Voluntary Disclosure Behaviour of Kuwait Companies

conscious revealing Behaviour of capital of capital of capital of Kuwait CompaniesBACKGROUND OF STUDY1.1 interpolation manifestation of schooling in corporate yearbook reports has attracted a number of look intoers in both developed and develop countries. The unforced apocalypse entropy in excess of requisite revelation, has been receiving an increasing amount of attention in recent accounting system studies. Because of the inadequacy of compulsory training, the demand for instinctive apocalypse fork outs investors with the necessary instruction to make much than informed decisions (Alsaeed, 2006). in instinctive divine revelation of decision-useful corporate entropy is considered to be the first step in solving the alleged lines of traditional fiscal inform (Leadbetter, 2000). Its objectives be well defined closing (or narrowing) the gap amidst a companys potential intrinsic market place value and its current market value.Voluntary divine revelation, in t he linguistic context of globalization of the worlds fiscal markets, has received a great deal of attention in the accounting literature in recent divisions (Hossain, Berera and Rahman, 1995). This is due to the pursual reasons Firstly, additional apocalypses may help to attract new shargonholders thereby helping to maintain a healthy demand for copes, and a shargon price that much fully reflects its intrinsic value. It is possible that poor revelation could lead to an undervalued shargon making it enchanting to a potential predator. Secondly, increased instruction may sanction in reducing tuitional danger and thereby paltryer the bell of capital (Spero, 1979). A lower cost of capital should mean that borderline projects become paid. Thirdly, in order to raise capital on the markets, companies will increase their freewill revelation. Consequently, listed companies be much likely to have a high take aim of disclosure than unlisted companies and multiple liste d companies those raising capital on the outdoor(a)(a) markets will have a higher(prenominal) train of disclosure than domestically listed companies. Fourthly, multiple listed companies oftentimes have an interest in foreign capital markets since foreign opeproportionns are often financed by foreign capital (Choi and Mueller, 1984). Disclosure aims might be increased to adapt to local customs to meet the requirements of depones and other suppliers of capital finally, listed and multiple listed companies might increase their social responsibility disclosures to usher that they act responsibly (Watts and Zimmerman, 1979). Companies may have attained their status on the securities markets and be able to attract new funds, non least because they act responsibly. correspond to Healy and Palepu (2001) a companys disclosure decision could be a response to innovation, globalization or changes in business and capital market environments.Kuwait is the focus of this read for three re asons. First, Kuwait is a subtle rich country, relatively open economy with crude oil reserves of about 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait Stock fill in to mobilize domestic savings and attract foreign capital investment funds. These measures embroil privatization of state corpo rations through with(predicate) the rip exchange and set asideing foreign investors to own apportions in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is becoming an important capital market in the region. It is bedded the second jumbost market in the Arab world (after Saudi-Arabian Arabia) in terms of total market capitalization. Its total market capitalization was US$128,951 million as of December 2006 (Arab M angiotensin-converting enzymetary Fund 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a root, inves tors may be interested in the reading disclosure practices of listed companies in Kuwait (Al-Shammari, 2008).1-2 Problem StatementMany developing countries strive to mobilize financial resources from domestic as well as outside(a) sources with a stack to attaining their economic and social development goals. Domestic and international investors utilize financial and non-financial information available on potential investment signals for assessing risk and making scathing investment decisions. Thus, the availability of financial and non-financial information in sufficient quantity and of sufficient quality has an important bearing on efforts gear towards mobilizing investment for support economic and social development.Adequate reporting and disclosure of financial and non-financial information will undertake asymmetric information problem, hence are likely to better investor confidence and a lower cost of investment. According to Gray, milds and Roberts (1995) investors dema nd information to assess the timing and uncertainty of current and future change flows so that they may value self-coloureds and make other investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by render unpaid accounting information, thereby enabling them to raise capital on the best available terms (Gray et al., 1995).Given the faster pace of globalization, the growing mutuality of international financial markets and increased mobility of capital, developing countries need to attach greater importance to corporate transparency and disclosure. Policy makers, legislators and regulators, in recognition of the signifi brooknistert catch that corporate transparency has on decisions of investors, need to strengthen further the various components of corporate disclosure infrastructure so that domestic and international resources are mobilized much(prenominal) efficiently.Kuwait is one of the developing countries that face diffic ulties to attract foreign investments. Birgit Ebner at Ger many another(prenominal)s Frankfurt Trust, who helps manage a Middle tocopherolern stock fund, said Kuwait was not an attractive investment compared with others in the region (www.gulfnews.com). One of the main reasons that interpret this matter is the absence of voluntary disclosure as a result of sharp low supply of information by companies.According to Birgit Ebner, We are underweight in Kuwait because in Kuwait there are many holding unswervings peremptory the market. And on top of it, the transparency is currently lower than in other Gulf States.In opinion of many analysts in Kuwait, the problem of gulf bank is related to absence of voluntary disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines (www.alaswaq.net 2007).The purpose of this instructi on is to empirically investigate the influence of several devoted characteristics on the train of voluntary disclosure of companies listed in Kuwait and whether disclosure level improves over the geezerhood give changes in the accounting environment of the country and globalization that have taken placed.There are many studies have examined the kin between a companys characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978) United Kingdom (Firth, 1979, 1980) Nigeria (Wallace, 1987) Sweden ( make watere, 1989) Japan (Cooke, 1992) United States (Imhoff, 1992 and Lang and Lundholm, 1993) Bangladesh (Ahmed and Nicholls, 1994) Switzerland (Raffournier, 1995) Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999) Jordan (Naser, Alkhatib and Karbhari, 2002) Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the role of voluntar y disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).The aim of this muse is to understand what motivate or demonstrate a companys disclosure by empirically investigate the experience between a number of company characteristics and the extent of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting year on voluntary disclosure will as well as be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammaris piece of work only cover the year of 2005, the execution of this lead is fully justified.1.3 Research QuestionsIn general, this study seeks for explanation on voluntary disclosure behaviour of Kuwait companies. The followings are the research questions-1- What is the consanguinity between the potent surface, debt ratio, possession distri entirelyion, favourableness, size of it of it up ste ady size, persistence heavens and voluntary disclosure level?2- Does reporting year influences voluntary disclosure?3- To what extent do the above factors view the voluntary disclosure?1.4 Research ObjectivesTo determine the influences of pie-eyed size, debt ratio, possession diffusion, profitability, inspect firm size, patience orbit and reporting year on the level of voluntary disclosure of companies listed in Kuwait.1.5 Significance of the StudyThe significance of study can be viewed from contri plainlyions given to Accounting academic discipline and to the practitioners and policymakers.Contribution to Accounting body of knowledgeThis study contributes to the literature on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and visiting profession. It also contributes to the corporate governan ce literature on whether the company characteristics appoint to be of import in companies operating in developed countries are resembling to those a developing country like Kuwait.This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help formulate voluntary disclosure in Kuwait.Contribution to the practitioners and policy makersKnowledge on firms characteristics that influence voluntary disclosure would enable policy makers to target training and monitor activities to suitable target companies in order to improve disclosure level in the country. This is important because higher disclosure among companies could improve investors confidence and help attracting more foreign investment into the country.The study is also able to show whether the external environment in Kuwait have improved the voluntary disclosure activities.1.6 ground and Limitations of the StudyThis study investigates the relationship between firm characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are unalike from those of non financial firms (Alsaeed, 2006).A disclosure business leader was constructed as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is pitch on the information that firms supply in their annual financial reports to shareholders. Albeit not as conclusive, financial reports serve as a widely accepted (Knutson, 1992).The disclosure index does not intend to be comprehensive, nor does it intend to specify what firms ought to disclose. Rather, the index is crafted solely for the purpose of capturing and measuring differences in disclosure practices among firms. The selection of items embedded into the index was entirely manoeuvre by Meek, Rober and Gray (1995), Botosan (1997), Naser an d Nuseibeh (2003) and Alsaeed (2006)1.7 Organization of the StudyThe reminder of this study is organized as follows Chapter Two discusses the literature review related to the study Chapter Three consists of research methodology including theoretical framework, hypothesis development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter basketball team provides the discussion, implications and recommendation of the study as well as suggestions for future research.CHAPTER TWOLITERATURE REVIEW2.1 IntroductionThis Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which shanghai the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide rear end knowledge of the issue understudy. Section cardinal discusses the concept and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as arrange from preliminary theoretical and empirical literature. These variables include firm size, debt ratio, self-command scatter, profitability, examine firm size.2.2 Disclosure Requirement in KuwaitMandatory disclosure continues to firms disclose information about their operations because of legal requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).2.3 Voluntary disclosure levelMore detailed disclosure by the firms beyond the level of information let out within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making public the financial and non-financial informat ion regarding the firms operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).Alsaeed has identified a more comprehensive items for voluntary disclosure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in delay 2.1Table 2.1 Voluntary disclosure items in Alsaeed (2006)no(prenominal)Disclosure items1Strategic information2Brief history of company3Information on events affecting future years results4Board directors names5Top managements names6Majority shareholders7Information on distinct types of products8Information statistics for more than two years9Information on dividends policy10Information on future expansion projects11Percentage of foreign and national travail force12Information on training and workers development13Information on social and environmental activities14Statement of corporate goals and objectives15Principle markets16Average co mpensation per employee17Market share18Information on events affecting current years results19 warlike environment20Forecasted meshMany studies have examined the relationship between a companys characteristics and voluntary disclosure level. Alsaeed, (2006) argued that firm size, profitability and auditor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976) Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between companys firm size, debt ratio, owner ship and auditor firm size and the level of disclosure.2.4 Determinants of Voluntary Disclosure2.4.1 unassailable sizeMost of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006) Donnelly and Mulcahy (2008) Brammer and Pavelin (2004) Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hour igan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).Many studies found a compulsive(p)ly charged relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He found that there was a domineering relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that say-so cost are higher for larger companies because shareholders are widespread, therefore, additional disclosure might reduce these cost (Watts and Zimmerman, 1983). This finding is unvarying with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might suffer from a competitive disadvantage if they provide additional disclosure. Thirdly, large companies might be of interest to different users of annual reports including government agencies.2.4.2 Debt ratioThere is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies found a world-shattering verificatory relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995) Hossain et al. (1995), Al-Shammari, (2008) and Bradbury, (1992).Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency be by facilitating debt ratio suppliers assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their structure of capi tal are accustomed to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information unbalance with shareholders.Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase with leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is detrimental relationship b etween voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).2.4.3 ProfitabilityMany studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971) Foster (1986), Richard (1992), Meek et al. (1995) and Naser et al. (2002) they argues that when the level of firms profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitability and disclosure with mixed results.Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from little profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annu al reports in order to justify their financial performance and to reduce governmental costs. However Wallace et al. (1994) found no real relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.Inchausti (1997) elaborated that agency possibleness suggests that managers of larger profitable companies may wish to disclose more information in order to obtain personal advantages like continuance of their management incline and compensation.Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variables provides an explanation of the disclosure level.Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other transcend found profitability to be positively and significantly related with two of the four disclosure categories, financial and forward looking disclosures, wher eas other categories expend negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing welkin were found to disclose less of financial information, and instead disclosed more on general and strategic information to explain in detail factors affecting their poor financial performance.2.4.4 self-possession dispersionThe ownership dispersion represents the percentage of shares owned by noncitizen after subtracting shares owned by the insider. Many studies found positive relationship between voluntary disclosure level and ownership, as explained by the agency theory which suggests that difference in the proportion of the companys shares owned by outsider shareholders causes differences in the voluntary disclosure level. This is because the companies with more outsider ownership are more likely to disclose more information than companies w ith less outsider ownership and also the demand for publicly available information is likely to increase (Wallace and Naser 1995).Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunthe, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found try consistent with this prediction.Many studies found negative relationship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.Naser et al. (2002) examined the affect of ownership on US companys disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.Ho and Wong (2001) found negative relationship between family ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level.2.4.5 Audit firm sizeAccording to Jensen and Meckling (1976) large audit firms act as a weapon to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of in formation in their annual reports.In terms of size, audit firms can be divided into two large or small. Large audit firms are identified as being one of these Big Four (or Big Five or Six formerly) international auditing firms, and smaller audit firms are the rest the firms are more likely to choose a Big Six auditing firm. Such selection of audit firms signals to investors that the circumscribe of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world while small firms are domestically hence the large audit firms have more capability to disclosure of the information and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm (Alsaeed, 2006).Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (19 95), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosure and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didnt fine significant association.2.4.6 labor celestial sphereAccording Cook (1989) disclosure level is more likely to vary from one effort to the other due to the likelihood that leading firms operating in a particular manufacture could promote a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. Cooke (1992) found evidence that Nipponese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982) Wallace (1987) Wallace et al. (1994) Raffournier (1995) Inchausti, (1997) Patton and Zelenka (1997) Naser (1998) Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found peanut effect.Table 2.2 Summary of nonparasitic variables influence on voluntary disclosureStudyIndependent variablefindingsAkerlof (1970) Profitability exacting relationshipSinghvi and Desai, (1971)Profitability unequivocal relationshipJensen and Meckling, (1976)Debt ratio and audit firm sizePositive relationship with debt ratio and audit firm size.Firth, (1979)Firm size and audit firm sizePositive relationship with debt ratio and audit firm size.Leftwich, Watts, and Zimmerman (1981)Ownership dispersionpositive relationship with ownership dispersionMcNally et al.(1982)Industry celestial sphereInsignificant with industry sphere of influenceFama and Jensen (1983)Own ership dispersionpositive relationship with ownership dispersionWatts and Zimmerman (1983).Firm sizepositive relationship with firm sizeFoster, (1986)Firm size, profitability meaning(a) positive with firm size and found positive with profitability.Watts and Zimmerman (1986)Profitabilitypositive with profitabilityWallace (1987)Industry fieldInsignificant with industry sector.Cook (1989)Industry sectorPositive with industry sector.Bradbury (1992) Firm size and debt ratio.Significant positive with firm size and debt ratio.Richard, (1992) ProfitabilityPositive with profitability.Forker (1992) Audit firm sizePositive but insignificant with audit firm size.Craswell and Taylor (1992)Audit firm sizePositively significant with audit firm size.Cooke (1992)Industry sectorpositive with industry sectorMckinnon and Dalimunthe, (1993)Firm size, debt ratio, ownership dispersion.Positive with firm size and ownership dispersion and negative with debt ratio.Hossain et al. (1994)Firm size, debt ratio, ownership dispersion and audit firm size.Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.Wallace et al. (1994)Industry sectorInsignificant with industry sector.Meek et al, (1995)Firm size, debt ratio, profitability. Positive with firm size and profitability whereas significant, negative with debt ratio.Hossain et al. (1995)Firm size and Debt ratioSignificant positive with firm size and debt ratio.Mitchell et al. (1995) Firm size and Debt ratio.Significant positive with firm size and debt ratio.Wallace and Naser (1995) Firm size, profitability, Ownership dispersionPositive with firm size, ownership dispersion andindustry sector but-,audit firm size and industry sector Negatively with profitability and audit firm size.Ahmed (1995)Firm size and audit firm sizePositive significant with firm size and audit firm size.Raffournier (1995)Profitability, audit firm size and industry sector.No significant with profitability and industry secto r, but significant positive with audit firm sizeZarzeski (1996) Firm size and debt ratioPositive with firm size and debt ratioAitken et al. (1997) Firm size, Debt ratio and owner ship dispersionPositive with the firm size and ownership dispersion but negative with debt ratio.Inchausti (1997)Profitability, audit firm size and industry sector.Positive with profitability and significant positive with audit firm size and insignificant with industry sector.Patton and Zelenka (1997)Industry sectorInsignificant with industry sector.Naser (1998)Debt ratio and industry sector.Significant positive with debt ratio but insignificant with industry sector.Owusu-Ansah (1998),Industry sectorInsignificant with industry sector.Mahmood (1999)Audit firm sizeSignificant with audit firm size.Brennan and Hourigan, (2000)Firm size and debt ratio.Significant positive with firm size and significant negative with debt ratio.Gelb (2000)Ownership dispersionNegatively with Ownership dispersionDepoers (2000)Audit firm sizeNo significant with audit firm size.Naser and Alkhatib (2000)industry sectorInsignificant with industry sector.Ho and Wong (2001)Profitability, ownership dispersion and audit firm size.No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.Naser et al. (2002).Firm size, Profitability, ownership dispersion and audit firm size.Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.Eng and Mak (2002)ProfitabilityNo significant with profitabilityChau and Gray (2002)Ownership dispersionPositively with outside ownership dispersion.Camfferman and Cooke (2002)Profitability, audit firm size and industry sectorVoluntary Disclosure Behaviour of Kuwait CompaniesVoluntary Disclosure Behaviour of Kuwait CompaniesBACKGROUND OF STUDY1.1 IntroductionDisclosure of information in corporate annual reports has attracted a number of researchers in both developed and developing countries. The voluntary disclosure information in excess of mandatory disclosure, has been receiving an increasing amount of attention in recent accounting studies. Because of the inadequacy of compulsory information, the demand for voluntary disclosure provides investors with the necessary information to make more informed decisions (Alsaeed, 2006). Voluntary disclosure of decision-useful corporate information is considered to be the first step in solving the alleged problems of traditional financial reporting (Leadbetter, 2000). Its objectives are well defined closing (or narrowing) the gap between a companys potential intrinsic market value and its current market value.Voluntary disclosure, in the context of globalization of the worlds financial markets, has received a great deal of attention in the accounting literature in recent years (Hossain, Berera and Rahman, 1995). This is due to the following reasons Firstly, additional disclosures may help to at tract new shareholders thereby helping to maintain a healthy demand for shares, and a share price that more fully reflects its intrinsic value. It is possible that poor disclosure could lead to an undervalued share making it attractive to a potential predator. Secondly, increased information may assist in reducing informational risk and thereby lower the cost of capital (Spero, 1979). A lower cost of capital should mean that marginal projects become profitable. Thirdly, in order to raise capital on the markets, companies will increase their voluntary disclosure. Consequently, listed companies are more likely to have a higher level of disclosure than unlisted companies and multiple listed companies those raising capital on the international markets will have a higher level of disclosure than domestically listed companies. Fourthly, multiple listed companies often have an interest in foreign capital markets since foreign operations are often financed by foreign capital (Choi and Muell er, 1984). Disclosure levels might be increased to adapt to local customs to meet the requirements of banks and other suppliers of capital finally, listed and multiple listed companies might increase their social responsibility disclosures to demonstrate that they act responsibly (Watts and Zimmerman, 1979). Companies may have attained their status on the securities markets and be able to attract new funds, not least because they act responsibly.According to Healy and Palepu (2001) a companys disclosure decision could be a response to innovation, globalization or changes in business and capital market environments.Kuwait is the focus of this study for three reasons. First, Kuwait is a small rich country, relatively open economy with crude oil reserves of about 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait Stock Exchange to mobilize domestic savings and attract foreign capital investment. These mea sures include privatization of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is becoming an important capital market in the region. It is ranked the second largest market in the Arab world (after Saudi Arabia) in terms of total market capitalization. Its total market capitalization was US$128,951 million as of December 2006 (Arab Monetary Fund 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a result, investors may be interested in the information disclosure practices of listed companies in Kuwait (Al-Shammari, 2008).1-2 Problem StatementMany developing countries strive to mobilize financial resources from domestic as well as international sources with a view to attaining their economic and social development goals. Domestic and international investors utilize financial and non-financial information ava ilable on potential investment targets for assessing risk and making critical investment decisions. Thus, the availability of financial and non-financial information in sufficient quantity and of sufficient quality has an important bearing on efforts geared towards mobilizing investment for financing economic and social development.Adequate reporting and disclosure of financial and non-financial information will reduce asymmetric information problem, hence are likely to improve investor confidence and a lower cost of investment. According to Gray, Meeks and Roberts (1995) investors demand information to assess the timing and uncertainty of current and future cash flows so that they may value firms and make other investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by supplying voluntary accounting information, thereby enabling them to raise capital on the best available terms (Gray et al., 1995).Given the faster pace of globalization , the growing interdependence of international financial markets and increased mobility of capital, developing countries need to attach greater importance to corporate transparency and disclosure. Policy makers, legislators and regulators, in recognition of the significant influence that corporate transparency has on decisions of investors, need to strengthen further the various components of corporate disclosure infrastructure so that domestic and international resources are mobilized more efficiently.Kuwait is one of the developing countries that face difficulties to attract foreign investments. Birgit Ebner at Germanys Frankfurt Trust, who helps manage a Middle Eastern stock fund, said Kuwait was not an attractive investment compared with others in the region (www.gulfnews.com). One of the main reasons that interpret this matter is the absence of voluntary disclosure as a result of sharp low supply of information by companies.According to Birgit Ebner, We are underweight in Kuwai t because in Kuwait there are many holding firms dominating the market. And on top of it, the transparency is currently lower than in other Gulf States.In opinion of many analysts in Kuwait, the problem of gulf bank is related to absence of voluntary disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines (www.alaswaq.net 2007).The purpose of this study is to empirically investigate the influence of several firm characteristics on the level of voluntary disclosure of companies listed in Kuwait and whether disclosure level improves over the years given changes in the accounting environment of the country and globalization that have taken placed.There are many studies have examined the relationship between a companys characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978) United Kingdom (Firth, 1979, 1980) Nigeria (Wallace, 1987) Sweden (Cooke, 1989) Japan (Cooke, 1992) United States (Imhoff, 1992 and Lang and Lundholm, 1993) Bangladesh (Ahmed and Nicholls, 1994) Switzerland (Raffournier, 1995) Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999) Jordan (Naser, Alkhatib and Karbhari, 2002) Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the role of voluntary disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).The aim of this study is to understand what motivate or demonstrate a companys disclosure by empirically investigate the association between a number of company characteristics and the extent of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting year on voluntary disclosure wil l also be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammaris study only cover the year of 2005, the execution of this study is fully justified.1.3 Research QuestionsIn general, this study seeks for explanation on voluntary disclosure behaviour of Kuwait companies. The followings are the research questions-1- What is the relationship between the firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and voluntary disclosure level?2- Does reporting year influences voluntary disclosure?3- To what extent do the above factors affect the voluntary disclosure?1.4 Research ObjectivesTo determine the influences of firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and reporting year on the level of voluntary disclosure of companies listed in Kuwait.1.5 Significance of the StudyThe significance of study can be viewed from contributions given to Accounting academic discipline and to the practitioners and policymakers.Contribution to Accounting body of knowledgeThis study contributes to the literature on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and auditing profession. It also contributes to the corporate governance literature on whether the company characteristics found to be significant in companies operating in developed countries are similar to those a developing country like Kuwait.This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help explain voluntary disclosure in Kuwait.Contribution to the practitioners and policy makersKnowledge on firms characteristics that influence voluntary disclosure would enable policy makers to target training and monitoring activities to suitable targe t companies in order to improve disclosure level in the country. This is important because higher disclosure among companies could improve investors confidence and help attracting more foreign investment into the country.The study is also able to show whether the external environment in Kuwait have improved the voluntary disclosure activities.1.6 Scope and Limitations of the StudyThis study investigates the relationship between firm characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are different from those of non financial firms (Alsaeed, 2006).A disclosure index was constructed as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to shareholders. Albeit not as conclusive, financial reports serv e as a widely accepted (Knutson, 1992).The disclosure index does not intend to be comprehensive, nor does it intend to specify what firms ought to disclose. Rather, the index is crafted solely for the purpose of capturing and measuring differences in disclosure practices among firms. The selection of items embedded into the index was entirely guided by Meek, Rober and Gray (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006)1.7 Organization of the StudyThe reminder of this study is organized as follows Chapter Two discusses the literature review related to the study Chapter Three consists of research methodology including theoretical framework, hypothesis development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter Five provides the discussion, implications and recommendation of the study as well as suggestions for future research.CHAPTER TWOLITERATURE REVIEW2.1 IntroductionThis Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which affect the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide foundation knowledge of the issue understudy. Section two discusses the concept and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as found from prior theoretical and empirical literature. These variables include firm size, debt ratio, ownership dispersion, profitability, audit firm size.2.2 Disclosure Requirement in KuwaitMandatory disclosure refers to firms disclose information about their operations because of legal requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).2.3 Voluntary disclosure levelMore detailed disclosure by the firms beyond the level of information disclosed within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making public the financial and non-financial information regarding the firms operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).Alsaeed has identified a more comprehensive items for voluntary disclosure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in Table 2.1Table 2.1 Voluntary disclosure items in Alsaeed (2006)No.Disclosure items1Strategic information2Brief history of company3Information on events affecting future years results4Board directors names5Top managements names6Majority shareholders7Information on different types of p roducts8Information statistics for more than two years9Information on dividends policy10Information on future expansion projects11Percentage of foreign and national labor force12Information on training and workers development13Information on social and environmental activities14Statement of corporate goals and objectives15Principle markets16Average compensation per employee17Market share18Information on events affecting current years results19Competitive environment20Forecasted profitsMany studies have examined the relationship between a companys characteristics and voluntary disclosure level. Alsaeed, (2006) argued that firm size, profitability and auditor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976) Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between companys firm size, debt ratio, owner ship and auditor firm size and the level of disclosure.2.4 Determinants o f Voluntary Disclosure2.4.1 Firm sizeMost of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006) Donnelly and Mulcahy (2008) Brammer and Pavelin (2004) Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hourigan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).Many studies found a positive relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He found that there was a positive relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that agency costs are higher for larger companies because shareholders are widesprea d, therefore, additional disclosure might reduce these costs (Watts and Zimmerman, 1983). This finding is consistent with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might suffer from a competitive disadvantage if they provide additional disclosure. Thirdly, large companies might be of interest to different users of annual reports including government agencies.2.4.2 Debt ratioThere is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies found a significant positive relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995) Hossain et al. (1995), Al-Shammari, (2008) and Bradbury, (1992).Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency costs by facilitating debt ratio suppliers assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their structure of capital are prone to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information asymmetry with shareholders.Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase with leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is negative relationship between voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).2.4.3 ProfitabilityMany studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971) Foster (1986), Richard (1992), Meek et al. (1995) and Naser et al. (2002) they argues that when the level of firms profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitabilit y and disclosure with mixed results.Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from less profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. However Wallace et al. (1994) found no significant relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.Inchausti (1997) elaborated that agency theory suggests that managers of larger profitable companies may wish to disclose more information in order to obtain personal advantages like continuance of their management position and compensation.Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variab les provides an explanation of the disclosure level.Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other hand found profitability to be positively and significantly related with two of the four disclosure categories, financial and forward looking disclosures, whereas other categories ware negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing sector were found to disclose less of financial information, and instead disclosed more on general and strategic information to explain in detail factors affecting their poor financial performance.2.4.4 Ownership dispersionThe ownership dispersion represents the percentage of shares owned by outsider after subtracting shares owned by the insider. Many studies found positive relationship between voluntary disclosure level and ownership, as explained by the agency the ory which suggests that difference in the proportion of the companys shares owned by outsider shareholders causes differences in the voluntary disclosure level. This is because the companies with more outsider ownership are more likely to disclose more information than companies with less outsider ownership and also the demand for publicly available information is likely to increase (Wallace and Naser 1995).Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunthe, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found evidence consistent with this prediction.Many studies found negative rela tionship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.Naser et al. (2002) examined the affect of ownership on US companys disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.Ho and Wong (2001) found negative relationship between family ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level .2.4.5 Audit firm sizeAccording to Jensen and Meckling (1976) large audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports.In terms of size, audit firms can be divided into two large or small. Large audit firms are identified as being one of these Big Four (or Big Five or Six formerly) international auditing firms, and smaller audit firms are the rest the firms are more likely to choose a Big Six auditing firm. Such choice of audit firms signals to investors that the contents of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world while small firms are domestically hence the large audit firms have more capability to disclosure of the information and have higher reputation and power to affect the vol untary disclosure level related to the smaller audit firm (Alsaeed, 2006).Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosure and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didnt fine significant association.2.4.6 Industry sectorAccording Cook (1989) disclosure level is more likely to vary from one industry to the other due to the likelihood that leading firms operating in a particularind ustry could produce a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. Cooke (1992) found evidence that Japanese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982) Wallace (1987) Wallace et al. (1994) Raffournier (1995) Inchausti, (1997) Patton and Zelenka (1997) Naser (1998) Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found insignificant effect.Table 2.2 Summary of independent variables influence on voluntary disclosureStudyIndependent variablefindingsAkerlof (1970) ProfitabilityPositive relationshipSinghvi and Desai, (1971)ProfitabilityPositive relationshipJensen and Meckling, (1976)Debt ratio and audit firm sizePositive relationship with debt ratio and audit firm size.Firth, (1979)Firm size and audit firm sizePositive relations hip with debt ratio and audit firm size.Leftwich, Watts, and Zimmerman (1981)Ownership dispersionpositive relationship with ownership dispersionMcNally et al.(1982)Industry sectorInsignificant with industry sectorFama and Jensen (1983)Ownership dispersionpositive relationship with ownership dispersionWatts and Zimmerman (1983).Firm sizepositive relationship with firm sizeFoster, (1986)Firm size, profitabilitySignificant positive with firm size and found positive with profitability.Watts and Zimmerman (1986)Profitabilitypositive with profitabilityWallace (1987)Industry sectorInsignificant with industry sector.Cook (1989)Industry sectorPositive with industry sector.Bradbury (1992) Firm size and debt ratio.Significant positive with firm size and debt ratio.Richard, (1992) ProfitabilityPositive with profitability.Forker (1992) Audit firm sizePositive but insignificant with audit firm size.Craswell and Taylor (1992)Audit firm sizePositively significant with audit firm size.Cooke (1992)In dustry sectorpositive with industry sectorMckinnon and Dalimunthe, (1993)Firm size, debt ratio, ownership dispersion.Positive with firm size and ownership dispersion and negative with debt ratio.Hossain et al. (1994)Firm size, debt ratio, ownership dispersion and audit firm size.Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.Wallace et al. (1994)Industry sectorInsignificant with industry sector.Meek et al, (1995)Firm size, debt ratio, profitability. Positive with firm size and profitability whereas significant, negative with debt ratio.Hossain et al. (1995)Firm size and Debt ratioSignificant positive with firm size and debt ratio.Mitchell et al. (1995) Firm size and Debt ratio.Significant positive with firm size and debt ratio.Wallace and Naser (1995) Firm size, profitability, Ownership dispersionPositive with firm size, ownership dispersion andindustry sector but-,audit firm size and industry sector Negatively with profitability and audit firm size.Ahmed (1995)Firm size and audit firm sizePositive significant with firm size and audit firm size.Raffournier (1995)Profitability, audit firm size and industry sector.No significant with profitability and industry sector, but significant positive with audit firm sizeZarzeski (1996) Firm size and debt ratioPositive with firm size and debt ratioAitken et al. (1997) Firm size, Debt ratio and owner ship dispersionPositive with the firm size and ownership dispersion but negative with debt ratio.Inchausti (1997)Profitability, audit firm size and industry sector.Positive with profitability and significant positive with audit firm size and insignificant with industry sector.Patton and Zelenka (1997)Industry sectorInsignificant with industry sector.Naser (1998)Debt ratio and industry sector.Significant positive with debt ratio but insignificant with industry sector.Owusu-Ansah (1998),Industry sectorInsignificant with industry sector.Mahmood (1999)Audit firm sizeSignificant with audit firm size.Brennan and Hourigan, (2000)Firm size and debt ratio.Significant positive with firm size and significant negative with debt ratio.Gelb (2000)Ownership dispersionNegatively with Ownership dispersionDepoers (2000)Audit firm sizeNo significant with audit firm size.Naser and Alkhatib (2000)industry sectorInsignificant with industry sector.Ho and Wong (2001)Profitability, ownership dispersion and audit firm size.No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.Naser et al. (2002).Firm size, Profitability, ownership dispersion and audit firm size.Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.Eng and Mak (2002)ProfitabilityNo significant with profitabilityChau and Gray (2002)Ownership dispersionPositively with outside ownership dispersion.Camfferman and Cooke (2002)Profitability, audit firm size and industry sec tor