Voluntary Disclosure: Theories and Corporate Reporting

Introduction to Voluntary Disclosure

The law requires all companies to disclose their financial information, together with additional information, either in annual, half-yearly, or quarterly financial reports. The description that best fits such a legal requirement is a typical example of mandatory disclosure of information. Apart from mandatory disclosure, annual reports also contain voluntary disclosure of information. Notably, there are other opportunities available for voluntary disclosure, including conference calls, press releases, websites, and other corporate reports (Sharma, 2013). There are several definitions of voluntary disclosure, but this paper borrows from a definition postulated by a FASB committee, which defined voluntary disclosure as disclosures, mainly outside financial statements, that are not explicitly required by GAAP or an SEC rule.

In practice, the distinction between mandatory disclosure and voluntary disclosure is not always clear-cut. For instance, companies may be obligated by law to disclose information concerning environmental issues, yet the specific information required for disclosure may not be clearly defined. Owing to the definition provided by FASB, such disclosure requires a voluntary drive because the information that requires disclosure does not have a detailed description. It is possible to argue that there is an obligation to disclose the information, which suggests that disclosing is a mandatory practice. In addition, information disclosure qualifies as information publicity, and the motive is to publicize information on securities with respect to the method of providing stocks, listing on the market, and trading (Tian and Chen, 2009).

When companies issue securities publicly and execute the information disclosure system, they act in line with the requirements of modern securities markets. The disclosure system covers the whole process of securities' issue and circulation. Notably, prior to the issue of stocks, firms publicize stock-issuing introductions, listing announcements, interim reports, annual reports, and significant affairs reports, which primarily include the firm's operations and financial statements. Currently, voluntary disclosure is increasingly prominent in the securities market, primarily due to the interests of participants whose trading activities have led securities markets to identify a balance where full disclosure of information enables effective allocation of resources. Most importantly, compulsory disclosure of information suggests that relevant laws and rules clearly regulate the information disclosure obligations of listed firms.

In the case of voluntary disclosure, companies disclose information voluntarily as a way to protect the company's image, reassure investors, and avoid risks related to litigation. The aim of voluntary disclosure is to introduce and elaborate upon the companies' capabilities to investors, drive the fluidity of capital markets, decrease capital costs, and guarantee effective allocation of capital. Nevertheless, the development of the information disclosure system suggests that voluntary disclosure of information emerges after compulsory disclosure of information. In this context, voluntary disclosure appears to be an extension and complement of mandatory information disclosure. Historically, the two were treated as distinct concepts; however, relevant laws and regulations indicate that it is possible to transform them mutually.

In different economic, political, legal, and social settings, different states may face varied conditions in relation to voluntary disclosure, mainly because of differing relevant laws. Notably, compulsory disclosure can influence voluntary disclosure; although it cannot prevent the disclosure of invalid information (Sharma, 2013), it can restrain voluntary disclosure. Owing to this, it is possible for companies to adopt a partial disclosure strategy, which gives them the privilege of disclosing positive or negative news at their convenience. Compulsory disclosure and relevant market laws can influence voluntary disclosure in the following ways. First, they may reduce listed companies' voluntary disclosure, because if companies are required to disclose additional information, voluntary disclosure will increase costs incurred by the company owing to information processing, litigation risks, and loss of competitive advantage.

Theoretical Framework

Second, poor quality of compulsory disclosure and inadequate market laws may lead company managers to adopt voluntary disclosure to send signals to the market, hoping to receive positive feedback, which incentivizes them to disclose more information voluntarily. In addition, some scholars have studied the credibility of voluntary disclosures; the results suggest that alongside improvements in the quality of information in compulsory disclosure, the quality of information in voluntary disclosure will also improve. Furthermore, if the enforcement period is long and punishment is effective, the quality of information in compulsory disclosure can serve as a standard for evaluating voluntary disclosure, which will encourage company managers to provide valid information voluntarily (Tian and Chen, 2009).

There is considerable literature on corporate social responsibility. Some works examine the relationship between social performance and social disclosure, social performance and economic performance, and social disclosure and economic performance. The main challenge in these studies is the conceptualization of the central issues, because there is no consensus on methodology and results when studies are compared. Therefore, it is not apparent whether it is feasible to apply similar models to both financial disclosure and social disclosure. Nevertheless, the nature of the relationships between social disclosures, economic performance, and social performance requires deeper study, taking into consideration the strategies of different companies and focusing on how they manage the demands of their stakeholders. Studies on social disclosure that utilize economic theory have remained on the periphery of accounting theory. Political studies have applied both legitimacy theory and stakeholder theory; however, in most cases legitimacy theory predominates compared to stakeholder theory. In addition, the concept of theory in voluntary disclosure research is central to authors of substantial bodies of literature (Orij, 2007).

Stakeholder Theory

There have been considerable debates concerning the accountability of a given firm — specifically, whether a company's liability should extend beyond shareholders to other parties. Some theories, based on the primacy of shareholder interests, ignore the non-shareholder parties with a stake in the company's activities. If managers can maintain a good relationship with their stakeholders by improving the quality of disclosures to them, this will work well in generating a valuable reputation. Stakeholders refer to individuals or groups of people who can affect, or be affected by, the company's objectives. They include shareholders, employees, customers, suppliers, competitors, lenders, communities, government, and various groups such as environmentalists, media, and consumer advocates (Oliveira, Rodrigues and Craig, 2013).

Stakeholder theory is a system-oriented theory because a company is part of society and represents the broader social system. The company operates within this society and seeks to achieve positive accountability to its stakeholders from a strategic perspective. The theory has an ethical dimension, which aims to prompt managers to recognize the legitimacy of different stakeholder interests. It also has a managerial branch that stresses the need to manage stakeholders actively. This means that the more crucial stakeholder resources are to the continued growth of a company, the greater the expectation that the company will address those stakeholders' demands. Most importantly, the relationships between companies and their stakeholders are vital because stakeholders are sources of wealth.

One way that companies strengthen stakeholder relationships is by voluntarily disclosing company information. Sound stakeholder relationships are valuable because they assist the company in surviving and prospering. On the other hand, intangibles and intellectual capital are valuable because they help the company achieve a competitive advantage; however, it is difficult to measure, categorize, and define these two aspects in financial statements. Owing to this, scholars suggest that disclosure should extend beyond short-term financial measures to include non-financial measurements. From the stakeholder perspective, corporate disclosure helps build the relationship between the company and its stakeholders, because it is a strategy that can help manage or address the demands of diverse stakeholders (Oliveira, Rodrigues and Craig, 2013).

Many companies that have developed corporate reporting place a stakeholder perspective at its center. These include intellectual capital reporting, triple bottom line reporting, social and environmental reporting, sustainability reporting, and integrated reporting, which combines financial, intellectual capital, and sustainability issues. However, some corporations have advocated guidelines promoting voluntary disclosure of both financial and non-financial information (Sharma, 2013) regarding intangibles and capital. In this context, it is likely that companies expect sound stakeholder relations to enhance their reputation by differentiating them from competitors. These valuable intangible resources have the capacity to reinforce and strengthen relations with all stakeholders.

Conclusion

When the law requires companies to disclose their information, this constitutes mandatory disclosure. Firms can disclose information in various ways, including annual reports, websites, and press releases. This paper demonstrates that the practice of information disclosure is strategic because it helps organizations gain legitimacy, develop sound relationships with stakeholders, and achieve competitive advantage over other firms in the same industry (Bagnoli and Watts, 2005). Several theories have attempted to explain voluntary disclosure, but among them, legitimacy theory is the most widely applied. Research suggests that firms do not disclose their information primarily as an act of accountability; rather, they do so to gain legitimacy from diverse stakeholders.