Corporate Disclosure Practices in Indian Software Industry
Transcript of Corporate Disclosure Practices in Indian Software Industry
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AN EMPIRICAL INVESTIGATION OF THECORPORATE DISCLOSURE PRACTICES IN
INDIAN SOFTWARE INDUSTRY
Poonam Mahajan
Junior Research Fellow
Department of Commerce & Business Management
Guru Nanak Dev University, [email protected]
+91-98159-66291
Dr. Subhash Chander
Professor
Department of Commerce & Business Management
Guru Nanak Dev University, [email protected]
+91-98140-01493
mailto:[email protected]:[email protected]:[email protected]:[email protected] -
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AN EMPIRICAL INVESTIGATION OF THE CORPORATE
DISCLOSURE PRACTICES IN INDIAN SOFTWARE INDUSTRY
ABSTRACT
This study empirically examines the quantum of corporate disclosure and itsassociation with corporate attributes, such as, age, size, profitability, leverage, listing status,
shareholding pattern, audit firm, and residential status of a company. It is based on a sample
of 50 companies from the software industry drawn from PROWESS database of the Centerfor Monitoring Indian Economy (CMIE) for the year 2004-05 on the basis of market
capitalization as on march, 31, 2005. An unweighted disclosure index consisting of 90 items
of information was constructed, which was used to compute the disclosure score of eachselected company. Pearson correlation product moment matrix was used to check the
multicolleanarity between independent variables. Multiple regression analysis revealed that
significant association exists between size, profitability, and audit firm and disclosure level.However, no significant association was found between disclosure score and age, listing
status, leverage, shareholding pattern, and residential status of a company.
INTRODUCTION
Corporate disclosure and its determinant analysis has become a thrust area of research for
various researchers and academicians. Many researchers have contributed towards exploration
of this area of research. Still, many questions arise in the mind of an analyst or researcher as
to why do different firms in the same industry has varying disclosure practices? The need is to
explore the area why extent of information is differing among industries or in same industry?
Day by day the concept of disclosure is also changing. Now, it does not mean disclosing
immaterial, irrelevant, vague information. Now emphasis is given to the qualitative aspect of
information which is relevant to informed investors for making economic decisions. The main
reason for this emphasis is that full and complete disclosure is the cornerstone to protect the
shareholders rights. Shareholders are the owners of a company and they should be informed
about the working prospects of a company. Only through full and complete disclosure canshareholders feel confident that the firm to which they have given their hard earned money is
being operated with their best interests in mind.
Forward-thinking companies report both financial and regulatory (operational) data to key
external and internal constituents. They monitor market and stakeholder reactions to the
reported information and then adapt their disclosure in response to such feedback as well as
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other market, regulatory, and social developments. In return for such transparent, proactive
reporting, the companies enjoy benefits such as stronger stakeholder relationships, greater
support throughout all operations for reporting initiatives, larger following of investment
analysts, easier access to capital, and lower reputation risk. (Price Waterhouse Coopers, 2005,
p. 3).
With globalization of Indian economy and subsequent entry of foreign institutional investors,
there has been demand for more disciplined financial reporting (Mathew, 1999, p.373).
Globalization of capital markets has been accompanied by calls for globalization of financial
reporting (Healy and Palepu, 2000, p. 42). The challenges faced in the corporate disclosure
are now greater than ever (Hutton, 2004, p 8). It has become a precondition for the proper
working of the capital markets. It may be viewed as a special protection instrument that
investors and creditors (banks in particular) have at their disposal to protect their interest
(Farina, 2005, p.6). Better disclosure has a positive impact on the efficient functioning of the
capital markets (Patel, Dallas, 2002, p. 5). It is vital for the optimum decision of investors and
for a stable capital market (Datt, 1999, p. 660). Greater transparency and better disclosure
keep corporate stakeholders better informed about the way company is being managed.
The developing nations in need of external finance both from domestic as well as foreign
sources are under a great pressure to improve the quality of reporting practices for their
economic growth and well being. Todays complex business environment has increased the
pressure on companies to be more transparent in their financial reporting.
CONCEPT OF DISCLOSURE
The subject of corporate disclosure which is also known as Financial Reporting,
Corporate Reporting and Disclosure has increasingly gained significance during the recent
years. A lot of changes have taken place in economic environment of the country and the
corporate sector in particular, due to market oriented policies introduced by the Government
since 1991 and emergence of new multilateral trading system under the aegis of World Trade
Organization (Committee report on companies bill (1997), 2002, p. 4).
The term disclosure can be defined in different ways. Kohlers Dictionary for Accountants
defines it as an explanation, or exhibits, attached to a financial statement, or embodied in a
report (e.g. auditor report) containing a fact, opinion or detail required or helpful in the
interpretation of the statement or report (cooper and Ijiri, 1984, p.176). It means the
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communication of material and relevant facts concerning financial position and the results of
the reporting concerns to various users (Meigs, Johnson and Meigs, 1977, p. 493). The term
Disclosure refers to the fact of disclosing any information concerning a company, whether
on voluntary or on statutory basis (Farina, 2005, p. 15).
Disclosure is a process of providing certain financial information to a wide variety of users,
relevant to their data needs, concerning the performance of an entity (Datt, 1999, p. 660). The
extent of information disclosure, its adequacy, relevance and reliability are important
characteristics of financial reporting practices prevalent in a country. So, in nutshell,
disclosure means to convey financial and non-financial information to various users that assist
them in taking economic and financial decision of better quality.
SIGNIFICANCE OF DISCLOSURE
The need for full disclosure is irrefutable in a free enterprise economy (Chander, 1992, p.4).
Investors have a very real interest in what companies disclose, in the trustworthiness of the
disclosure, and in how and when they disclose (Litan, 2003, p. 8). Better disclosure enhances
the quality and level of monitoring of firm by shareholders and strengthens corporate
governance. Over the years, the information provided by business organizations has increased
in quantity, quality, variety and timeliness (Narayanswamy, 2005, p.55). The working groups
on Indian Companies Act stated that other things being equal, greater the quality of
disclosure, the more loyal are a companys shareholders (CII report, 1998, p. 7).
Besides investors, financial disclosure is significant from the point of view of large number of
other potential users, these include in addition to present and future investors, employees,
suppliers, creditors, management, customers, financial analysts, advisors, brokers,
underwriters, stock exchange authorities, legislators, financial press, reporting agencies, labor
unions, trade associations, business researchers, academicians and above all public at large
(Datt, 1999, p. 660).
The financial sector and capital market reforms over last one decade have resulted in
substantial growth in the capital market and at the same time brought transparency in the its
operations (Committee report on companies bill (1997), 2002, p. 23). Indian companies,
banks and financial institutions can no longer afford to ignore better corporate practices. As
India gets integrated in the world market, Indian as well as international investors demand
greater disclosure, more transparent explanation for major decisions and better shareholder
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value (CII report, 1998, p 1). It is the financial reporting behavior of publicly listed companies
that is of primary importance to international portfolio investors and creditors (Craig and
Diga, 1998, p.248).
A communication revolution is on the anvil. Published annual reports are used as a medium
for communicating both quantitative and qualitative corporate information to shareholders,
potential shareholders (investors) and other users. Although publication of an annual report is
a statutory requirement, companies normally voluntarily disclose information in excess of the
mandatory requirements. Company management recognizes that there are economic benefits
to be gained from a well-managed disclosure policy. Thus, information disclosure in itself is a
strategic tool, which enhances a companys ability to raise capital at the lowest possible cost
(Healy and Palepu, 1993; Lev, 1992).
Thus, disclosure is significant from the point of view of users, companies and the nation on
the whole. It reduces uncertainty in the market and helps the users in selecting the best
portfolio for their investments. So, corporate disclosure is an essential element for the
efficient functioning of the capital market.
REVIEW OF LITERATURE
Since, the 1960s there has been an increased interest in accounting disclosure studies. A
number of studies have been conducted the world over to see the impact of company specific
attributes on the extent of the disclosure practices of the companies. A synoptic view of these
studies has been presented in table 1:
Table 1. Studies on the extent of disclosure and its association with corporate attributes
Author Period
of study
Sample
size/Countr
y of the
study
No. of
disclosure
items in
the
disclosure
index
Independent
variables
Statistical
techniques
used
Significant
explanatory
variables
Cerf (1961) 1960 527
USA
31 Size, Listing
Status, andprofitability
Regression
Analysis
Size, Listing Status
Singhvi (1968) 1963-1965
45India
34 Size, rate of return,earnings margin,audit firm, type ofmanagement,number ofstockholders
Univariate Size, management,number ofstockholders
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Singhvi andDesai (1971)
1965 155USA
34 Size, number of shareholders,listing status, sizeof auditing firm,rate of return andearnings margin
Univariate &Multivariate.
Listing status
Buzby(1974)
1970-1971
88USA
39 No variablesidentified
Mean and t-test
No adequatedisclosure by smalland medium sizedfirms in sample.
Buzby (1975) 1970-1971
88USA
38 Size, listing status Univariate Size
Barrett(1976)
1963-1972
103USA, UK,
France,Germany,Sweden,
Japan, andNetherlands
17 No variablesidentified
DescriptiveStatistics
Disclosure improvedthroughout years ofstudy. Wide variancesexist betweendisclosure levels ofUSA, UK from otherfive nations.
Stanga (1976) 1972 -1973 80USA 79 Size, industry Univariate &Multivariate Size, industry
Firth (1979) 1976 180UK
48 Size, listing status,audit firm
Univariate Size, listing status
McNally et al.(1982)
1979 103New
Zealand
41 size, rate of return,growth, audit firm,industry
Univariate Size
Firth (1984) 1977 180UK
48 Stock market risk Linear regression
No significantrelation
Garg(1986)
1979 51India
Notspecified
No variablesidentified
DescriptiveStatistics
Extent of statutorydisclosure is morethan voluntarydisclosure
Chow andWong-Boren(1987)
1982 52Mexico 24 Size, leverage,proportion of assetsin place
Multivariate(linearregression)
Size
Cooke (1989) 1985 90Sweden
224 Listing status,parent companyrelationship, size,number ofshareholders
Multivariate,threeregressionmodels
Listing status, size
Tai et al.(1990)
1987 76Hong Kong
11 Size, industry,audit firm
Univariate Size
Cooke (1991) 1988 48Japan
106 Size, listing status,industry
Univariate &Multivariate.
Size
Chander
(1992)
1981-
1985
50 (Public
& Privatesector each)India
92
(public),98(private)
Size, profitability,
age of a company,and nature ofindustry
Multivariate Size, Profitability
Cooke (1992) 1988 35Japan
165 Size, listing status,industry
Multivariate Size, listing status,industry
Cooke (1993) 1988 48Japan
195 Listing status Univariate Listing status
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Malone et al.(1993)
1986 125USA
129 Size, listing status,leverage,profitability, auditfirm
Stepwiseregressionmodel
Listing status,leverage, size
Ahmed andNicholls
(1994)
1988 63Bangladesh
94 Size, leverage,audit firm,
multinationality,qualification of thechief accountant
Univariate &Multivariate
Multinationality,accountants
qualification, size
Hossain et al .(1994)
1991 67Malaysia
78 Size, ownershipstructure, leverage,assets in place,audit firm, listingstatus
Univariate &Multivariate
Size, ownershipstructure, listingstatus
Wallace et al.(1994)
1991 50Spain
16 Size, listing status,leverage,profitability, auditfirm, liquidity
Multivariate Size (+), listing status(+), liquidity (-)
Ahmed (1996) 1987-88,
1992-93
118Bangladesh
150 Size, leverage,audit firm, relationwith parent,qualification ofaccountants
RegressionAnalysis
Audit,Multinationality
Hossain et al.(1995)
1991 55New
Zealand
95 Size, leverage,assets in place,audit firm, listingstatus
Multivariate Size, leverage, listingstatus
Meek et al.(1995)
1994 116 (US)64 (UK)
16(France)
12(Germany)
18(Netherland)
85 Size, countryorigin, industries,leverage,
multinationality,profitability, listingstatus
Linearregression
Size, country, listingstatus
Raffournier(1995)
1991 161Switzerland
30 Company size,leverage,profitability,ownershipstructure,internationality,auditor size,industry type
Univariate &Multiple linearregressions
Size, internationality
Wallace and
Nasser (1995)
1991 80
HongKong
142 Foreign registered
office, profitmargin, earningsreturn, liquidityratio, leverage,size, outsideshareowners,conglomerates,audit firm
Multivariate Size,
conglomerates, andprofits.
Marston andRobson (1997)
1983-1990
29India
17 Size, change intime
Univariate Size
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Giner (1997) 1989-91 138Spain
50 Size, listing status,profitability,leverage, auditfirm, industry,dividend payout
Multivariate Size, auditing, listingstatus, andprofitability
Patton and
Zelenka(1997)
1993 50
CzechRepublic
66 Size, performance,
risk factors, othermonitoring factors(listing status, bigsix auditing firms,industry)
Univariate &
Multiple linearregressions
Type of auditor,
number of employees
Owusu-Ansah(1998)
1994 49Zimbabwe
214 Size, ownership,age, multinationalaffiliation,profitability, audit,industry, liquidity
Multivariate Size, ownership, age,multinationalaffiliationprofitability
Chen andJaggi (2000)
1993,1994
87HongKong
142 Independent non-executive directors,family control,profitability,leverage, size,audit firm
OLSregression
Independent non-executive directors
Depoers(2000)
1995 102France
65 Firm size, foreignactivity, ownershipstructure, leverage,size of auditing,proprietary costsrelated tocompetition, laborpressure
Multiple linearregression.
Foreign activity andsize
Gelb andZerowin(2000)
1980-1993
82USA
AIMR-FAFdisclosurescores
Informativeness ofstock prices
Multipleregressionmodel ofCollins,Kothari,Shanken, andSloan (1994)
Stock prices
Jaggi and Low(2000)
1991 28(from 28countries)
90 Cultural, legal andfinancial variables
Univariate &Multivariate
Common law, culture
Ho and Wong(2001)
1998 98Hong Kong
20 Independent non-executive directors,audit committee,dominantpersonalities,family + control
variables
Multivariate(linearregression)
Audit committee,family
Bujaki andMcConomy(2002)
1997 272Canada
25 Size, Financialcondition, leverage,share issue,unrelated directors,regulatedindustries.
Linearregression
Unrelated directors,leverage
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Chau and Gray(2002)
1997 62Hong KongSingapore
110 Ownershipstructure, size,leverage, auditfirm, profitability,multinationalty,industry
Multivariate Ownership structure
Ferguson et al.(2002)
1995/96 142Hong Kong
93 Firm type, size,leverage, industry,listing status
Univariate &Multivariate
Firm type, leverage(type of disclosure)
Haniffa andCooke (2002)
1995 167Malaysia
65 Corporategovernance,cultural and firmspecific
Linearregression
Family memberssitting on board, non-executive chairman
ArchambaultandArchambault(2003)
1992,1993
621(From 33countries)
85 Cultural, national,financial systems
Multivariate Many factors
Eng and Mak
(2003)
1995 158
Singapore
84 Ownership
structure, boardcomposition
OLS
regression
Lower managerial
ownership,governmentownership, outsidedirectors, lower debt
Cahan,Rahman andPerera (2005)
1998 or1999
216(From 17Countries)
Botosans(1997)index
Globaldiversification
OLSregression
Globaldiversification,number of analystssize
Ahmed(2005)
2002 100(non
financiallisted
companies)India
12 Industry type Descriptivestatistics
Level of reportingvoluntary informationis low but variabilityin disclosure is wideamong all sectors inindustry.
Ahmed(2005)
2002 100(non
financiallisted
companies)Bangladesh
148 Companys tradingcategory
Descriptivestatistics
Companys tradingcategory
Alsaeed(2005)
2003 40SaudiArabia
20 Size of firm, age,debt ratio,ownershipdispersion, profitmargin, return onequity, liquidityratio, industry type,audit firm size.
Multivariate Size of firm
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Hossain andTaylor(2006)
1992-1993
261Bangladesh,India, andPakistan
94 Size, profitability,debt/equity ratio,presence ofdebenture in debt,international linkof the audit firm,
industry type,subsidiary of amultinationalcompany.
Multivariate Size (total assets),subsidiary of amultinationalcompany(Bangladesh),Presence of debenture
in debt, industry type,Size (total sales),profitability (ROA)(India) and assets-in-place, size (totalassets), presence ofdebenture in debt(Pakistan)
A perusal of review of literature reveals that the association between the level or quality of
disclosure in corporate annual reports and corporate attributes has been examined in several
countries using a disclosure index approach. The disclosure indices constructed to measure
the quality and extent of disclosure varies considerably among the different studies, although
all share the basic idea of usefulness for the investment decision process. In studies either
voluntary or mandatory or both mandatory and voluntary information has been considered.
There are some researchers who have measured the extent of disclosure longitudinally to
determine whether quality of disclosure has improved over time. Most studies are country
specific, although there are studies, which have measured the extent of disclosure among
countries. Most disclosure studies have focused on only one year. The numbers of the
companies included in the samples in these studies have varied from 28 to 621. No disclosure
study other than Malone et al. (1993) was industry-specific. The number of corporate
attributes that were examined by researchers as a predictor of the level of disclosure has
ranged from 2 to 11.
The companies attribute which has proved most popular determinant of corporate disclosure
is corporate size as measured by assets, sales and market capitalization. The size of a
company has been regularly found to be significantly associated with the extent of disclosurein majority of the studies. This has been followed by profitability ratios, listing status and
auditor type. A little used variable is dividend pay out ratio. Some studies have used weighted
disclosure indices (weights were assigned by the researchers subjectively or weights were
based on preferences elicited by the researchers from surveys of a group or groups of users),
whereas other researchers used unweighted disclosure indices.
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Most of the researchers have used ordinary least square (OLS) regression to establish the
relationship between the extent of disclosure and company attributes, while other researchers
have used a stepwise (OLS) regression. However, Lang and lundholm (1993), Wallace, Naser
and Mora (1994) and Wallace and Naser (1995) used rank (OLS) regression to cater for the
monotonic behavior of disclosure indexes following a change in some independent variables.
The variety of methods used and results produced are related.
The changing feature of prior studies, such as the number of the firms included in the sample,
the type and the number of firm characteristics examined, the number of information items
that formed the basis of the set of disclosure indices as a dependent variable, the different
statistical methodologies used to analyze the data and the different settings (i.e. countries) of
the study, have jointly contributed to the mixed results from these studies (Wallace, Naser and
Mora, 1994, p. 43).
NEED AND OBJECTIVES OF THE STUDY
The foregoing review of literature reveals that some studies have been conducted to analyze
the various aspects of corporate disclosure practices in India (For details, see Singhvi, 1968;
Garg, 1986; Chander, 1992; Marston & Robson, 1997; Ahmed, 2005; and Hossain and
Taylor, 2006). Hardly any study has been carried out to explore the research on industry
specific disclosure practices in India. This has been taken as only one of the corporateattribute affecting the disclosure practices of firms in a few studies. There has been a maiden
study carried out by Malone et al. (1993) in USA to study the disclosure practices in oil and
gas industry. Hence, the need to carry out this study was felt.
The following are the objectives of this study:
1. To study the extent of disclosure in annual reports of selected companies of Indian
software industry.
2. To test the impact of various corporate attributes such as- age, size, profitability,
market capitalization, listing status, leverage, ownership pattern, residential status of a
company, and audit firm size on the reporting practices of the firms in software
industry.
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DATA BASE AND METHODOLOGY
The study has been carried out to analyze the disclosure practices of Indian software industry.
This industry has been chosen because India is considered to be the most favored destination
for offshore IT service delivery. Consequently, global players are also stepping up their
presence in India, not only to use the local delivery centers to service their offshore business
but also to target the fast-paced Indian IT services market. (Annual report of Satyam
Computers Ltd., 2005, p. 40). India is a premiere destination for off shoring IT services.
According to NASSCOMs Strategic Review report 2005, the total Indian IT enabled services
export market is projected to grow to $ 48 billion by fiscal 2009. According to the June 2004
Gartner Strategic Analysis Report, titled India Maintains Its Offshore Leading Position,
India will remain the dominant offshore service provider through 2008. According to this
report, no other nation will have a double-digit share of global offshore service revenue
(Annual report of WIPRO Ltd., 2005, p. 150). Directionally, the overall trends in Indian
software industrys services have remained unchanged in fiscal 2005 as compared to fiscal
2004 (Annual report of Satyam Computers Ltd., 2005, p.40).
Data Collection
The universe of study constitutes the companies representing software industry sector,
selected on the basis of market capitalization, as on March 31, 2005 from PROWESS, the
database of CMIE. There were 394 companies representing software industry, to which
following filters were applied:
1. The companies whose annual report for the year 2004-05 was not available were
eliminated.
2. The company whose information with regard to market capitalization as on March 31,
2005 was not available was also eliminated.
3. The companies, whose information with regard to any financial or non-financial
variable was not available, were also eliminated.
4. The companies with financial year-end September 31, 2005 were also eliminated.
Thus, as a result of these filters, out of 394 companies, a resultant sample size of 50
companies was selected and studied.
The annual reports of the selected companies for the year 2004-05 were the major source of
data collection. All the selected companies were requested to mail their annual reports. Out of
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which only 15 companies responded. The annual reports of some companies were
downloaded from the websites of respective companies. The annual reports of companies,
which were not available on their websites, were downloaded from website www.sebi.gov.in.
The annual reports of financial year 2004-05 were chosen because they were relatively more
recent and easier to obtain. The data related to the corporate attributes was taken from
PROWESS database of the Center for Monitoring Indian Economy (CMIE).
SPSS version 10.05 was used for application of various tests.
Disclosure Index Construction
A disclosure index is taken 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. Annual financial report is taken as one of the
best media for dissemination of useful information relevant for economic decision making to
investor. The quantum of disclosure in the annual reports of the Indian software industry has
been studied by framing a disclosure index comprising of 90 items of information. The items
of information for constructing an index of disclosure was selected on the basis of review of
literature on corporate disclosure, criteria laid down by ICAI for selecting the best presented
published accounts and scanning the annual reports of the companies which have been
awarded by ICAI for their best presented published accounts in 2005.
The unweighted index was used for the purpose of present study. The contents of each annual
report were compared to items listed in disclosure index and coded as 1 if disclosed or 0 if not
disclosed. For each item, a disclosure index was computed as the ratio of the actual score
given to the firm divided by maximum score. Empirical studies also provide substantial
evidence in favor of usage of unweighted disclosure index (For details see, Cooke, 1989;
1992; Tai et al., 1990; Chander, 1992; Ahmed and Nicholas, 1994; Hossain et al., 1994;
Wallace et al., 1994; Hossain et al., 1995; Chen and Jaggi, 2000; and Archambault and
Archambault, 2003). Ahmed and Courtis (1999, p.36) write that the approach based on
unweighted items has become the norm in annual report studies, because it reduces
subjectivity. The disclosure score for each company has been calculated as follows:
DISCLOSURE SCORE (%) = (Actual Disclosure/Total Possible Disclosure) x 100
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Model Development
In order to study the impact of various corporate attributes, Multiple Regression Analysis has
been used. The model employed to test the relationship between specific-related variables and
level of disclosure is presented below:
Y = 0 + 1X1 + 2 X2 + 3 X3 + 4 X4 + 5 X5 + 6 X6 + 7 X7 + 8 X8 +
Where Y = Disclosure score;
X1 = Age of a company (from year of incorporation till March 2005);
X2 = Listing status of a company (A group company=1, others=0);
X3 = Shareholding Pattern (Promoters share in shareholding);
X4 = Leverage (Debt to Equity ratio);
X5 = Size of a Company;
X6 = Profitability of a Company;X7 = Audit firm size ( Big 6 audit firms = 1 & Others= 0);
X8 = Residential status of company (Foreign=1, Indian=0);
= Slopes of the independent variables while 0 is a constant or thevalue of Y when all values of X are zero;
= The error term, normally distributed about a mean of 0
Hypotheses Development
1. Size of the company
There are several studies which have found a significant association between the size of the
company and the extent of disclosure in the corporate annual reports in both developed and
developing nations (Singhvi and Desai, 1971; Buzby, 1974; Chow and Wong-Boren, 1987;
Cooke, 1989; Wallace, Naser and Mora, 1994). However Stanga (1976) found that the size of
the company did not significantly explain an association with the level of disclosure and its
variability.
Larger companies may be hypothesized to disclose more information in their company annual
reports than smaller companies for a variety of reasons. Firstly, the cost of disseminating and
accumulating detailed information may be relatively low for the larger corporation than the
smaller corporations (Cerf, 1961; Singhvi & Desai, 1971; Buzby, 1975; and Firth, 1979) and
large companies have the resources and expertise to produce more information in their
companys annual reports (Ahmed & Nicholls, 1994; and Hossain & Adams, 1995) and
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hence, little extra cost may be incurred to increase disclosure. In addition, larger corporations
may collect more information to be used for their internal management systems.
Secondly, larger firms tend to go to the stock market for financing more often than those
smaller firms and as a result may disclose more information in their annual reports for their
own interest. Thirdly, Wallace and Naser (1995) state the impacts that large companies can
have on the economy can be considerable as these companies account for a significant
proportion of goods and services produced, consumption of raw materials and number of
people employed. As such, large companies are likely to come under the scrutiny of various
interested parties and hence tend to disclose adequate information in their annual reports.
Fourthly, smaller firms may feel that their information disclosure activities could endanger
their competitive oppositions with respect to other larger firms in their industry. As a result,
smaller companies may tend to disclose less information than large companies.
Fifthly, it has been suggested that the annual reports of large corporation are more likely to be
scrutinized by financial analysts than those of smaller firms and investors may interpret non-
disclosure as bad news, which could adversely affect firm value. So, larger firms may have an
incentive to disclose more information than smaller firms.
Sixthly, larger corporations are likely to have a higher level of internal reporting to keep
senior management informed and therefore are likely to have relevant information available
(Cerf, 1961; Buzby, 1975; and Owusu-Ansah, 1998). Cerf (1961), however, notes that the
accumulation of such information is no guarantee that it will be presented in the annual report.
Finally, Firth (1979) argued that large firms tend to be in the public eye and attract more
interest from government bodies, and thus may disclose more information to enhance their
reputation and public image on one hand and to allay public criticism and government
intervention in their affairs on the other hand. This is analogous to arguments concerning
political visibility put forward by Watts and Zimmerman (1986) although the latter authors
are concerned not with disclosure but the choice of accounting policies.
There are several measures of size available. In this study, sales turnover, total assets, and
market capitalization are used as surrogates of a companys size. The foregoing discussions
lead to development of the following hypothesis:
H1: The size of a company as measured by assets, or sales, or market capitalization has a
positive impact on its disclosure score.
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2. Profitability of a company
Profitability has also been used by number of researcher as an explanatory variable for
differences in disclosure levels. Companies having higher profitability may disclose more
information in their corporate annual reports than the companies with lower profitability (or
losses) for a number of reasons. Firstly, if the profitability of a company is high, management
may disclose more detailed information in their corporate annual reports in order to
experience the comfort of communicating it, as it is a good news. On the other hand, if
profitability is low, management may disclose less information in order to cover up the
reasons for losses or lower profits. However, Cerf (1961) postulates that a company that is
less profitable may disclose more information to explain the reasons for the lower
profitability. The companies are interested in keeping the market informed to avoid the under
valuation of their shares. Secondly, for profitable companies, if the rate of return on
investment is more than the industry average, the management of a company has an incentive
to communicate more information, which is favorable to it as the basis of explanation of good
news and is likely to disclose more information in their corporate annual reports as a result.
Wallace and Naser (1995) argue that a profitable company is more likely to signal its good
performance to the market by disclosing more information in its annual report.
The empirical studies, however found mixed results. Among these researchers, Singhvi
(1967); Singhvi and Desai (1971); Wallace (1987); Wallace, Mora and Naser (1994); Wallace
and Naser (1995); and Raffournier (1995); found a positive association between profitability
and the extent of disclosure whereas Belkaoui and Kahl (1978) found a negative association
between variables. Spero (1979) found that there existed a positive association for French
companies and no significant association for the British and Swedish companies in that study.
Others, (McNally et al., 1982; Raffournier, 1995; and Owusu-Ansah, 1998) found no
significant relationship.
Researchers have used a number of measures to determine the associations between
profitability and disclosure levels. In the present study, return on assets, returns on sales,
return on net worth, and return on capital employed have been used as a determinant of
measuring the association between profitability and level of disclosure. The following specific
hypotheses have been formulated and tested:
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H2: The profitability of a company as measured by ROA, or ROS, or ROCE, or RONW has a
positive impact on its disclosure score.
3. Leverage of a company
Several studies investigated the relationship between leverage (book value of debt to
shareholders equity or book value of debt to total assets) and disclosure, with the general
view that companies with a higher level of leverage disclose more information. The general
agency relationship can also be applied to the relationship between managers and debt
providers. Debt providers may be concerned about possible wealth transfers to shareholders;
that is, managers are more likely to favor the interests of shareholders to the detriments of the
providers of debt (Francis & Wilson, 1988). Ahmed (1996) suggests that the agency costs of
debt are higher for companies with more debt in their capital structure and an increased level
of disclosure may reduce these costs. While increased disclosure may not necessarily be part
of a contractual agreement. Wallace et al., (1994) opine that a company with a higher gearing
level has a greater obligation to satisfy the needs of its long-term creditors for information and
may therefore provide more information in its annual reports than a more lowly geared
company. However, the empirical evidence has generally not supported this theory (e.g.
Chow & Wong-Boren, 1987; Wallace et al., 1994; Hossain & Adams, 1995; Raffournier,
1995; Wallace & Naser, 1995). A possible explanation for these findings might be that debt
holders are in a position to demand additional information other than that contained in the
annual report and are therefore not as reliant on the disclosures made in the annual report. As
these previous studies have considered different countries and utilized differing methods,
there is a value in considering leverage in this study. Therefore, the following hypothesis is
tested in this study:
H3: The leverage of a company has a positive impact on its disclosure score.
The Debt to Total Equity has been used as a surrogate to measure the leverage of a company
in the present study.
4. Audit Firm Size
A number of studies test the relationship between audit firm size and the level of disclosure.
Large audit firms are widely scattered across the world, while small audit firms operate
domestically. The classification of audit firms into two groups draws on the assumption that
large firms have more concern for their reputation and, therefore, are more willing to
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associate with firms that disclose more information in their published financial reports. On the
other hand, small audit firms do not possess the power to influence the disclosure practices of
their clients. Rather, they attempt to meet the needs of their clients in order to retain them
(Firth, 1979; Wallace and Naser, 1995). Empirical evidence on the relationship between audit
firm size and the disclosure extent is rather ambiguous. Naser et al. (2002) observed a
positively significant relationship. Wallace et al. (1994) found it positive but insignificant. In
contrast, Wallace and Naser (1995) noticed a significantly negative relationship between the
disclosure level and firm size. Therefore, the following hypothesis has been formulated and
tested in this study:
H4: The audit firm size of a company has a positive impact on its disclosure score.
Audit firms of 394 companies from software industry (PROWESS) were divided into large
(Big 6: Price Waterhouse, A F Furguson, S B Bilimoria, S R Batliboi, Delloitte, Haskins and
Sells, B S R & Co.,) and small firms (other than above Big 6). This variable has been used as
a dummy. The companies being audited by Big 6 audit firms were assigned 1 and others 0.
5. Age of a Firm
Camferrman and Cooke (2002) identified a number of new variables, such as the age of a
company to be investigated by future studies. The rationale for selecting this variable lies in
the possibility that old firms might have improved their financial reporting practices over
time. The older the firm, the scope for disclosure also broadens. It helps in understanding
variations among disclosure practices of different firms in same industry. Therefore, the
above arguments led to the formulation of following hypotheses:
H5: The age of a firm has a positive impact on its disclosure score.
The age of a firm is computed from the year of its incorporation till March 31, 2005.
6. Residential status of a firm
Subsidiaries of multinational corporations operating in developing countries are expected to
disclose more information and observe higher standards of reporting for a number of reasons;
Firstly, they have to comply with the regulations of not only their host country but also the
parent company where substantially higher standards of reporting and accounting are
maintained. Secondly, they are usually equipped with more advanced accounting software
tools, efficient audit staff, competent and efficient management and staff, and so, have the
potential to disclose more information without any incremental processing costs. Thirdly, they
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are under closer scrutiny of various political and pressure groups within the host country that
view them as sources of economic exploitation and agents of imperialist power (Ahmed and
Nicholls, 1994). Hence, they have an incentive to disclose more information in order to avert
any pressure for excessive control for exploitation.
Wallace (1987) and Ahmed and Nicholls (1994) used multinational company influence as an
explanatory variable in developing their models and the latter found it to be the most
significant variable explaining disclosure levels. Therefore, the following hypothesis has been
formulated and tested in this study:
H6: The residential status of a company has a positive impact on its disclosure score.
The influence of residential status is operationalized by means of dummy variable, with 1 for
multinational companies and 0 for domestic companies.
7. Listing Status of a firm
The listing status of a firm also influences the disclosure level of that firm. Every Indian
company listed on a stock exchange has to comply with its listing agreement. The companies
whose shares are actively traded have always been scrutinized sharply by the market as a
whole and investors in particular. Empirical evidence also suggests a significant association
between disclosure level and the listing status of a firm (Singhvi and Desai, 1971; Cooke,
1989; Cooke, 1992; Malone et al., 1993; and Wallace et al., 1994). So, the above discussions
led to the formulation and testing of the following hypothesis:
H7: The listing status of a firm has a positive impact on its disclosure score.
The companies trading on stock exchanges in India have been categorized as category A,
B1, B2, S, and T. The impact of listing status of a firm on extent of disclosure level has
been examined by introducing dummy variable, with 1 if firm falls under A category and 0
otherwise.
8. Shareholding Pattern
This variable has been selected on the ground that the extent of disclosure may differ among
firms in response to the proportion of shareholders interest. Shareholding pattern here means
the percentage of common shares held by promoters. Fama and Jensen (1983) theorized that a
low concentration of ownership causes conflict of interest between the principal
(shareholders) and the agent (management). To alleviate the potential for higher agency costs,
more disclosure of information is expected. McKinnon and Dalimunthe (1993) empirically
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examined the nature of relation and found support for this idea in a study covering some
Australian companies. So, the following hypothesis has been formulated and tested:
H8: The promoters interest in the shareholding of a company has a positive impact on its
disclosure score.
RESULTS AND DISCUSSIONS
The results and discussions have been divided into two parts. In the first part, the extent of
disclosure of companies in the software industry has been analyzed. The impact of corporate
attributes on corporate disclosure has been examined in the second part.
Part I) Extent of Corporate Disclosure of the Companies in the Software Industry
The extent of disclosure of companies in the software industry has been examined with the
help of disclosure score. The percentage of disclosure score has been computed for every
selected company from the software industry. The range of disclosure level of the companies
in the software industry varies between 32.2% and 71.1%. The picture of the extent of
corporate disclosure of companies in the software industry is highlighted in the table 2.
Table 2 examines that the highest level of the disclosure is maintained by Wipro Technologies
Ltd. And Infosys Ltd. (71.1%), followed by Rolta India, Info Tech Enterprises (67.8%) and I-
Flex solutions Ltd. (65.6%). The companies namely, Silicon Valley Info Tech Ltd (32.2%),
followed by Orient Information Technologies Ltd. (37.8%), T-Spiritual Ltd, Micro-Tech
(India) Ltd., I-Gate Global Solutions Ltd. (38.9%) and Pentamedia Graphics Ltd (41.11%) areat the lowest level of corporate disclosure ranks.
The variation in the disclosure level may be due to the fact that a few of the companies from
the Indian software industry are known for their wealth creation. They try to disclose the
information even beyond the level required by statutory provisions of Indian law. These
companies have large overseas operations and their shares are listed on the international stock
exchanges. So, in order to meet the regulatory requirements of listing agreements of other
nations, they have to widen the scope of disclosure level. That is why the level of disclosing
voluntary information is also high in the case of companies like Wipro Ltd., Satyam
Computers Ltd. and Infosys Ltd.
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Table 2 Extent of corporate disclosure of 50 Indian companies in Software Industry
Sr.
No.
Name of Company Disclosure Score
(%)
Sr.
No.
Name of Company Disclosure
Score (%)
1 Micro Technologies (India) Ltd. 38.89 2 CMC ltd 47.78
3 P S I Data Systems Ltd. 51.11 4 Sonata Software Ltd 51.11
5 Orient Information Technology Ltd. 37.78 6 Tata Consultancy ServicesLtd
53.33
7 Geodesic Information Systems Ltd. 53.33 8 I-Gate Global SolutionsLtd
38.89
9 B S E L Infrastructure Realty Ltd. 48.89 10 N I I T Ltd 51.11
11 Helios & Matheson InformationTechnology Ltd.
51.11 12 Rolta India Ltd 67.78
13 Kale Consultants Ltd. 50 14 Wipro Ltd 71.11
15 Four Soft Ltd. 50 16 Blue Star Infotech Ltd 53.33
17 N I I T Technologies Ltd. 47.78 18 Cranes Software Intl. Ltd 48.89
19 Nucleus Software Exports Ltd. 57.78 20 Visualsoft TechnologiesLtd
45.56
21 Cambridge Solutions Ltd. 50 22 Financial Technologies(India) Ltd
46.67
23 G T L Ltd. 48.89 24 Infotech Enterprises Ltd 67.78
25 Hinduja T M T Ltd. 58.89 26 Patni Computers Ltd 60
27 Datamatics Technologies Ltd. 48.89 28 Geometric SoftwareSolutions Co. Ltd
52.22
29 Megasoft Ltd. 45.56 30 T-Spiritual World Ltd. 38.89
31 Aztec Software & TechnologyServices Ltd.
50 32 Mphasis BFL Ltd 58.89
33 Spanco Telesystems & SolutionsLtd.
50 34 Zensar Technologies Ltd 50
35 H C L Technologies Ltd. 53.33 36 Ramco System Ltd 43.33
37 I-Flex Solutions Ltd. 65.56 38 Subex System Ltd 57.78
39 Polaris Software Lab Ltd. 58.89 40 Satyam Computers Ltd 62.22
41 Pentamedia Graphics Ltd. 41.11 42 Infosys Ltd 71.1143 Aftek Infosys Ltd 48.89 44 Hexaware Technologies
Ltd48.89
45 Aptech Worldwide Ltd 50 46 Flextronic SoftwareSystems Ltd
62.22
47 Silicon Valley Infotech Ltd. 32.22 48 Tata Elxci Ltd 47.78
49 Mascon Global Ltd 45.56 50 Tata Infotech Ltd 57.78
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Part II) Impact of the Corporate Attributes on the Corporate Disclosure
Since, wide variations have been observed in the disclosure score of the selected companies
from the Indian software industry. So, it becomes imperative to know the reasons of such
variations. The reasons might be company specific. So an attempt has been made to find the
effect of corporate specific variable on the disclosure score.
Assessing the validity of the model
Before proceeding to the results of regression analysis, it was instructive to check the
existence of multicollinearity among the explanatory independent variables. Multicollinearity
or collinearity, the situation where two or more of the independent variables are highly
correlated, can have damaging effects on the results of multiple regression. The correlation
matrix is a powerful tool for getting a rough idea of the relationship between predictors. The
suggested rule of thumb is that, if the pair-wise or zero-order correlation coefficient between
two regressors is high, say , in excess of 0.8, then multicollinearity is a serious problem.
(Gujarati, 2006, p. 359). The solution to it is to drop that variable and then run regression
analysis with rest of the variables. Another way to check the multicollinearity is to compute
the average VIF (Variance inflation factor). As a rule of thumb, if the VIF of a variable
exceeds 10, which will happen if R2 exceeds 0.80, that variable is said to be highly collinear
(Gujarati, 2006, p. 362).
Correlation Analysis
To examine the correlation between the dependent and independent variables and with the
dependent variables, Pearson product moment correlation (r) was computed. A correlation
matrix of all the values of r for the explanatory variables along with dependent variables was
constructed and is shown in table 3:
TABLE 3 Correlation Matrix
Independent variables Age ListingStatus
PromoterShare
MarketCap
Leverage Assets
ROS AuditFirm
ResidentialStatus
DIS
Age 1.00Listing status .316* 1.00
Promoter share .310* .102 1.00
Market cap .291* .25 .015 1.00
Leverage .407** .301* .407** .256 1.00
Assets -.113 .156 -.146 .124 -.117 1.00
ROS .264 .246 .040 .194 .125 -.234 1.00
Audit firm size .521** .409** .534** .183 .901** -.147 .152 1.00
Residential .630** .140 .161 .354* .269 -.033 .013 .306* 1.00
DIS -.05 -.172 -.134 -.007 -.106 -.109 -.04 -.100 .101 1.00
*, ** and # : significant at 1%, 5% level and 10% level (respectively).
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Table 3 shows that correlation exists between age, listing status, market capitalization,
residential status, audit firm, leverage, and shareholding pattern at 1% and 5% level.
Collinearity is an issue in case of leverage and audit firm size.
Regression Analysis
A regression analysis has been run in two stages. Firstly, multiple regression analysis was run,
wherein no concluding results could be found out or in other words, no variable except audit
firm size could significantly explain variations in the disclosure level. Afterwards, in the
second stage, step-wise regression analysis was run, wherein few variables were dropped
from the model and a combination of various variables were applied to see the effect of these
combinations on the disclosure level.
Multiple Regression AnalysisThe results from the multiple regression analysis have been presented in Table 4. Three
separate determinants of firm size (sales, assets, and market capitalization) as well as four
different measures of profitability (ROS, ROA, ROCE, and RONW) were used. Each
surrogate to represent size and profitability was used only once in a model. This led to the
creation of twelve regression equations, the results of which has been presented in table 4:
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TABLE 4 REGRESSION RESULTS (MULTIVARIATE ANALYSIS)
*, **, and #: significant at 1%, 5% level and 10% level (respectively).Constan
t
Age Listing Promote
r
Lev Mkt
Cap
Asset Sales ROA ROS ROC
E
RONW AUD RES R 2 Adj.
R2
F
(Sig)
DW
Dis 15.025 .91 .75 .24 -.18 X x 1.37 1.239 X x x 4.30* -2.8 54.7 44.5 0.000 1.997
Dis 14.915 1.50 .97 .00 -.59 X x .47 x 1.70# x x 4.50* -.28 52.8 43.6 0.000 2.041
Dis 16.193 .95 .96 -.072 -.28 X x 1.32 x X .856 x 4.68* -.43 55.1 46.4 0.000 2.069
Dis 15.093 1.61 1.01 -.128 -.43 X x .14 x X X 1.136 4.54* -.02 53.7 44.7 0.000 2.037
Dis 15.973 1.13 .49 .057 -.36 X 1.32 x 1.065 X x x 4.40* -.33 54.5 45.6 0.000 2.074
Dis 15.968 1.10 .461 .054 -.50 X 1.34 x x 1.67# x x 4.39* -.04 56.7 45.7 0.000 2.072
Dis 16.668 .648 .50 .003 -.20 X 1.82# x x X .822 x 4.60* -.47 55 48.3 0.000 2.082
Dis 16.107 1.17 .49 -.034 -.39 X 1.11 x x X X .789 4.39* -.26 52.61 46.2 0.000 2.07
Dis 14.808 1.71# 1.14 -.04 -.36 .142 x x 1.437 X x x 4.62* -.25 52.6 43.3 0.000 2.033
Dis 14.807 1.68# 1.11 -.033 -.59 .166 x x x 1.65# X x 4.60* -.25 52.6 43.3 0.000 2.033
Dis 16.032 1.17 1.13 -.079 -.35 1.033 x x x X 1.012 x 4.75* -.43 54.4 45.5 0.000 2.079
Dis 15.006 1.77# 1.14 -.156 -.39 -.214 x x x X X 1.004 4.60* -.13 53.7 44.7 0.000 2.028
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Table 4 reveals that for all models audit firm size was found to be significant at 1% level.
ROS was significant at 10% level when applied in combination with all surrogates of size.
Other profitability surrogates could not significantly explain variations in the disclosure level.
The age of a firm was found to be significant at 10% level in explaining variations in
disclosure, when applied in combination with market capitalization, ROA, ROS and RONW,
the surrogate of size and profitability. Other variables could not find any place in explaining
significant variations in the disclosure level. So, out of 12 models, the model, which is
satisfying validity requirements and having improved adjusted R2 has been chosen and
selected as a valid model. The model with combination of Age, Listing status, promoter share,
leverage, assets size, ROCE (measure of profitability), audit firm size and residential status
has 0.55 (Adjusted R
2
), F value is significant at 0.00 level of significance and DW is 2.082.But in this model, only audit firm size and firm with large asset size is found to be significant.
The firms with large assets size and being audited by big six audit firms have more extent of
disclosure. These are significant at 10% and 1% level of significance. Other variables were
found to be insignificant.
Step-wise Regression Analysis
The step-wise regression was applied by eliminating different independent variables having
insignificant effect on disclosure. The problem of multicollinearity between independent
variables namely, leverages and audit firm size was resolved by eliminating leverage (the
insignificant variable). A stepwise regression model separately applied showed that all size
measures are significantly influencing the level of disclosure. Size measured in terms of assets
is significant at 1% and other two measures at 5%. Of the four performance measures, only
ROS was found to be significant at 5% level of significance (see table 5). Rest of the specific
variables other than audit firm size could not statistically significantly influence the extent of
disclosure and hence have been excluded.
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TABLE 5 STEPWISE REGRESSION MODEL
*, **, and #: significant at 1%, 5% level and 10% level (respectively).
All the three models were found to be valid. But as the Adjusted R2 is improved in the first
step-wise regression equation, i.e. 0.528, so, this model has been chosen. The results of
stepwise regression analysis reveal that the F-ratio is significant at 5% level of significance.
The results statistically support the significance of the model. R2 (.547), which is a respectable
result, implies that independent variables explain 54.7 percent variance in disclosure score.
The multicollinearity doesnt exist if average VIF is 1 or is near about 1. The problem of
multicollinearity doesnt exist in the model, being satisfied by average VIF, which is
approximately 1. Additionally, to test the assumption of independent errors (autocorrelation),
the Durbin-Watson statistic was used. The value of this statistic closer to 2 is considered as
better, and for this data the value is 2.063, which is very close to 2. Hence, the assumption has
almost been accomplished. In sum, the diagnostics indicate the model to be valid and reliable.Testing the Hypothesis
The results from the step-wise regression analysis shows that firms with large assets size are
more in the eyes of general public and are required to disclose more information. Although in
the table 5, all size measures found to be significant in explaining the extent of disclosure, but
the total assets explain more variation in the disclosure practices of the firms in software
industry. So, H1 is accepted in favor of the hypothesis that all the surrogates of the size of a
company have a positive impact on their disclosure score.
Out of profitability measures, ROS explains more significant variations in disclosure than
firms with more ROA, RONW, and ROCE. So, H 2 is accepted in favor of the hypothesis that
the profitability of a company as measured by ROS has a positive impact on the disclosure
score. And it is rejected for other surrogates of the profitability. The companies in the
software industry have more extent of disclosure as these are globally recognized for their aim
DependentVariable
Constant
Mkt Cap Asset Sales ROS AUD R 2 Adj.R2
F(Sig)
Avg. VIF DW
Disclosure 30.654 x 3.143* X 2.083** 5.102* .
547
.
528
0.043 1.087 2.063
Disclosure 29.904 x x 2.527** 2.208** 5.154* .527
.496
0.000 1.074 2.002
Disclosure 29.374 2.096** x X 2.187** 5.270* .509
.477
0.042 1.064 1.995
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of wealth maximization. As wealth maximization depends on the market value of the share,
which in turn depends on the cost of equity and dividend policy of the company, which
depends on the profitability of a concern. All profitability measures found to be positively
associated with disclosure score. Hence, the wealth maximization objective is being achieved
by the companies in the software industry. But ROS found to have statistically positive
relationship with the disclosure level. It helps the management, providing insight into how
much profit is being produced per unit of sales. It indicates that the software industry is
growing more efficiently. So, the results move in hypothesized direction
The firms being audited by big six-audit firm, who are having international links too, disclose
more extent of information than others. H4 is accepted in favor of positive impact of audit firm
size on the disclosure score.
The residential status of a firm, leverage of a company has negative association (though
insignificant) with the level of disclosure. It shows that the Indian companies have to comply
with the legal provisions of Indian legislation and hence have more mandatory disclosure than
foreign companies. The companies having more debt content have policy of disclosing only
mandatory information because the companies disclose to the maximum extent only when
they have more share of public in the share capital. So, all other variables dont explain
significant variations in the level of disclosure except audit firm size.
Table 5 shows that the other variables like age of a company, listing status of firms and
shareholding pattern have positive association with extent of disclosure though not
significant. It explains that companies listed in A category at BSE, disclose more extent of
information. It appears that all the companies in software industry are young in age. So, age
did not emerge as a significant factor influencing the level of disclosure.
The companies in which the promoters have high stake in capital structure have less extent of
disclosure. Wallace et al. (1994) observed no significant association between shareholding
pattern and the level of disclosure. The results are evidenced by literature and are in
hypothesized direction.
So all hypothesis except H1, H2, H4 are rejected.
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CONCLUSION
This study provides an evidence of the extent of corporate disclosure in Indian software
industry. The analysis reveals that the extent of disclosure within the software industry varies
within 32.2% to 71.1% (approximately) for period of study. It implies that though all the
companies disclose mandatory information as required by law, but at the same time, a large
number of companies disclose more than required by legal provisions. These companies are
globally recognized and have overseas operations too. These companies are also known for
maximization of the shareholders wealth. That is why these companies try to be more
transparent in the eyes of domestic as well as foreign investors and have better disclosure
level.
It has also been observed that the extent of disclosure is influenced by size (as measured by
total assets), profitability (as measured by return on sales) and the audit firm size of acompany. The companies with large assets size, higher profitability and audited by big audit
firms have tendencies to be more transparent and hence disclose more information. However
age of a company, shareholding pattern, listing status, leverage and residential status dont
significantly influence the level of disclosure.
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