010)

Industrial competition 1 if the company is in non-monopoly industries, 0 if not. Observed variables

Voluntary disclosure index

1 if the item is voluntarily disclosed, 0 if not. The final index is the sum of all scores divided by 24

3.4 Sample and data sources

We select 489 manufacturing companies listed on Shanghai Stock Exchange before the end of 2009. Focusing on voluntary disclosure under normal financial conditions, we exclude ST (and ST *) companies, because of their abnormal financial conditions. We randomly select 212 companies from the companies to be our sample, using the random sampling function of Excel 2003. The data sources include CCER economic and financial database and annual reports of these listed companies. We

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analyze data using software such as Amos7.0, SPSS15.0 and Excel2003.

4

Empirical Analysis

4.1 Descriptive statistics

As shown in Table 3, voluntary disclosure index has a mean value of 0.5043, which means around 12 items (0.5043 times the total number of items 24) are disclosed by each company. The level of voluntary disclosure by Chinese companies is to be improved.

Table 3 Descriptive Statistics of Voluntary Disclosure Index

In order to give an intuitive picture of voluntary disclosure level, we examine voluntary disclosure items in five categories. When measuring each category, we employ the average score of disclosure items. Specifically, average scoring rate for a category = total score of all sampled companies for this category/ full score of all sampled companies for this category. For example, background information category includes two items, then the full score for 212 sampled companies = 2*212=424; and the actual score for all companies = 384, then the scoring rate for background information category = 384/424= 90.57%. The average scoring rate for each of the five categories are listed in Table 4.

Table 4 Scoring Rate for Voluntary Disclosure Background information Summary of historical results Key non-financial information Projected information Management’s discussion and analysis Score Full score Scoring rate 384 424 90.57% 791 1272 62.19% 470 1060 44.34% 508 1060 47.92% 413 1272 32.47%

Table 4 shows that background information and summary of historical results have higher scoring rates, both over 60%. Key non-financial information, projected information and management’s discussion and analysis have lower scoring rate, below 50%. Especially, management’s discussion and analysis category suffers the lowest scoring rate of 32.47%.

4.2 Model evaluation

Evaluation of structural equation models usually includes parameter test and goodness-of-fit test. 4.2.1Parameter test

The parameter significance test for structural equation models uses C.R. (critical ratio) statistic, which is similar to the t-test in traditional regression models. Table 5 shows the estimations of path coefficients:

Table 5 Path Coefficient Estimation Path Estimation Standard

error

C.R. P value

Financial condition → level of voluntary disclosure

Corporate governance structure → level of voluntary disclosure 1.722 4.185 0.862 1.876 1.997 2.230 0.046 0.028 Sample size Minimum Maximum Mean Standard

deviation Voluntary disclosure index 212 0.0833 0.9583 0.5043 0.1462

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External environment → level of voluntary disclosure Path 0.398 Estimation 0.135 Standard error 2.954 C.R. 0.005 P value

Corporate governance structure → Financial condition

External environment → Financial condition External environment → Corporate governance structure 0.680 -0.712 -0.134 0.692 0.271 0.175 0.984 -2.627 -0.763 0.325 0.009 0.446

With regard to Assumption 1, the path coefficient of financial condition and level of voluntary disclosure is 1.722, and the two factors are positively correlated. At 5% level, the hypothesis is not rejected, which indicates that companies with better financial condition will voluntarily disclose more information to distinguish themselves from companies with poor financial condition and thus avoid adverse selection.

As to Assumption 2, the path coefficient of corporate governance structure and level of voluntary disclosure is 4.185, and the two factors are positively correlated. At 5% level, the hypothesis is not rejected. This suggests that with a sound corporate governance system, investors can monitor and encourage managers in a more effective way, which improves the company’s information transparency. Regarding Assumption 3, the path coefficient of external environment and level of voluntary disclosure is 0.398 and these 2 factors are positively correlated. At 1% level, the hypothesis is not rejected. Level of voluntary disclosure increases with the effectiveness of external environment.

With regard to Assumption 4, the path coefficient of corporate governance and financial condition is 0.680. While the direction of influence is as expected, the path coefficient is not significant with a P-value of 0.325. This could be explained by the fact that most Chinese companies enhance corporate governance system for the purpose of internal control, rather than monitoring the operation strategy. Certain positions have not played their role, and therefore could not significantly affect the companies’ financial condition.

4.2.2 Goodness-of-fit test

Structural equation models provide various goodness-of-fit indices to test the model fitting. Common goodness-of-fit indices are listed in Table 6.

Table 6 Common Goodness-of-fit Indexes

Index Evaluation criteria

Absolute goodness-of-fit indices

χ2/df RMSEA GFI AGFI

1-2, smaller value preferred <0.08, smaller value preferred >0.9, value closer to 1 preferred >0.9, value closer to 1 preferred

Relative goodness-of-fit indices NFI CFI

>0.9, value closer to 1 preferred >0.9, value closer to 1 preferred

Parsimony goodness-of-fit indices AIC

BIC

Preset model has smaller AIC value than that of independent model and saturated model.

Preset model has smaller BIC value than that of independent model and saturated model.

Absolute goodness-of-fit indices, including Chi-square value to degree of freedom (χ2/df), Root Mean Square Error of Approximation (RMSEA), Goodness-of-fit index(GFI) and Adjusted Goodness-of-fit Index(AGFI), measure the absolute goodness-of-fit of the model by comparing the sample covariance matrix with the covariance matrix implied by hypothesis model. Relative goodness-of-fit indices,

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including Normed Fit Index (NFI) and Comparative Fit Index (CFI), measure goodness-of-fit of the model by comparing preset model with independent model. Parsimony goodness-of-fit indices, including Akaike Information Criterion (AIC) and Bayesian Information Criterion (BIC), indicate the parsimony of the model. Usually the preset model has smaller indices than those of independent model and saturated model. The goodness-of-fit indices of this paper are shown in Table 7.

Table 7 Goodness-of-fit of the Model

Goodness-of-fit index Value Evaluation

χ2/df RMSEA GFI AGFI NFI CFI AIC BIC 1.631 0.055 0.940 0.907 0.932 0.975

160.589, smaller than AIC of independent model and saturate model

271.356, smaller than the BIC of independent model and saturate model Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable

In summary, all goodness-of-fit indices are within the acceptable range, which indicate good fit of the model.

5

Conclusion

We set the data of the year 2009 of 212 Chinese manufacturing companies listed at the Shanghai Stock Exchange for the sample and discuss the internal and external factors influencing voluntary disclosure. Internal factors contain financial condition and corporate governance of company, while external factors include regulatory penalties, audit opinion, the development of regional market and degree of industrial competition. We put forward four assumptions and use structural equation modeling to do an empirical test. The main results of this paper are as follows: (1) More favorable financial condition to the shareholder leads to higher level of voluntary disclosure. (2) Better structure of corporate governance leads to higher level of voluntary disclosure.(3) More effective external supervision leads to higher level of voluntary disclosure.(4)There is not a significant positive association between corporate governance and financial condition.

6

Recommendations

Empirical analysis shows that, in general, the level of voluntary disclosure of Chinese listed companies is low and unsatisfactory. Based on our researches, we will give some recommendations on how to improve voluntary disclosure from perspective of listed companies and external environment.

6.1 Listed companies

6.1.1 Improving profitability and enhancing core competence

We find that the company’s financial condition is positively correlated with level of voluntary disclosure. Therefore, listed companies in China should develop strategies in line with their specific conditions to improve profitability and financial conditions and thus improve voluntary disclosure. This is also the source and foundation of enhancing core competence and maintaining competitive edge. To improve

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profitability, listed companies should rely on technological innovation, greatly increase inputs in technology, and implement innovation strategies, with a focus on informatization of core business and key processes.

6.1.2 Perfecting the corporate governance structure

6.1.2.1 Optimizing ownership structure by reducing concentration

Due to the special condition of China, most listed companies in China were transformed from state-owned enterprises through restructuring, which leads to high ownership concentration. “Owner absence” arises as state-owned shares are usually the “one dominant stock”. In this context, listed companies should attract institutional investors, corporations and general public to diversify shareholders, which may include asset management companies, investment funds, banks, corporate enterprises, financial intermediates, management and employees.

6.1.2.2 Enhancing board of directors system and improving board independence

On one hand, listed companies should raise the percentage of independent directors, promote cooperation among directors, and specify the duties of independent directors. On the other hand, listed companies should accelerate the separation of CEO and chairman of board to improve information transparency, avoid insider control caused by common interest of management and board, and enhance the board’s supervision on information disclosure and management.

6.1.2.3 Enhancing internal control system and reinforcing supervisory efforts

Listed companies should establish an effective board of supervisors. A system that guarantees supervisor’s integrity and due diligence should be in place to protect shareholders’ interests. Besides, supervisors should include representatives of shareholders and representatives of employees, and supervisors nominated by state-owned shareholders should not take up more than one-third of the number of supervisors.

The listed companies should enhance the building of audit committee, a specialized committee mainly comprising independent directors and experienced professionals. This ensures the independence of audit committee members, regulates internal control, and thus improves the level of voluntary disclosure.

6.2 External environment

6.2.1 Improving laws and regulations on voluntary disclosure

The regulation and supervision of voluntary disclosure is more challenging than that of mandatory disclosure, because of the ambiguity, extensiveness and randomness of voluntary disclosure. Therefore it is necessary for China Securities Regulatory Commission to promulgate a series of regulations, such as Guidelines on Voluntary Disclosure of Listed Companies which specifies the content, scope, channel and timeliness of voluntary disclosure, to improve the level of voluntary disclosure.

6.2.2 Increasing supervision on voluntary disclosure by certified public accountants

Audit by certified public accountants, featuring independence, objectivity and impartiality, is an important means to ensure the reliability of accounting information. Since voluntary disclosure is provided by management, there are potential risks of speculation. That is why the certified public accountants need to verify the objectivity and reliability of voluntary disclosure. Through the audit of voluntary disclosure is not necessarily as strict as that of mandatory disclosure, review is still necessary to verify and improve the reliability of voluntary disclosure. For example, projected information should be reviewed to ensure its reasonability and consistency and to verify that forecasts are consistent with assumptions.

6.2.3 Accelerating market development to reduce regional differences

China’s imbalanced development is characterized by relatively developed southeastern coastal area and relatively undeveloped central and western areas. The Western Development Policy has been in effect for nearly a decade and is fruitful in narrowing regional differences and pursuing common prosperity. We should continue to implement this policy and place special emphasis on the development of product markets, factor markets and market intermediates in order to boost the marketization of undeveloped areas and therefore improve the voluntary disclosure of listed companies and attract more investors.

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6.2.4 Breaking monopoly and introducing competition

The reform of monopoly industries takes two forms. One is to split one monopoly company into two or more companies and then restructure its business. This form is taken by ordnance, shipbuilding and aerospace industries. The other form of reform is to restructure the business of two or more companies in the industry, which is taken by the oil & gas industry and petrochemical industry. This form shortens the reform process and thus saves the reform costs. It also breaks monopoly in short time and introduces competition rapidly, which addresses unbalanced economic interests due to limitation of business scope. In sum, the above measures can effectively increase competition and therefore improve the level of voluntary disclosure in target industries.

Authors in brief:

LI Huiyun (1964-), female, born in Qinhuangdao, Hebei Province, China, associate professor of School of Management and Economics, Beijing Institute of technology, Ph.D. candidate. Research focus: applied statistics, securities market and information disclosure. Email: lihuiyun@bit.edu.cn

ZHAO Peng (1985-), male, born in Tianjin, China, master candidate of School of Management and Economics, Beijing Institute of technology. Research focus: financial management. Email: zxn1985@126.com

References

[1]. Christine A. Botosan, “Disclosure Level and the Cost of Equity Capital”, The Accounting Review, (7), 1997, pp.323-349

[2]. Elbert. H. and R. I. Parker, “The Practice of Business: The Current Status of Corporate Social Responsibility”, Business Horizons 16 (4), 1973, pp.5-14

[3]. Jason D.Mitchell, Chris W.L. and Andrew S.Loh, “Voluntary Disclosure of Segment Information Further Australia Evidence”, Accounting and Finance 35(2), 1995, pp.1-16

[4]. John J. Forker, “Corporate governance and disclosure quality”, Accounting and Business Research 22(86), 1992, pp.111-124

[5]. Mohamed Omran Elsayed, Zahirul Hoque, “Perceived international environmental factors and corporate voluntary disclosure practices: An empirical study”, The British Accounting Review (42), 2010, pp.17-35

[6]. FAN Gang, WANG Xiaolu, and ZHU Hengpeng, NERI INDEX of Marketization of China’s Provinces 2009 Report. Beijing: Economic Science Press, 2010: pp. 259-288 (in Chinese)

[7]. QIAO Xudong, SUN Meihua, and WU Shengzhu, Empirical Research on the Influence of Internal Corporate Governance on the Voluntary Disclosure Level of Listed Companies in China”, Collected Essays On Finance and Economics, 2007, (1): pp. 89-96 (in Chinese)

[8]. SHI Jianliang, “Research on the Relationship between Board Characteristics and Voluntary Disclosure”, On Economic Problems, 2010, (5): pp.57-60 (in Chinese)

[9]. XUE Zuyun, HUANG Tong, “Characteristics of Board of Directors and Board of Supervisors and Quality of Accounting Information”, The Theory and Practice of Finance and Economics, 2004, 25(130): pp.84-89 (in Chinese)

[10].ZHANG Yan, GUAN Min, “Empirical Study of the Exterior Factors Affecting Corporate Environmental Disclosures”, China Population, Resources and Environment, 2009, 6(19): pp.103-106 (in Chinese)

Figure

Table 1 Voluntary Disclosure Index
Figure 1 Framework of the Voluntary Disclosure Influencing Factors Model Financial conditionCorporate governance structureLevel of voluntary disclosureExternal environmentSize of companyFinancial leverageProfitability Percentage of  independent directorsCE
Table 2 Variables Selected and Definition
Table 4 Scoring Rate for Voluntary Disclosure  Background  information  Summary of historical  results  Key  non-financial information  Projected  information  Management’s discussion and analysis    Score    Full score    Scoring rate  384 424  90.57%  79
+3

References

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