The Firm Characteristics
Associated with the
Voluntary Issuance of the
New Style Audit Report in
the Netherlands
An Empirical Investigation
Fabian Meijs
September 2014
This thesis examines the firm characteristics associated with the voluntary disclosure of the new
style audit report over 2013 in the Netherlands. This country was selected, as the new style audit
report is already mandatory over 2013 in the UK, while in other countries firms do not yet
engage in publishing their audit report ‘new style’. The research sample consists of 111 Dutch
firms, of which 30 voluntary issued a new style audit report. The research, which is conducted by
means of a logistic regression analysis, contains a wide range of independent variables. These
variables were selected based on theories applicable to voluntary disclosure and a review of
previous literature on voluntary disclosure determinants. It was found that listing age, ownership
dispersion and having a Big Four auditor are significantly positively associated with the
voluntary disclosure of the new style audit report. On the other hand, competitive pressure and
being cross-listed exhibit a significantly negative relation with the issuance of the new style audit
report. Industry-related significantly positive associations with disclosure of the new style audit
report were found for firms in the sectors Industrials and Consumer Services.
Table of contents
Page
Table of contents
2
1. Introduction to the thesis
4
1.1 Introduction to the subject
4
1.2 Research question
5
1.3 Relevance
6
1.4 Methodology
7
1.5 Structure
8
2. Institutional background
9
2.1 The new style audit report
9
2.1.1 ISA 701 – Communicating key audit matters
10
2.1.2 Materiality and an overview of the scope of the audit
11
2.1.3 ISA 570 – Going concern
12
2.2 Voluntary disclosure
13
2.2.1 Agency theory
14
2.2.2 Positive accounting theory
15
2.2.3 Signaling theory
18
2.2.4 Capital need theory
19
2.2.5 Legitimacy theory
19
2.2.6 Institutional theory
19
2.2.7 Litigation cost theory
20
2.3 Measuring voluntary disclosure
21
2.4 Content analysis
22
2.5 Research models in voluntary disclosure literature
23
3. Literature review on empirical research
24
3.1 Determinants of voluntary disclosure
24
3.2 Environmental voluntary disclosure indicators
29
3.3 Determinants of early IFRS adoption
30
3.4 Conclusion
31
2
4. Hypotheses
37
4.1 Firm size
37
4.2 Leverage
37
4.3 Big Four auditor
38
4.4 Cross-listing
39
4.5 Board size
40
4.6 Age
41
4.7 Competitive pressure
41
4.8 Ownership dispersion
42
4.9 Industry
44
4.10 Concluding remarks
45
5. Research design
46
5.1 Research sample
46
5.2 Variables
47
5.3 Research model
52
5.4 Descriptive statistics
54
5.5 Statistical testing
56
6. Results
58
6.1 Correlation
58
6.2 Results of the statistical tests
59
6.3 Discussion of the results
62
6.4 Analysis
66
6.5 Robustness tests
71
7. Summary and conclusion
73
References
78
Appendix
85
3
1. Introduction to the thesis
1.1
Introduction to the subject
This thesis examines the differences in characteristics of voluntary adopters of the new style
audit report compared to non-adopters in the Netherlands for the year 2013. The characteristics
included in the research are primarily determined on the basis of previous literature examining
the factors related to voluntary disclosure. In short, this study tries to find out what the main
drivers are behind the choice to voluntarily issue a new style audit report.
The objective of the new style audit report is to provide stakeholders with more ‘behind-thescenes’ information about the work of the auditor and about the financial state and important
issues of the audited firm. The most important additions to the new style audit report in the UK
are paragraphs about 1) the key audit matters/areas of particular focus, 2) materiality issues and
an overview of the scope of the audit, and 3) the firm’s going concern.
According to the IAASB (2013a), the key audit matters are “those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements of the
current period.” All key audit matters must be selected from issues communicated with the
firm’s Board of Directors. A study by PwC (2014a) found that the three most reported key audit
matters among Dutch listed firms are the acquisition or sale of firm activities, tax issues and the
valuation of goodwill. In the paragraph about materiality it is explained what materiality exactly
involves and at what percentage the materiality is set for a particular audit. The going concern
paragraph states whether or not the firm can be considered as going concern. Previously, the
audit report only reported about going concern in case of hesitation about the continuity of a
firm.
As of now, the UK is the only country in which the new style audit report is mandatory for listed
firms. However, there are strong signs that from 2015 on the International Auditing and
Assurance Standards Board (IAASB) will make it obligatory for all listed firms to publish new
style audit reports in their Annual Report. This implies that the new style audit report will
4
become effective for audit reports over the year 2014. However, firms under the jurisdiction of
the IAASB are not yet obliged to issue new style audit reports from 2015, as the IAASB is still
discussing this issue. The IAASB is an independent institution for the accountancy profession
which sets “high-quality international standards for auditing, quality control, review, other
assurance, and related services”, and facilitates “the convergence of international and national
standards” (IAASB, 2014). As a result of the imminent new style audit report regulations, many
Dutch listed firms have already voluntarily published a new style audit report over the fiscal year
2013 in cooperation with their auditor. To be precise, 32 out of 114 examined firms listed on a
Dutch stock exchange (i.e. the AEX, AMX, ASCX and other stocks) have published their audit
report according to the future regulations. Four of them are also listed on the London Stock
Exchange, meaning that these firms were obliged to issue a new style audit report over 2013.
Consequently, these firms are excluded from the sample. Two non-listed Dutch firms issuing a
new style audit report over 2013, ABN AMRO and PGGM, are also included in the sample. This
means that this research includes 30 voluntary adopters of the new style audit report. According
to Piersma (2014), the Netherlands is the leading country when it comes to voluntarily issuing
the new style audit report. This is supported by the fact that not a single firm on the major stock
indices in surrounding countries like Germany, Belgium and France has published a new style
audit report in 2014. That is the primary reason this thesis only concentrates on the Dutch
market. This means that this study concentrates on the characteristics of Dutch firms that
reported voluntarily according to the rules of the new style audit report.
1.2
Research question
In the past, there have been plenty of studies about the (management) characteristics and features
of firms voluntarily disclosing information on certain issues in their Annual Report. Of course
this has never been done before when it concerns the new style audit report, as this report is only
issued since the beginning of 2014. This means that this is the first study investigating the
relationship between firm characteristics and the voluntary issuance of the new style audit report.
By investigating the Dutch firms that have voluntary issued the new style audit report, it is
possible to find out whether there are associations with certain firm characteristics. As a
consequence, the main research question of this study is:
5
What are the firm characteristics associated with the voluntary issuance of the new style audit
report in the Dutch stock market?
In order to adequately answer the main research question, the following sub-questions are
constructed:
1) What are the differences in the new style audit report compared to the old format audit
report?
2) What are the reigning voluntary disclosure theories, and how can they be related to the
voluntary issuance of the new style audit report?
3) According to previous literature, which factors are of influence on the choice whether or not
to disclose voluntary items?
4) What are the appropriate hypotheses for this study?
5) What is the best research design for this study?
6) What are the results of the research regression?
7) What are the conclusions of this research?
All sub-questions are addressed throughout this study.
1.3
Relevance
Besides being the first paper examining this particular relationship, another aspect making this
study interesting is the research on the new style audit report. Daboo (2013) characterizes the
introduction of the new style audit report as “the most significant advance in auditor reporting in
decades”. The work of an auditor involves a lot more than can be derived from the audit report.
6
However, the audit report is the only information about the audit the public sees, and that is the
reason it is so important to expand the audit report in order to provide stakeholders with more
valuable information about the audited firm. The audit report is basically the representation of
the audit profession towards the public.
Examining the factors associated with voluntarily providing a new style audit report improves
the understanding of investors and other stakeholders about a firm’s reporting strategy. By
linking the voluntary disclosure of the new style audit report to various voluntary disclosure
theories, managers’ motives behind voluntary disclosure can be recognized. Moreover, with the
results of this study, stakeholders are able to assess which firm characteristics determine
innovation, as the new style audit report is a very innovative addition to the audit. Knowing these
characteristics may be of influence on the decision to invest in a firm, since innovativeness in
financial reporting may be an indication of innovativeness in business operations, which might
lead to enhanced future growth prospects. The results of this study can also be used by standardsetters when asking the question which kind of firms should be subjected to this new regulation.
Suppose that firm size is found to be significantly positively associated with the voluntary
issuance of the new style audit report. When that happens, it might be a confirmation to the
IAASB that their (likely) decision to impose this regulation only on listed firms is a good choice.
1.4
Methodology
This study tries to link the voluntary issuance of the new style audit report to the prevalent
voluntary disclosure theories. Therefore, this study discusses several theories that can be applied
to voluntary disclosure practices, namely the agency theory, positive accounting theory,
signaling theory, capital need theory, legitimacy theory and institutional theory. Based on a
review of previous literature about the determinants of voluntary disclosure, the firm
characteristics that will be included in the hypotheses and regression model are established. After
constructing the hypotheses, the Dutch firms fitting in the research are determined. In order to
distinguish voluntary audit report issuers from old format audit report issuers, a dummy variable
is constructed which assigns a value of ‘1’ to voluntary issuers and a value of ‘0’ otherwise.
Next, to investigate the factors attributable to the voluntary issuers, a regression model will be
7
developed. This model includes the voluntary disclosure firm characteristics found by previous
literature. By running the regression, it is possible to examine the factors that are significantly
related to the firms voluntarily issuing the new style audit report. The results will be analyzed
and compared with theory, expectations and results of prior research.
1.5
Structure
The paper is organized as follows. Section 2 provides an overview of the background and
implications of the new style audit report and a discussion of theories and practices applicable to
voluntary disclosure. Section 3 deals with a study of previous empirical literature on the subject
this paper investigates. In Section 4, the hypotheses are constructed and motivated. Section 5
discusses the research method, the sample, and the proxies that are used in the regression model.
In Section 6 the results will be reviewed and analyzed. Finally, Section 7 provides the summary
and conclusion of this thesis.
8
2. Institutional background
The first part of this section provides a background of the new style audit report. Thereafter, the
most prominent voluntary disclosure theories are discussed. The remainder of this section is
about the ways to measure voluntary disclosure, the recognition of new style audit report
adopters and the research models applied in previous literature. The main objective of this
section is to find links between the new style audit report and the theories applicable to voluntary
disclosure.
2.1
The new style audit report
Currently, the UK is the only jurisdiction in which the issuance of a new style audit report is
mandatory for all listed firms. The new style audit report in the UK is effective since January 1,
2014. According to the Financial Reporting Council (FRC), the objective of the new style audit
report is “to enhance the transparency of the auditor’s report with the aim of better
communication to investors” (FRC, 2013). In the UK, the FRC is the body in charge of the
promotion of high quality corporate governance and reporting. The style audit report was
implemented by the Auditing Practices Board (APB), which is one of the six divisions of the
FRC (FRC, 2013).
In other countries, the choice to issue a new style audit report is still voluntary. However, the
IAASB, which is the independent standard setting body of the International Federation of
Accountants (IFAC), has hinted that it wants to make the new style audit report mandatory from
2015 (Piersma, 2014). It seems like only some Dutch firms already anticipate on the proposed
new style audit report, since they are the forerunners of the voluntary disclosure of the new style
audit report. In 2014, 28 firms listed on the NYSE Euronext Amsterdam and 2 non-listed Dutch
firms have voluntarily issued a new style audit report. To put this into perspective, none of the
listed firms in the surrounding countries France, Germany and Belgium has done so.
The IAASB (2013b) lists several advantages of the new style audit report. First of all, the
transparency of the audit increases. Second, management might shift focus to items that recur in
9
the audit report by covering them more extensively in their annual report. This increases
financial reporting quality. Third, reporting key audit matters might renew the auditor’s attention
on the issues to be covered. This would lead to more professional skepticism, hence resulting in a
higher audit quality. Fourth, communication between auditor and management might improve, as
there will be more dialogue about the reported key audit matters.
The most important mandatory additions to the new style audit report in the UK are paragraphs
about the key audit matters/areas of particular focus, materiality issues and an overview of the
scope of the audit, and the firm’s going concern. The proposed IAASB requirements do not
include the paragraph about materiality and the scope of the audit (PwC, 2014b). As a result,
some voluntary issuers in the Netherlands do not report on all three subjects, as there are some
firms that do not include a paragraph about the materiality and the scope of the audit. However,
because many Dutch firms include all three new additions in their new style audit report, each
new style audit report regulation is discussed in detail.
2.1.1 ISA 701 – Communicating key audit matters
According to the definition provided by the IAASB (2013a), key audit matters are “those matters
that, in the auditor’s professional judgment, were of most significance in the audit of the
financial statements of the current period.”
The IAASB (2013b) mentions three circumstances under which the auditor should report a key
audit matter:
“1) Areas identified as significant risks in accordance with ISA 315 (assessing risk of material
misstatements) or involving significant auditor judgment.
2) Areas in which the auditor encountered significant difficulty during the audit, including with
respect to obtaining sufficient appropriate audit evidence.
3) Circumstances that required significant modification of the auditor’s planned approach to the
audit, including as a result of the identification of a significant deficiency in internal control.”
(IAASB, 2013b)
(Cursive text added)
10
In a study of PwC (2014a), it was found that the most recurring key audit matters for Dutch firms
are the acquisition or sale of firm activities, tax issues and the valuation of goodwill. Other
examples of key audit matters are the valuation of real estate, derivatives, pensions and the risk
of fraud. On average, four key audit matters are included in an audit report.
2.1.2 Materiality and an overview of the scope of the audit
Materiality is a concept applied in the audit process of a firm. When assessing the fairness of a
firm’s financial statements, auditors collect evidence in order to verify that the line item amounts
in the financial statements correspond to reality. When an auditor finds out that a line item in the
financial statements significantly differs from reality, so that it influences the decision-making of
the user, the difference is considered material. For each line item, a so-called materiality
threshold is constructed. This materiality threshold is usually set at 3-5% of the total amount of
the line item. When the difference exceeds the predetermined materiality threshold, an adverse
opinion might be issued by the auditor, which implies that a firm did not fairly present its
financial statements.
The new style audit report contains information about a firm’s materiality level and the scope of
the audit. In the UK, paragraphs on these subjects are mandatory. However, since the new style
audit report is still voluntary outside the UK and this paragraph is not a proposed requirement by
the IAASB, about half of the Dutch firms publishing a new style audit report does not provide
information about the materiality levels and the scope of the audit (PwC, 2014a). According to
PwC (2014a), a reason for this abstention might be that auditors have trouble to define the
concept of materiality and report on the corresponding choices that come along with the
determination of the materiality level of an audit. Moreover, auditors might find it difficult to
explain their approach and discuss the structure of the audit, issues that are normally defined in
the new paragraph about the scope of the audit. In this research however, firms that have
published their audit report mostly in accordance with the new style audit report regulations but
only lack information on materiality levels and the scope of the audit àre considered new style
11
audit report adopters. This is done, because the remainder of their audit report is similar to the
new style audit report regulations proposed by the IAASB.
In the materiality paragraph of the new style audit report, first the concept of materiality is
explained. Second, the auditor reports on the materiality level applied during the audit. This level
is expressed both in percentages and in absolute amounts. By providing absolute numbers and
percentages, the degree of transparency about materiality has increased considerably.
The new style audit report paragraph on the overview of the scope of the audit mainly explains
how an audit is performed. Since there are no clear IAASB guidelines for the content of this
paragraph, the enclosed information differs between firms. Certain factors that are discussed in
this paragraph are the overall audit approach, the collection of evidence and the type of work
performed. Usually, the amount of reporting components for which a full scope audit was
required is given as well. Furthermore, it sometimes provides information on which parts of the
firm were exactly audited.
By inspecting new style audit reports, it could be determined that in contrast to the remainder of
the text, the last sentence of this paragraph is normally fixed: “This gave us sufficient evidence
we needed for our opinion on the financial statements as a whole.”
2.1.3 ISA 570 – Going concern
This ISA already existed, meaning that this is an amended proposal. The IAASB does not only
want auditors to evaluate a firm’s going concern, but also to report their findings in the audit
report. That is the core of this amended regulation.
A firm is considered a going concern when there is substantial doubt that the firm will remain in
business for the foreseeable future. Under IFRS, the foreseeable future is defined as the twelve
months following the audited reporting period (IFRS, 2013). So in case a firm’s reporting period
ends at year-end 2013, the auditor has to assess whether the firm is still in business as at year-end
2014. This period is the minimum required ‘look-forward’ period. However, auditors have the
12
flexibility to extend this period and assess a firm’s operating continuance over a longer time
frame (Laudato, 2012). According to the still existing (‘old’) audit report regulations, auditors
only have to report on going concern in case the audited firm is considered a going concern.
However, in line with the new audit report regulation (ISA 570), auditors have to include a
separate paragraph on a firm’s going concern, no matter their financial state.
In the new style audit report paragraph about going concern, the auditor first states that the firm’s
financial statements have been prepared using the going concern basis of accounting. Second, if
necessary, the auditor explains in which cases the going concern basis of accounting is
considered to be inappropriate. Third, there is a sentence about the appropriateness of the going
concern basis of accounting for this firm. In case there is no doubt about going concern, the
second part of the paragraph starts with the statement that the auditor has not discovered any
material uncertainties that “may cast significant doubt on the firm’s ability to continue as a going
concern” (p. 15). The paragraph concludes by explaining that no guarantees can be given with
respect to the firm’s going concern (IAASB, 2013b).
2.2
Voluntary disclosure
An important question to ask is how voluntary disclosure can be defined. Meek, Roberts & Gray
(1995) define it as “free choices on the part of company managements to provide accounting and
other information deemed relevant to the decision needs of users of their annual reports.” The
two most vital concepts of voluntary disclosure are embedded in this definition. First of all, it is a
free choice. Voluntary disclosure as defined by the FASB (2001) emphasizes this, as they
explain that a voluntary disclosure item is “not explicitly required” by a governing body.
Moreover, the objective of voluntary disclosure in the annual report is to provide stakeholders
reading this report with relevant information. With this additional information, users should be
better able to evaluate a firm. Based on that, they can make a more legitimate decision whether
or not, for example, to invest in the firm.
It is essential to distinguish between mandatory and voluntary disclosure. Mandatory disclosure
is required by a legislative body, while voluntarily disclosing information is a firm’s own choice.
13
However, as Hassan & Marston (2010) point out, voluntary disclosure can also be recommended
by an authoritative institute. This is also more or less the case for the new style audit report, as
the IAASB is planning on implementing this report on short notice. However, they still give
firms an opportunity to ‘voluntarily’ get acquainted with the new style audit report before it
becomes mandatory.
The 2014 issuance of a new style audit report by Dutch firms is an example of voluntary
disclosure. Since publishing a new style audit report is still non-mandatory in the Netherlands,
firms disclose new style audit reports strictly out of free will. Of course, there are certain
motivations behind the choice of voluntarily disclosing information to the public. These
voluntary disclosure theories are discussed in this subsection and linked to the new style audit
report.
Shehata (2014) identifies four theories that are applicable to voluntary disclosure: the agency
theory, signaling theory, capital need theory and legitimacy theory. Moreover, the positive
accounting theory, institutional theory and litigation cost theory are discussed.
2.2.1 Agency theory
This is the most often applied theory in articles about the determinants of voluntary disclosure.
The agency theory is a normative theory, meaning that the assumptions are value-based. The
agency theory is not about imposing, but about advising and prescribing. Normative theories
describe what ought to be. This is in contrast to positive theories, which are often based on
factual statements and deal with what is (Friedman, 1953).
The agency theory assumes that there is an imaginary contract between the managers of a firm
and its shareholders. The managers are labeled as the ‘agents’. They perform their tasks and run
the firm on behalf of the ‘principal’, the firm’s shareholders (Jensen & Meckling, 1976). So
according to this theory, managers are expected to act according to the will of the shareholders.
However, the agency theory points out that this is often not the case, as the two groups might
have different interests. This is called the ‘principal-agent problem’.
14
The principal-agent problem consists of two central problems: self-interest and information
asymmetry. When the interests of management are not aligned with the interests of the
shareholders, management might follow a strategy in order to maximize its own wealth at the
cost of the returns of the shareholders. Information asymmetry exists when managers have more
information than shareholders. This way, it is difficult for the shareholders to ensure that
management is acting in line with the shareholders’ interests.
In order to reduce management’s self-interest and information asymmetry, agency costs have to
be made. Agency costs are composed of monitoring costs, bonding costs and residual loss. The
former is the cost of shareholders monitoring managers’ activities. Bonding costs are paid by the
agents to ensure the principal that their actions will not negatively affect shareholder value.
Residual loss is the difference between management’s choices and the decisions that would have
led to shareholder welfare maximization (Shehata, 2014).
Moreover, there are costs of risks and rewards. Suppose that the interests of managers and
shareholders are perfectly aligned. In that case, managers make decisions with the purpose to
maximize shareholder value. Many firms apply an incentive system for managers. When
shareholder value rises, manager compensation increases. So when managers’ decisions turn out
to be profitable, there are costs of reward for the firm, as manager compensation increases.
However, there is always the risk that management makes the wrong choices. In that case,
shareholder value declines. This is called the cost of risks.
Voluntary disclosure is a way to reduce information asymmetry and subsequently reduce agency
costs, since it benefits shareholders with inside information.
2.2.2 Positive accounting theory
The positive accounting theory is based on the agency theory. The positive accounting theory
can be seen as a subset of the agency theory which is focused on accounting. This theory aims to
explain and predict why managers choose certain accounting policies, and why accounting
15
policies differ across firms. The original positive accounting theory as developed by Watts &
Zimmerman (1978) was founded upon three main attributes: the bonus plan hypothesis, the debt
covenant hypothesis and the political cost hypothesis.
The bonus plan hypothesis assumes that managers only take into account their own wealth when
making (accounting) decisions. To give an example, according to this hypothesis, managers
choose to disclose a new style audit report with the aim to enhance their reputation on the
managerial labor market. This serves their own interest, because chances increase to get a higherpaid job.
The debt covenant hypothesis states that managers try to enhance profits in such a way, so that
the firm does not violate its debt covenants by exceeding predetermined borrowing limits. When
a firm exceeds its borrowing limits, it has to pay off its debt on an accelerated basis. This is
disadvantageous for the firm, because it might cause liquidity problems. Furthermore, in case of
a debt covenant violation, the bank may wish to receive a higher interest rate on the debt the next
time they do business with the firm. Translating this to the new style audit report, managers may
issue such a report with the objective to lower information asymmetry and improve transparency.
Higher transparency results in less uncertainty among the creditors of a firm, which is associated
with a lower cost of capital.
According to the political cost hypothesis, managers tend to report lower accounting profits as
they want to reduce their firm’s visibility to the government. Because governments are inclined
to place stricter regulations on highly profitable industries, firms in those industries try to
downplay their accounting profits. However, the political cost hypothesis is not only about
government pressure. Also environmental organizations might be troublesome for firms.
Especially firms with high emission and large public visibility are likely to be pinpointed by
environmental organizations. Take Royall Dutch Shell as an example. Their oil winning
activities in Nigeria were subject to large-scale protests of environmental (and nonenvironmental) organizations. Understating accounting profits is a way to reduce public
visibility, and, consequently, attention of environmental organizations. Converting the political
cost hypothesis to voluntary disclosure practices, firms might report more on environmental
16
issues. Openly providing information on, for example, CO2 emissions, diminishes the chance
that the government investigates a firm’s environmental practices. Because of that, the
government is less likely to impose stricter environmental regulations. Environmental
organizations are probably less likely to attack a firm, as they have more information about a
firm’s environmental practices. Moreover, when disclosing environmental information, firms
often provide solutions to reduce their emission. This further reduces the chance that
environmental organizations revolt against a firm.
Related to the positive accounting theory, Graham, Harvey & Rajgopal (2005) examined the
reasons managers engage in voluntary disclosure based on a survey among more than 300
executives. In their theoretical background, they provide five arguments in favor of voluntary
reporting: information asymmetry, increased analyst coverage, stock price motivations, stock
compensation and management talent signaling. Information asymmetry was already discussed
as part of the agency theory, while management talent signaling can be linked to the bonus plan
hypothesis, as this motivation only has the objective to increase managerial wealth. The
management talent signaling principle states that managers would report voluntarily in order to
signal their character to the managerial labor market.
According to Graham et al. (2005), another argument to choose for voluntary disclosure is to
attain more analyst coverage. The reasoning behind this thought is that more firm-specific
information becomes available as a consequence of voluntary reporting. This makes it more
attractive for analysts to follow a firm, as it becomes easier to make predictions about a firm’s
future performance. Voluntary disclosure can also be explained by stock price motivations. It is
argued by the authors that voluntary disclosure can be used to increase share price, and, if
necessary, to distract investors’ attention from poor financial performance. The stock
compensation theory assumes that managers want to reduce contracting costs by providing
voluntary information. Related to stock compensation, managers would be concerned that new
employees might ask a risk premium in case they feel that managers have an information
advantage. It is argued that voluntary disclosure can mitigate this problem, as the information
advantage might disappear (Graham et al., 2005).
17
In conducting their research, the authors found three reasons that were most significant when
asking the question why managers choose to report information voluntarily. Voluntarily
communicating information namely “promotes a reputation for transparent/accurate reporting,
reduces the ‘information risk’ that investors assign to the stock, and provides important
information to investors that is not included in mandatory financial disclosures” (Graham et al.,
2005).
2.2.3 Signaling theory
This theory assumes that firms voluntarily disclose information to the outside world in order to
show that they are better than their competitors. They want to signal their superiority to the
market by disclosing additional, positive information about the firm. These disclosures make it
easier for the firms to attract capital. Moreover, it is good for the firm’s reputation (Shehata,
2014; Verrecchia, 1983).
As for how the signaling theory can explain the voluntary disclosure of the new style audit
report, there seems to be no real association regarding the content of the new style audit report.
The new style audit report only includes objective, neutral information. It does not contain any
positive information which is favorable to the firm. The paragraphs about the areas of focus and
materiality are included to objectively inform users of the annual report about the audit. Only the
extra paragraph about going concern, which (almost always) concludes that a firm’s use of the
going concern basis of accounting is appropriate, might be favorable to the firm.
However, the choice to voluntarily issue a new style audit report signals to the market that a firm
is innovative in its reporting choices. So the signaling theory can be used in explaining the mere
fact that a firm issues a new style audit report, but there seems to be no link between the
signaling theory and the content of the new style audit report.
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2.2.4 Capital need theory
The capital need theory argues that firms voluntarily disclose information with the objective to
attract more capital at a lower cost. This theory resembles the debt covenant hypothesis. It is
generally believed and has often been showed that more (voluntary) firm disclosures lead to a
lower cost of capital (Diamond & Verrecchia, 1991; Cheynel, 2013; Petrova, Georgakopoulos,
Sotiropoulos & Vasileiou, 2012).
The FASB (2001) explains that a firm’s cost of capital includes a premium for investor
uncertainty. It is motivated that voluntary disclosure results in a decrease in investor uncertainty.
Hence, the premium on the cost of capital is lowered, which also decreases the cost of capital in
general.
2.2.5 Legitimacy theory
According to the legitimacy theory, the voluntary reporting decisions of a firm depend on
management’s views on what society considers to be appropriate for the firm. The connection
between firm and society relies on the notion of a social contract. This is a fictitious contract
which consists of the community expectations about the behavior of a firm. The legitimacy
theory believes that in case a firm diverges from its social contract, it loses its ground to continue
as an organization (Suchman, 1995).
Relating this information to the new style audit report, the legitimacy theory argues that a firm
takes the wishes of society into consideration when making the decision whether or not to issue
the new style audit report. So according to the legitimacy theory, the chance that firms engage in
voluntary disclosure is bigger when society expects them to do so.
2.2.6 Institutional theory
Another widespread theory applied in explaining voluntary disclosures is the institutional theory.
This theory illustrates how mechanisms for obtaining and preserving legitimacy become
19
institutionalized. The institutional theory consists of two main elements, of which one is
applicable to this study: isomorphism. The ‘institutional model of isomorphic change’ was
developed by DiMaggio and Powell (1983). The authors identified three forms of isomorphism:
coercive, normative and mimetic isomorphism. Coercive isomorphism implies that firms
voluntarily disclose information in response to stakeholder pressures of, for example,
governmental organizations. Normative isomorphism expects firms to voluntarily report in order
to follow group norms and values. Mimetic isomorphism implies that firms only engage in
voluntary disclosure in order to copy the disclosure practices of other firms in their industry.
They do this out of uncertainty about their own organization. Mimicking others is seen as a safe
solution.
The institutional theory is different from most other previously discussed theories in that it
provides more than one explanation for the choice of voluntary disclosure. This theory actually
consists of multiple layers. Coercive and mimetic isomorphism might be applicable to the new
style audit report. As stated earlier, the IAASB attempts to make the new style audit report
mandatory from 2015. Firms might feel pressure to practice with the new style audit report in
2014, before it becomes obligatory one year later. Mimetic isomorphism could also be associated
with voluntary disclosure. To examine this, it could be tested whether there are significant
differences in voluntary reporting among industries. As shown in the next section, this relation
has also been tested in previous studies.
2.2.7 Litigation cost theory
Palepu & Healy (2001) add another theory which can explain the choice for voluntary reporting.
However, there are two sides to this theory. On the one hand, it can be argued that managers
engage more in voluntary reporting, as an inadequate disclosure policy might result in
shareholder litigation. On the other hand, managers might also restrain from voluntary reporting
as a result of the threat of shareholder litigation. This is especially the case when providing
forward-looking information. Managers might face shareholder litigations when the projected
voluntary information turns out not to be correct.
20
For the voluntary disclosure of the new style audit report, the first reasoning seems to be more
appropriate, as there is no forward-looking information involved. However, when a firm’s
auditor does not report on the areas of risk, which is one of the additions to the new style audit
report and could be useful in predicting the continuance of a firm, shareholder litigations might
follow.
The theories discussed in this section will be used to motivate the hypotheses. The aim is to
explain the predicted direction of the hypotheses by looking at both the previous literature and
the relevant theories. Furthermore, when analyzing the regression results in Section 6, the
discussed theories can be utilized to explain the outcomes.
2.3
Measuring voluntary disclosure
Often, articles not only examine whether a voluntary disclosure item is included in the Annual
Report, but they also evaluate the quality of the information. Beattie, McInnes & Fearnley (2004)
list numerous ways to determine disclosure ratings. Five methods are discussed in detail:
subjective ratings, disclosure index studies, a thematic content analysis, readability studies and a
linguistic analysis.
When authors employ subjective ratings, it usually means that they use disclosure ratings
constructed by analysts. Analyst ratings measure the informativeness of the disclosed
information. Disclosure index studies is “a partial form of content analysis where the items to be
studied are specified ex ante” (Beattie et al., 2004). Most studies analyzing the determinants of
voluntary disclosure employ this technique, which is based on the analysis of the Annual Reports
of firms. In the case of these studies, the pre-specified items are voluntary disclosure items. By
examining these voluntary disclosure items, they can assign a voluntary disclosure rating to each
firm.
The remaining three rating techniques are textual analyses. In a thematic content analysis the
whole text to be studied is analyzed, sentence per sentence, and is evaluated based on
predetermined criteria. For example, does the sentence imply good news or bad news? Does it
21
describe the past, the present or the future? Those kinds of issues are investigated in a thematic
content analysis. This technique is applied especially to compare different industries in order to
determine which disclosures are useful and represent good practice for which industries.
Readability studies assess how hard it is to read a text by examining the difficulty of the text and
the amount of complex words and sentences included in the text. A linguistic analysis resembles
a thematic content analysis in that the whole text is examined. However, the difference is that
instead of the content, the linguistic analysis looks more at the structure, connectivity and
communicative value of the text (Beattie et al., 2004).
2.4
Content analysis
In order to distinguish new style audit report adopters from non-adopters, a content analysis is
performed. The content analysis performed in this study exhibits most resemblances with the
disclosure index studies method. Namely, only a part of the Annual Report is evaluated (the
audit report) and the items to be studied are specified ex ante. The audit report of each firm in the
sample is evaluated based on the three main attributes of the new style audit report, which are
paragraphs about 1) the key audit matters/areas of particular focus, 2) materiality issues and an
overview of the scope of the audit, and 3) the firm’s going concern. When at least two out of
three paragraphs are included in a firm’s 2013 audit report, the firm is considered to be a new
style audit report adopter. The inclusion of these paragraphs can be recognized by reading the
audit reports carefully. Almost all firms clearly head their paragraphs, making it easy to assess
whether the paragraphs characterizing for the new style audit report are included. However, in
contrast to the disclosure index studies method, this study does not rate the information in the
audit report on quality. It only looks at whether certain information is included in the audit
report, in order to distinguish between new style audit reports and ‘old’ style audit reports.
Authors of studies that construct a voluntary disclosure index to measure the quality of voluntary
disclosure often have to read a firm’s Annual Report in detail in order to assign a voluntary
disclosure score to each firm. The advantage of the method this study takes is that it is quite easy
to tell whether a firm engaged in voluntary disclosure, as only the audit reports of the sampled
firms have to be studied.
22
2.5
Research models in voluntary disclosure literature
The research models applied in previous literature can be used to construct the research model of
this study. Therefore, this sub-section provides a short review of the research techniques used in
previous literature about the determinants of voluntary disclosure.
The articles which will be discussed in Section 3 apply a wide range of research models. The
three research models that are most often applied in these studies are the Ordinary Least Squares
(OLS), logistic and multiple regression models. Other research techniques included a.o. the
Poisson, linear, binomial, probit and panel data regression model. For an overview per article,
see Table 7. Five articles used a dummy variable as their dependent variable in the research
model (i.e. André, Walton & Yang, 2012; Gassen & Sellhorn, 2006; Zunker, 2011; Sheu, Liu &
Yang, 2008; and Spiegel & Yamori, 2003). This method is also applied in this study. The former
three aforementioned studies performed a logistic regression, while the latter two applied an OLS
regression. This empirical part of this study is performed by running a logistic regression, as this
research technique is constructed specifically for the purpose of regressions of which the
dependent variable is binary (i.e. it can only have two values). The choice for a logistic
regression model will be discussed in detail in Section 5.
The research design of this study will be modeled after André et al. (2012), as out of the three
articles applying a logistic regression with a dummy dependent variable, this article is the only
one solely focusing on one issue, the determinants of IFRS adoption. Zunker (2011) does not
only examine the determinants of voluntary employee-related disclosures, but she also measures
the firm characteristics related to the quality and quantity of voluntary disclosure. Besides the
determinants of IFRS adoption, Gassen & Sellhorn (2006) measure the consequences of IFRS
adoption by comparing the post-IFRS differences between IFRS adopters and non-adopters in,
for example, the bid-ask spread and stock price volatility. Both studies employ multiple
regression models for different purposes. This is in contrast to André et al. (2012), whose
research design is quite basic. This makes the research design of this article the easiest and
therefore the most applicable research design to model this study after.
23
3. Literature review on empirical research
This section discusses previous literature about the determinants of voluntary disclosure. The
information obtained in this section is used in order to develop the hypotheses and the research
model. Since there are no studies in this field that are specifically audit-related, all recent articles
about the characteristics explaining voluntary disclosure are considered. Mainly research about
the voluntary disclosure of financial information is taken into account. However, at the end of
this section, also studies related to the voluntary disclosure of non-financial, environmental
information and the early adoption of IFRS are reviewed. The order in which the articles are
discussed is based on the geographical area the articles focus on. First, studies with data of firms
on the American continent are discussed. After that, articles founded upon data from firms in
respectively Europe, Africa, East Asia and Oceania, and the Middle East are observed. All
relationships and associations discussed in this section are statistically significant.
3.1
Determinants of voluntary disclosure
In his study among 198 U.S. firms in the period 1993-2003, Premuroso (2008) examined the
determinants of the voluntary disclosure on initial outsourcing. It was found that leverage, the
total cost ratio (operating expenses over net sales) and the return on assets (ROA) were
positively associated with this voluntary disclosure item. Examining 570 U.S. firms, Zhu &
Gong (2013) found that economic performance was negatively associated with the voluntary
disclosure of executive compensation. El-Gazzar, Fornaro & Jacob (2006) also investigated
American firms. In their research, containing a sample ranging from 1996 to 2000 including 500
firms, they examined the voluntary disclosure of the report of management’s responsibilities,
which was non-mandatory at the time. The percentage of independent audit committee members,
the percentage of voting shares owned by institutional owners and the frequency of audit
committee meetings, new public debt issues and new equity issues were positively related to
voluntary disclosure. On the other hand, financial statement restatements, the percentage of
voting shares owned by management and the average interest rate on debt were found to be
negatively related to voluntary disclosure. Studying 68 Brazilian firms with executive stock
option (ESO) plans in 2007, Schiehll, Terra & Victor (2013) found that a firm’s Board size and
24
the presence of a compensation committee are positively related to the voluntary disclosure of
ESOs. Moreover, firms audited by a Big Four firm were found to have higher voluntary
disclosure. The authors also showed that family-controlled businesses tend to disclose less
information about ESO plans.
Coebergh (2011) and Braam & Borghans (2010) examined voluntary disclosure in the Dutch
market. In his research containing 399 firm-year observations over the period 2003-2008,
Coebergh (2011) found that firms with a foreign exchange listing and a high listing age are
inclined to voluntarily disclose more about corporate strategy. However, a high return on equity
(ROE) is associated with less corporate strategy disclosure. Furthermore, it was found that the
choice of disclosing voluntary information also depends on the firm’s industry. Last, the author
found that firms listed on the AEX have a higher tendency towards voluntary disclosure than
firms listed on the AMX and the ASCX, which are the second and third tier stock indices in the
Netherlands. Braam & Borghans (2010) studied the factors associated with the voluntary
disclosure of financial and non-financial performance measures, based on a sample of 149 firms
in the year 2004. In case a person associated with one firm sits on the Board of Directors of
another firm, that firm’s voluntary disclosure is higher. Moreover, disclosure tends to be higher
when other businesses, to which the firm is related via their external auditor, disclose similar
performance measures. This implies that firms tend to mimic other organizations when it comes
to voluntary disclosure, as indicated by the institutional theory.
In his study among 161 Swiss firms in 1991, Raffournier (1995) explored a positive association
between a firm’s size and international diversification and the extent of voluntary disclosures in
its annual report, measured by a disclosure index. Kateb (2012) examined the determinants of
voluntary disclosure of structural capital information in France in 2006. Applying a sample of 55
firms, it was found that firm size is positively associated with voluntary disclosure of structural
capital information, while the author found a negative relation with managerial ownership
concentration and leverage. Alves, Rodrigues & Canadas (2011) studied voluntary disclosure of
140 firms in Spain and Portugal in 2007. For each firm, a voluntary disclosure index was
measured, based on the presence of voluntary disclosure items in their annual report. The authors
found that a high proportion of the board’s remuneration that is not fixed is related to more
25
voluntary disclosure. In addition, firm size, growth opportunities, economic performance,
organizational performance, board compensation and shareholder ownership are positively
related to voluntary disclosure. On the other hand, a high bid-ask spread and the presence of a
large shareholder have a negative association with the level of voluntary disclosure. Oxelheim &
Thorsheim (2012) investigated the association between firm characteristics and the voluntary
disclosure of macroeconomic effects on corporate performance in Europe. In their sample, the
authors included 100 firm-year observations over the period 2000-2009. Cross-listing, corporate
governance strength and leverage are positively related to the voluntary disclosure of
macroeconomic effects on corporate performance. Also firms in industries with a high threat of
entry are associated with a higher level of voluntary disclosure. However, capital intensity,
which is measured as a firm’s PP&E scaled by total assets, has a negative association with the
level of voluntary disclosure.
Chakroun & Matoussi (2012), Dhouibi & Mamoghli (2013) and Kolsi (2012) all examined the
determinants of voluntary disclosure of Tunisian firms, measured by voluntary disclosure
indices. The research of Chakroun & Matoussi (2012) included 144 observations over the period
2003-2008. The authors found that firms with a high degree of regulatory reform, managerial and
institutional ownership, a large board size, a combination of the functions ‘general manager’ and
‘board chairman’, high indebtedness and a high firm age tend to disclose more voluntary items in
their annual report. Businesses in industries with an intense competition on the market for goods
and services that are family-controlled and have a high degree of board independence and
ownership concentration are associated with a low level of voluntary disclosure. The research
sample of Dhouibi & Mamoghli (2013) consists of 10 banks in the period 2000-2011. Foreign
ownership and firm size have a positive relation with voluntary disclosure, while board size,
blockholder ownership and state ownership are negatively related to voluntary disclosure.
Kolsi’s (2012) study included 52 observations from 2009 and 2010. Firms audited by a Big Four
auditor are, just like firms with a high leverage and ROA, inclined to disclose more voluntary
information. Furthermore, firms in the financial sector are associated with higher voluntary
disclosure than firms in other sectors. Barako (2007), whose research focused on 43 Kenyan
firms in the period 1992-2001, also found that firms audited by a Big Four member tend to
disclose more voluntary information. Just like the three Tunisian studies, Barako (2007)
26
measured voluntary disclosure on the basis of a voluntary disclosure index. Audit committee,
foreign and institutional ownership, firm size and ROE are positively related to voluntary
disclosure as well.
The articles of Wang, Sewon & Claiborne (2008) and Lan, Wang & Zhang (2013) also measured
voluntary disclosure by employing a voluntary disclosure index for each firm. Both studies
focused on the Chinese market. The research of Wang, Sewon & Claiborne (2008) included 109
observations from 2005. They explored that firms having a high ROE and a large degree of state
ownership and foreign ownership are associated with more voluntary disclosure. Also firms
having a Big Four auditor tend to disclose more voluntary information. In their study containing
1,066 observations from 2006, Lan, Wang & Zhang (2013) found that firm size, leverage and
assets-in-place are positively related to voluntary disclosure. However, it was found that firms
audited by a Big Four auditor disclose less voluntary information, which is in contrast to the
findings of previously discussed studies (Schiehll, Terra & Victor, 2013; Kolsi, 2012; Barako,
2007; Wang, Sewon & Claiborne, 2008).
Spiegel & Yamori (2006) examined the determinants of the voluntary disclosure of nonperforming loans in Japan. Using a sample of 814 observations from 1996 and 1997, they found
that firms with a large size and high competitive pressure are more inclined to voluntarily
disclose information about non-performing loans. On the other hand, bad loan problems and
leverage are negatively associated with the voluntary disclosure of this item. The study of Sheu,
Liu & Yang (2008) included 3,841 observations of Taiwanese firms in the period 1998-2005.
The authors investigated the factors that explain the voluntary disclosure of directors’
compensation. The sum of the directors’ compensation, board size, diversified ownership and
managerial ownership are positively related to the voluntary disclosure of this item. Government
ownership and native institutional ownership were found to be negatively related to the voluntary
disclosure of directors’ compensations. Besides a microeconomic perspective, Ho (2009) also
takes a macroeconomic point of view in examining the factors influencing voluntary disclosure.
Applying a sample of Malaysian firms, measuring firms’ voluntary disclosure indices in 1996,
2001 and 2006, the author found that voluntary disclosure has increased over time. Also the
occurrence of global corporate scandals has a positive relation with voluntary disclosure.
27
Furthermore, external regulatory pressures, the strength of the corporate governance structure,
ownership concentration and firm size are positively associated with voluntary disclosure. Vu
(2012), whose research focused on 252 firms in the Vietnamese market over the year 2009, also
found a positive relation between corporate governance strength and voluntary disclosure.
Moreover, size, profitability and listing duration are associated with higher disclosure. Also a
firm’s industry and auditor are explanatory factors in voluntary disclosure. Vu (2012) found that
organizations audited by a Big Four firm are more inclined to voluntarily disclose information.
State ownership and managerial ownership are negatively related to voluntary disclosure. Zunker
(2011) investigated the determinants of the voluntary disclosure of employee-related information
in Australia. Applying a sample 970 observations from 2004, she found that firms with high past
and current economic performance, a large size and more adverse publicity tend to voluntarily
disclose more employee-related information.
The research sample in the study of Hossain & Reaz (2007) included 38 Indian banking firms in
the period 2002-2003. The authors measured firms’ voluntary disclosure levels by means of
constructing voluntary disclosure indices, which are based on firms’ annual reports. It was found
that firm size and assets-in-place are positively related to voluntary disclosure. Sehar, Bilal &
Tufail (2013) examined the determinants of voluntary disclosure also by means of composing
voluntary disclosure indices. Their sample consisted of 372 Pakistani firm observations from
2012. Profitability, firm size, firm age and a Big Four auditor were all associated with higher
voluntary disclosure, while leverage was found to be negatively related to the disclosure of
voluntary information. The study of Almutawaa (2013), who examined 206 firms from Kuwait
over the period 2005-2008, also determined the voluntary disclosure level of a firm by looking at
firms’ voluntary disclosure indices. Firms with a high degree of government ownership tend to
exert more voluntary disclosure. Firms that are cross-listed and large-sized are also associated
with higher voluntary disclosure. On the other hand, the authors found that cross-directorships, a
large board size, role duality and firm growth are related to less voluntary disclosure. Hossain &
Hammami (2009) investigated the firm characteristics associated with voluntary disclosure on
the basis of a sample of 25 Qatari firms in 2007. To measure voluntary disclosure, they
composed a disclosure checklist, which examines 44 voluntary items in firms’ annual reports. It
was found that firm age, total assets and assets-in-place are positively connected to voluntary
28
disclosure. Moreover, the higher the complexity of a firm, which is determined as the firm’s
number of subsidiaries, the higher the voluntary disclosure tends to be.
3.2
Environmental voluntary disclosure indicators
So far, primarily determinants of financial voluntary disclosure items were discussed. Although
new style audit reports are mostly about financial information, research about firm characteristics
related to the disclosure of non-financial, environmental information will also shortly be
reviewed. This way, it can be detected whether the determinants of disclosing non-financial
information radically differ from those associated with the voluntary disclosure of financial
information.
Gamerschlag, Möller, Verbeeten (2011) examined the determinants of voluntary CSR disclosure
by using a CSR disclosure index for each firm. The research sample consisted of 470 firm-year
observations of German firms over the years 2005-2008. The authors found that a firm’s size,
visibility, profitability (return on invested capital) and shareholder structure (freefloat in
percentage of shares) are positively related to the voluntary disclosure of CSR information.
Sukcharoensin (2012) studied the same relationship, also applying a CSR disclosure index, but
now for Thai firms. Applying a sample of 50 firms, the author found that firms with a high
corporate governance rating and a large degree of public ownership and ownership dispersion
tend to disclose more CSR information. On the other hand, financial leverage is negatively
related to voluntary CSR disclosure. Using a sample consisting of 300 firm-year observations
from the period 2009-2011, Borghei-Ghomi & Leung (2013) investigated the firm factors
associated with the voluntary disclosure of greenhouse gas emission (GHG) information in
Australia. It was found that firm size, ownership concentration and leverage are positively
related to the disclosure of GHG information. In addition, the larger the proportion of nonexecutive directors on a firm’s board, the higher the voluntary disclosure of GHG information
tends to be. Also, cross-listed firms are more inclined to report on GHG than single-listed firms.
Prado-Lorenzo, Rodríguez-Domínguez, Gallego-Álvarez & García-Sánchez (2009) examined the
determinants of GHG disclosure based on a sample of 101 firms worldwide in the year 2005.
They found that firms that are large-sized and have a high market-to-book ratio disclose more
29
information on GHG. A firm’s industry is an essential factor in explaining the choice for GHG
disclosure as well. Besides airlines, also corporations doing business in chemicals, forest and
paper products, metals, mining, motor vehicles and utilities display a higher amount of GHG
disclosure than firms in other sectors. On the other hand, firms in the aerospace and defense
industry report less GHG information. Also firms with a high ROE tend to report less on GHG.
As can be seen, determinants of voluntary disclosure are largely the same when comparing nonfinancial disclosures with financial voluntary disclosures.
3.3
Determinants of early IFRS adoption
In 2005, the new accounting framework IFRS (International Financial Reporting Standards)
became mandatory for listed firms in European Union countries. Many firms anticipated on this
regulation by preparing their financial statements in accordance with IFRS before it became
mandatory. The issuance of the new style audit report is similar to the early adoption of IFRS,
because in both cases firms anticipated on the upcoming regulation by voluntarily adopting the
new standard. Therefore, also studies about the determinants of early IFRS adoption are
discussed.
Gassen & Sellhorn (2006) examined the determinants of IFRS adoption between 1998 and 2004
for German firms. The authors found that firm size, international exposure, ownership dispersion
and recent IPOs are positively related to early IFRS adoption. Furthermore, it was showed that
firms that are also listed in the U.S. were more inclined to adopt IFRS. André, Walton & Yang
(2012) investigated the determinants of voluntary IFRS adoption for non-listed UK firms in
2009. In contrast to listed firms in the European Union, IFRS is still non-mandatory for nonlisted firms. By applying a sample of 8,417 firms, the authors found that firm size, leverage,
internationality and having a Big Four auditor are positively related to voluntary IFRS adoption.
Kolsi & Zehri (2013) examined both microeconomic and macroeconomic determinants of
voluntary IFRS adoption. In their sample, they included 700 firm-year observations from 74
developing countries worldwide. Half of those countries adopted IFRS in 2008. Countries with
an Anglo-Saxon culture, a common law system, a good educational system and a high degree of
foreign operations and economic growth are more inclined to adopt IFRS than other countries.
30
Of the microeconomic determinants, firm size and having a Big Four auditor were found to be
positively related to IFRS adoption. From the discussed articles, it can be derived that the
determinants of IFRS adoption are similar to the explanatory factors for voluntary disclosure.
3.4
Conclusion
Concluded, is can be stated that certain firm characteristics are often significantly related to
voluntary disclosure. In many studies, firm size and profitability, which is often measured as the
ROA or ROE of a firm, are found to be significantly positively associated with voluntary
disclosure. Moreover, a large majority of the articles provided evidence that firms with a Big
Four auditor disclose more voluntary information than those audited by non-Big Four firms. In
addition, cross-listed firms tend to be more active in voluntary disclosures than single-listed
firms. Other recurring (at least two times) significantly positive relations have been found for
firm age, listing age, corporate governance strength and assets-in-place. Also industry type
frequently is a factor in explaining the choice for voluntary disclosure. Evidence is mixed
concerning the relation of competitive pressure, leverage, role duality and board size with
voluntary disclosure. No recurring significantly negative associations could be derived from the
studied articles.
Many studies also included variables related to stock ownership in their research. Overall,
institutional ownership and foreign ownership are positively associated with voluntary
disclosure. There is mixed evidence on the relation of voluntary disclosure with managerial and
state ownership, while ownership concentration is negatively related to voluntary disclosure in a
large majority of the articles. In addition, some studies found evidence that family-controlled
businesses are less willing to disclose voluntary information.
Table 13 (see appendix) is constructed with the purpose to show the number of significant
relations for each of the most recurring voluntary disclosure determinants. The numbers are
constructed based on all articles discussed in this section. In the next section, the hypotheses are
developed on the basis of the information acquired in this section. Table 13 is helpful in
31
recognizing which variables have exhibited most significant associations with voluntary
disclosure in prior studies.
Two tables summarizing the articles discussed in this section are provided below.
Table 1: Summary of articles about the determinants of voluntary disclosure
Authors
Geographi
cal area
Sample
Research
method
Voluntary
disclosure
item
Initial
outsourcing
Premuroso
(2008)
U.S.
1993-2003;
198 firms
Zhu & Gong
(2013)
El-Gazzar,
Fornaro &
Jacob (2006)
U.S.
570 firms
U.S.
1996-2000;
500 firms
Binary
logistic
regression
Regression
analysis
Logistic
regression;
OLS
regression
Schiehll, Terra
& Victor
(2013)
Brazil
2007;
68 firms with
ESO plans
OLS
regression
Executive stock
options
Coebergh
(2011)
Netherlands
2003-2008;
399 firm-year
observations
Panel data
regression
Corporate
strategy
Braam &
Netherlands
2004;
Linear
Financial and
Executive
compensation
Report of
management’s
responsibilities
32
Positive
association
No
association
Negative
association
Level of debt,
total cost ratio,
ROA
Ratio of
independent to
total audit
committee
members,
frequency of
audit committee
meetings, new
public debt
issues and new
equity issues,
institutional
ownership
Board size,
presence
compensation
committee, Big 4
auditor
Foreign
exchange listing,
listing/national
ranking status,
listing age, sector
(e.g. basic
materials, food
producers, retail,
media, fixed line
telecommunicati
ons, financial,
software &
computer
services)
Disclosure of
ROA,
debt/equity
ratio
Proportion of
independent
directors,
CEO duality,
ownership
concentration
Size,
leverage,
ownership
concentration
Economic
performance
Financial
statement
restatements,
management
ownership,
interest rate on
debt
Familycontrolled
Profitability
(ROE), sector
(i.e.
pharmaceutical
&
biotechnology)
Borghans
(2010)
149 firms
regression
non-financial
performance
measures
performance
measures of
other companies
to which the firm
is related via
their board
interlocks,
disclosure of
performance
measures of
other companies
to which the firm
is related via
their external
auditor
Size,
internationality
(i.e. international
diversification)
Cross-listing,
corporate
governance
strength,
leverage, threat
of entry
Size
Raffournier
(1995)
Switzerland
1991;
161 firms
Regression
analysis
Voluntary
disclosure
index
Oxelheim &
Thorsheim
(2012)
Europe
2000-2009;
100 firms
Logistic
regression
Macroeconomi
c effects on
corporate
performance
Kateb (2012)
France
2006;
55 firms
Poisson
regression;
negative
binomial
regression
Structural
capital
Alves (2011)
Spain,
Portugal
(i.e. the
Iberian
Peninsula)
2007;
140 firms
Multiple
regression
analysis
Voluntary
disclosure
index
Management
incentives (=
proportion
of the board’s
remuneration
that is not fixed),
size, growth
opportunities,
economic
performance,
organizational
performance,
board
compensation
Chakroun &
Matoussi
(2012)
Tunisia
2003-2008;
144
observations
Multiple
regression
analysis
Voluntary
disclosure
index
Regulatory
reform, board
size, managerial
33
Introduction
IFRS,
profitability
(ROA), stock
turnover
Capital
intensity (=
PP&E scaled
by total assets)
Firm age,
industry,
economic
performance,
interest in
stakeholder
pressure,
competitive
pressure
Managerial
ownership,
government
ownership,
board
independence
, board size,
existence of
monitoring
structures,
board
expertise,
leverage,
ownership
concentration,
turnover ratio
Size, Big
Four auditor)
Managerial
ownership,
level of debt
Bid-ask spread,
large
shareholder
Board
independence,
ownership
Dhouibi &
Mamoghli
(2013)
Tunisia
2000-2011;
10 banks
Linearmultiple
regression
Voluntary
disclosure
index
Kolsi (2012)
Tunisia
2009-2010;
52 firms
Multiple
regression
analysis
Voluntary
disclosure
index
Barako (2007)
Kenya
1992-2001;
43 firms
Pooled OLS
regression
with panelcorrected
standard
errors
Voluntary
disclosure
index
Lan, Wang &
Zhang (2013)
China
2006;
1,066 firms
OLS
regression
Voluntary
disclosure
index
Wang, Sewon
& Claiborne
(2008)
China
2005;
109 firms
Multivariate
regression
analysis
Voluntary
disclosure
index
Spiegel &
Yamori (2003)
Japan
1996-1997;
814
observations
Nonperforming
loans
Sheu, Liu &
Yang (2008)
Taiwan
1998-2005;
3,841
observations
OLS
regression;
probit
regression
(dummy
dependent
variable)
OLS
regression
(dummy
dependent
variable)
Ho (2009)
Malaysia
1996, 2001,
2006
(statistically
significant
increase in
voluntary
disclosure
over time)
Regression
analysis
Voluntary
disclosure
index
Directors’
compensation
34
ownership, role
duality,
institutional
ownership,
leverage, firm
age
Foreign
ownership, size
Leverage, Big
Four auditor,
ROA, financial
sector
Audit committee,
foreign
ownership,
institutional
ownership, size,
Big 4 auditor,
ROE
Size, leverage,
assets-in-place (=
ratio fixed
assets/total
assets), ROE
State ownership,
foreign
ownership, ROE,
Big 4 auditor
Competitive
pressure, size
Directors’
compensation,
board size,
diversified
ownership,
managerial
ownership
Global corporate
scandals,
external
regulatory
pressures,
corporate
governance
strength,
concentration,
familycontrolled,
competition on
the market
Number of
independent
directors, role
duality, Big 4
auditor
Large
shareholder,
size
Board size,
blockholder
ownership,
state ownership
Big Four
auditor
Bad loan
problems,
leverage
Government
ownership,
native
institutional
ownership
ownership
concentration,
size
Corporate
governance
strength, size,
profitability,
industry, Big 4
auditor, listing
age
Size, assets-inplace
Vu (2012)
Vietnam
2009;
252 firms
OLS
regression
Voluntary
disclosure
index
Hossain &
Reaz (2007)
India
2002-2003;
38 banking
companies
OLS
regression
Voluntary
disclosure
index
Sehar, Bilal &
Tufail (2013)
Pakistan
2012;
372 firms
Voluntary
disclosure
index
Profitability,
size, firm age,
auditor size
Almutawaa
(2013)
Kuwait
2005-2008;
206 firms
Crosssectional
multiple
regression
Multivariate
regression
analysis
Voluntary
disclosure
index
Government
ownership, crosslisting, size
Familycontrolled,
audit
committee
Hossain &
Hammami
(2009)
Qatar
2007;
25 firms
OLS
regression
Voluntary
disclosure
index
ROE
Zunker (2011)
Australia
2004;
970 firms
Employeerelated
disclosures
Gamerschlag,
Möller,
Verbeeten
(2011)
Germany
2005-2008;
470 firm-year
observations
Binary
logistic
regression
(dummy
dependent
variable)
Probit
regression
Firm age, assets,
number of
subsidiaries,
assets-in-place
Economic
performance,
size, adverse
publicity
Sukcharoensin
(2012)
Thailand
50 firms
Regression
analysis
CSR disclosure
index
BorgheiGhomi &
Leung (2013)
Australia
2009-2011;
300 firm-year
observations
Crosssectional
regression
Greenhouse gas
emission
(GHG)
disclosure
CSR disclosure
index
35
Visibility,
profitability
(ROIC), freefloat
in percentage of
shares, U.S.listed, size
Corporate
governance
rating, public
ownership,
ownership
dispersion
Size, corporate
governance
strength, crosslisted, ownership
Foreign
ownership
State
ownership,
managerial
ownership
Age,
diversificatio
n, board
composition,
cross-listed,
complexity of
business
Leverage
ROE, ROA,
Tobin’s Q
Industry
Crossdirectorships,
board size, role
duality,
company
growth
Financial
leverage
index
PradoLorenzo,
RodríguezDomínguez,
GallegoÁlvarez &
GarcíaSánchez
(2009)
World
2005;
101 firms
Linear OLS
regression
Greenhouse gas
emission
(GHG)
disclosure
index
concentration,
leverage
Size, market-tobook ratio, sector
(i.e. airlines,
chemicals, forest
and paper
products, metals,
mining and
crude-oil
production,
motor vehicles
and parts,
utilities)
Leverage,
ROA
ROE, sector
(i.e. aerospace
and defense)
Table 2: Summary of articles about the determinants of early/voluntary IFRS adoption
Authors
Geographical
area
Germany
Sample
André, Walton &
Yang (2012)
UK
2009;
8,417 firms
Kolsi & Zehri (2013)
Developing
countries
worldwide
2008;
700 firms from
74 developing
countries
Gassen & Sellhorn
(2006)
1998-2004;
708 firm-year
observations
Research
method
Logistic
regression
(dummy
dependent
variable)
Logistic
regression
(dummy
dependent
variable)
Positive association
No association
Firm size,
international
exposure, ownership
dispersion, recent
IPOs, U.S.-listed
Firm size, leverage,
internationality, Big
Four auditor
Level of debt,
number of
exchange listings
Logistic
regression
Firm size, Big Four
auditor
36
Profitability,
capital intensity,
sector
(manufacturing
and financial),
growth,
ownership
structure,
productivity
Cross-listed,
ROE, leverage
Negative
association
4. Hypotheses
In this section, the hypotheses are developed and explained. Most voluntary disclosure
determinants on which sufficient evidence was provided in Section 3 are included in the
hypotheses.
4.1
Firm size
In the previous section it could be seen that many prior studies had found a positive relation
between firm size and voluntary disclosure. Citro (2013), whose study reviews previous
literature on the determinants of disclosures, provides three arguments for this positive
association. First of all, collecting and producing voluntary information is more costly for
smaller firms, since they have fewer resources. Secondly, large firms are exposed to a higher
degree of public visibility, which results in more pressure to disclose additional information.
Thirdly, large firms are more inclined to attract capital from investors. Hence, they disclose more
voluntary items, since extra information usually leads to higher confidence and less uncertainty
among investors.
Since there is extensive evidence on a positive relation between firm size and voluntary
disclosure, it is hypothesized that this also holds for the issuance of the new style audit report.
H1: Firm size is positively associated with the voluntary disclosure of the new style audit report.
4.2
Leverage
Citro (2013) and Jensen & Meckling (1976) explain the relationship between leverage and
voluntary disclosure by means of the agency theory. In contrast to the mixed evidence this study
found, the articles Citro (2013) examined point into the direction of a positive association
between leverage and voluntary disclosure. She argues that highly leveraged firms incur more
monitoring costs. In order to reduce their monitoring costs, they tend to disclose more voluntary
information. As a result, leverage is assumed to be related to voluntary disclosure as there is
37
more need for highly leveraged firms to please their creditors by providing them extra
information. Jensen & Meckling (1976) follow the same line of reasoning. The authors explain
that when a firm engages more into debt contract covenants, they aim to reduce their monitoring
costs by providing more voluntary information to their bondholders and other stakeholders.
A study by Khlifi & Bouri (2010) proposes an argument against a positive association between
leverage and voluntary disclosure. The authors state that, conform the signaling theory, firms
with low leverage are more willing to signal their good performance to the market than highly
leveraged firms. Converting this theory to the new style audit report, an explanation in favor of a
negative relationship could be that low leverage firms have less to hide. Since the new style audit
report is focused on firms’ risk areas, low leverage might serve as an incentive to voluntarily
publish a new style audit report.
Since the evidence found in the Section 3 is inconclusive, but leaning towards a positive relation,
the hypothesis follows the theories predicted by Citro (2013) and Jensen & Meckling (1976).
H2: There is a positive association between leverage and the voluntary disclosure of the new
style audit report.
4.3
Big Four auditors
Schiehll, Terra & Victor (2013) state that the choice for a Big Four auditor is an indication that a
firm wants to achieve higher disclosure quality. A Big Four Auditor is more costly than a nonBig Four auditor, meaning that the choice for a large audit firm really signals to the market that
the firm aims to achieve high disclosure quality. Furthermore, big audit firms likely tend to start
earlier with innovations such as the new style audit report, since these are the auditors that have
most in-house knowledge and experience in auditing.
From the examination of past studies it could be concluded that a large majority found that firms
with Big Four auditors are more inclined towards voluntary disclosure than firms audited by a
non-Big Four auditor. Hence, the same direction of the relationship is hypothesized in this study.
38
H3: There is a positive association between Big Four-audited firms and the voluntary disclosure
of the new style audit report.
4.4
Cross-listing
According to Oxelheim & Thorsheim (2011), presence on various capital markets gives more
pressure to provide investors with information. Different markets are characterized by different
needs. Information that is beneficial to investors on one capital market might be meaningless to
investors on another exchange. Moreover, Cooke (1989) explains that a cross-listing leads to a
greater distance between owners and management. As a result, agency costs, like monitoring
costs, increase. In order to offset this rise in agency costs, cross-listed firms are assumed to
engage more in voluntary reporting.
Four of the articles discussed in the previous section have found a significantly positive relation
between a cross-listing and voluntary disclosure (i.e. Coebergh, 2012; Almutawaa, 2013;
Oxelheim & Thorsheim, 2011; and Borghei-Ghomi & Leung, 2013). No negative associations
were encountered. Based on this information, one would expect that cross-listed firms are more
inclined to disclose a new style audit report than other firms. However, there are quite some nonDutch firms listed on the NYSE Euronext Amsterdam, which are all included in the sample.
These firms are almost by definition cross-listed, as it is normal for a firm to have its IPO (Initial
Public Offering) at the local stock exchange. Non-Dutch firms might be less aware of the
existence of the new style audit report, as it is presumably popular in the UK and the
Netherlands. It can be argued that non-Dutch firms, which are almost always cross-listed, are
probably less likely to voluntarily disclose the new style audit report. With this information in
mind, and in contrast to what empirical evidence and theory says, this study predicts a negative
relation between being cross-listed and voluntarily issuing the new style audit report.
H4: There is a negative association between cross-listed firms and the voluntary disclosure of
the new style audit report.
39
4.5
Board size
One of the most often-heard arguments in favor of a positive association between board size and
voluntary disclosure, is that large boards have more resources (i.e. knowledge and capital) to
engage in additional, non-mandatory reporting practices (Schiehll et al., 2013). Notice that by
‘board’, the Board of Directors is meant. Dhouibi & Mamoghli (2013) add that large Supervisory
Boards are more likely, and have more possibilities, to monitor the Board of Directors. More
attention from the Supervisory Board might serve as an incentive for the Board of Directors to
voluntarily provide investors with more information. It is often assumed that a large Board of
Directors corresponds to a large Supervisory Board. For example, the correlation between the
size of the Supervisory Board and the size of the Board of Directors in this study is 0.48.
Therefore, this theory by Dhouibi & Mamoghli (2013) can also serve as a predictor of the
relation between Board of Directors size and voluntary disclosure.
Yermack (1996) found that small boards are more inclined to provide managers with
compensation incentives or fire them when results are insufficient. Following this line of
reasoning, it is expected that managers in firms with small boards tend to engage more in
voluntary reporting, as the performance-based rewards and threats are more extreme. Other
arguments for a negative relationship are provided in the article by Sheu, Liu & Yang (2008).
Large boards would be less flexible in initiating strategic changes and exhibit fewer consensuses,
leading to the postponement of decisions (Goodstein, Gautam & Boeker, 1994; Golden & Zajac,
2001). Both arguments would be detrimental for engaging in voluntary reporting.
Five articles discussed in the previous section found a significant relationship between board size
and voluntary reporting, of which three were positive and two were negative. As can be seen, the
evidence on this relationship is inconclusive. However, in order to construct a hypothesis, this
study follows the small majority. Thus, it is proposed that a positive relation exists between
board size and the voluntary issuance of the new style audit report.
H5: Board size is positively associated with the voluntary disclosure of the new style audit
report.
40
4.6
Age
For practical reasons, this study applies listing age as a proxy for age. This is extensively
explained in the next section. Sehar, Bilal & Tufail (2013) mention two reasons why older firms
tend to engage more in voluntary disclosure than younger firms. First of all, they state that
younger firms have lower investment funds, making it less profitable for them to voluntarily
disclose information. In addition, the younger the firm, the fewer records there are. As the
second argument, the authors bring forward that a young firm might have insufficient records of
operations, making them bound to disclose less information. Coebergh (2011) states that firms
that have been listed for a long time have often established a vast reputation, in contrast to new
firms on the capital market. Because of this better reputation, the market usually expects a higher
amount of disclosure by long-listed firms. On the other hand, Coebergh (2011) argues there
usually is more uncertainty surrounding younger firms. To reduce the information asymmetry,
younger firms might be more willing to disclose voluntary information. However, the evidence
obtained in the previous section points towards a positive association (e.g. Hossain & Hammami,
2009; Sehar, Bilal & Tufail, 2013; and Chakroun & Matoussi, 2012). Hence, it is expected that
age is positively related to the issuance of a new style audit report.
H6: Age is positively associated with the voluntary disclosure of the new style audit report.
4.7
Competitive pressure
The evidence on the relation between competitive pressure and voluntary disclosure is mixed.
Spiegel & Yamori (2003) found a positive relation, while Chakroun & Matoussi (2012) found
that competitive pressure is negatively related to voluntary reporting. According to Spiegel &
Yamori (2003), firms operating in a competitive market experience higher stakeholder pressure
to disclose extra information, in order to achieve or maintain a competitive advantage over
competitors. Not disclosing information that rival firms do disclose might lead to a competitive
disadvantage. Chakroun & Matoussi (2012) define competition as the degree of entry barriers in
an industry. High entry barriers are associated with a low degree of competition in an industry.
They state that the profits of firms in industries with high entry barriers are materially affected by
41
the entrance of a newcomer, in contrast to earnings of firms in sectors with low entry barriers.
Because there is more pressure on their profits, it is theorized that high entry barrier industry
firms are more willing to satisfy their stakeholders. One of the ways to achieve this is by
reporting voluntary information. This is called the proprietary cost theory. As is clear, evidence
and theories on the relationship between competitive pressure and voluntary disclosure are both
mixed, so the direction of the hypothesis is based on a closer look at both studies examining this
association. For three reasons, the hypothesis of this study follows the research of Chakroun &
Matoussi (2012). First of all, this study is much more recent. Second, in contrast to the research
of Spiegel & Yamori (2003), the study of Chakroun & Matoussi (2012) has been published in an
academic journal. Third, the relation between competitive pressure and voluntary disclosure has
a higher significance level in the research of Chakroun & Matoussi (2012). Therefore, it is
hypothesized that there is a negative association between competitive pressure and the issuance
of the new style audit report. As will be explained in the next section, market concentration will
serve as a proxy for competitive pressure.
H7: Competitive pressure is negatively associated with the voluntary disclosure of the new style
audit report.
4.8
Ownership dispersion
Ownership structure is believed to be related with the extent of voluntary disclosure. Let’s give
an example relating to managerial ownership. The main objective of shareholders is to gain a
return on their investment as a result of a rise in the share price. This can be achieved by a good
performance of the firm they invest in. For this, shareholders are dependent on the choices of
management. A high degree of managerial ownership results in a greater alignment between the
goals of management and shareholders. When managers own shares of the firm, they want, just
like the shareholders, to achieve a higher share price. It is assumed that voluntary disclosure is
advantageous for the share price of a firm, so when managerial ownership increases,
management might be more inclined to engage in voluntary disclosure.
42
Another example is government ownership. The government invests in firms for strategic
purposes. Profit maximization is often not the main objective for state-owned firms. They are
more focused on the public interest. Voluntarily disclosing information might be one of the
things that satisfy this public interest. On the other hand, Alves (2011) argues that managers of
state-owned firms are likely to face less discipline from the market for corporate control. This, in
turn, might lead to less voluntary disclosure.
Many studies discussed in Section 3 found evidence of a relation between voluntary disclosure
and a firm’s ownership structure. A majority showed a positive association for institutional and
foreign ownership, while there was mixed evidence on the association of managerial and state
ownership with voluntary disclosure. Negative relationships were found for family-controlled
businesses.
This study only focuses on ownership dispersion, as there are no data available for Dutch listed
firms about the percentage of shares held by different types of owners. As will be explained in
the next section, ownership dispersion will be represented by a variable measuring a firm’s
portion of freefloat shares.
In case of a dispersed ownership structure, shareholders have little authority over management.
Therefore, they have to guard their interests by effectively monitoring management, as theorized
by the agency theory, which assumes that the principal monitors the agent. Gamerschlag et al.
(2011) argue that because large shareholders have more direct authority over management, they
do not engage in monitoring management but try to influence decisions themselves. The
presence of large shareholders is associated with a concentrated ownership structure. With that in
mind, managers in firms with dispersed ownership might feel more need to report voluntary
information, as they are monitored more effectively. Furthermore, according to Chau & Gray
(2002), firms with a dispersed ownership structure face higher public demand for voluntary
information. This is the result of a broader shareholder base. As a consequence, managers of
dispersed ownership firms have more incentives to report voluntarily.
43
Gamerschlag et al. (2011) found that a high percentage of freefloat shares, which indicates a high
level of ownership dispersion, is related to more voluntary disclosure. Other prior studies also
found positive associations between ownership dispersion and voluntary disclosure. On the other
hand, negative associations were found between voluntary disclosure and ownership
concentration, which is the opposite of ownership dispersion. Therefore, this study predicts a
positive relation between ownership dispersion and the voluntary issuance of the new style audit
report.
H8: Ownership dispersion is positively associated with the voluntary disclosure of the new style
audit report.
4.9
Industry
According to Dahawi (2009), the association between industry type and voluntary disclosure
stems from a difference in transparency between industries. He argues that, for example,
financial firms engage less in voluntary disclosure because of greater opacity. Arya & Mittendorf
(2005) explain differences in voluntary disclosure among industries by the ‘herd behavior’
principle. This principle resembles mimetic isomorphism, discussed in Section 2. When one firm
in an industry reports voluntarily, other firms in the same industry feel like they cannot stay
behind, because that would lead to a competitive disadvantage. This can lead to significant
differences in voluntary reporting among industries.
Some studies discussed in Section 3 examined whether a firm’s industry is of effect on its degree
of voluntary reporting (i.e. Coebergh, 2011; Kolsi, 2012; Vu, 2012; and Prado-Lorenzo et al.,
2009). Most of the articles found significant industry effects. Combined with convincing
theoretical arguments, it seems evident that associations between industry type and voluntary
disclosure exist. Hence, the following hypothesis is constructed:
H9: Associations exist between the voluntary disclosure of the new style audit and the industry of
firms.
44
4.10
Concluding remarks
Two often-applied voluntary disclosure determinants, corporate governance strength and assetsin-place, could not be hypothesized. Corporate governance strength is normally measured as the
proportion of independent directors on a company’s board. However, for the measurement of this
proxy, a one-tier corporate governance structure is needed. Very few firms in the Netherlands
apply this structure. Hence, it is not feasible to include this variable in the regression model.
Assets-in-place is measured as the ratio of fixed assets over total assets. However, almost a
quarter of the firms in the research sample consist of financial institutions, which have no to very
few fixed assets on their balance sheet. This would lead very low ratios, which might bias the
research results. In other studies, financial institutions are often excluded from the sample, in
order to measure variables like assets-in-place. However, because of the low amount of
observations, financial institutions are not excluded from this study’s research sample. As a
result, also this variable cannot be hypothesized. Furthermore, it was decided not to examine the
relation between a firm’s profitability and the voluntary disclosure of the new style audit report.
There are many small firms in the sample, whose profitability, in contrast to large firms, often
fluctuates heavily from year to year. Therefore, it does not seem fair to test this relationship, as it
would represent a snapshot in time.
45
5. Research design
The empirical objective of this study is to examine the firm characteristics related to the
voluntary disclosure of the new style audit report. This section provides the statistical
background of this study. As explained in Section 2, the research design and research model are
largely modeled after André et al. (2012). First of all, the research sample is discussed. Second,
the variables applied in this research are reviewed. Finally, the logistic research model is
presented. Section 6 follows this section and analyzes the main results of the research regression.
5.1
Research sample
The research sample consists of 109 firms listed on the NYSE Euronext Amsterdam, plus ABN
AMRO, a formerly listed Dutch bank, and PGGM, a Dutch pension fund. Both issued a new
style audit report over 2013. ABN AMRO and PGGM are, as of May 2014, the only non-listed
Dutch firms of which it is known that they have issued a new style audit report over 2013. These
firms are included in sample, as more observations lead to stronger and more convincing
regression results, especially when the amount of observations is already quite low, as is the case
in this research. The NYSE Euronext Amsterdam actually consists of 114 firms. However, Reed
Elsevier, Royal Dutch Shell, Royal Bank of Scotland and Unilever are excluded from the
sample. These firms are listed on the London Stock Exchange, meaning that they had to
mandatorily publish a new style audit report over 2013. Novisource is also excluded from the
sample, as this firm reported zero revenues over 2013, and the latest ‘real’ earnings number
could not be found. This means that in total, there are 111 firms included in the research sample.
All audit reports in this research are over the fiscal year 2013. The large majority of the audit
reports are dated in the period February-April 2014. Some firms had a year-end of June 30, 2013
or September 30, 2013. These firms are also included in the sample.
46
5.2
Variables
The dependent variable is represented by the new style audit report (NEWit). Voluntary adopters
of the new style audit report are distinguished from non-adopters by the construction of a dummy
variable. Firms wíth a new style audit report are assigned a value of 1, while firms without a new
style audit report are assigned a value of 0.
In total, 10 independent variables are included in the regression model. All independent variables
were hypothesized in the previous section and are projected to exhibit a significant relationship
with the dependent variable.
Firm size is measured by the variable REVit, which is the total revenue of a firm over the year
2013. Some firms in the sample provided their earnings number in U.S. dollars. The revenues of
these firms were transformed to Euro by applying the US$ - Euro exchange rate as at December
31, 2013. Two firms did not report any earnings over the year 2013, as they are so-called ‘empty
shells’. This means that these firms do currently not have any operating activities. For these
firms, the earnings number of the latest available year with ‘real’ earnings numbers is taken as a
measure of firm size. Many studies used (the log of) total assets as a proxy for firm size (e.g.
Oxelheim & Thorsheim, 2012; André et al., 2012; and Gamerschlag et al., 2011). However,
when examining the financial statements of the sampled firms in this study, it was found that a
firm’s amount of total assets is much more volatile than the level of total revenue. Since the time
frame of this study is only one year, it is believed that total revenue as a proxy for firm size is a
better option, as this variable is more constant over time and therefore gives a better
representation of the size of a firm. Studies by Roberts (1992) and Prado-Lorenzo et al. (2009)
also applied (average) total revenue as a proxy for firm size.
Leverage (LEVit), which is an indicator of a firm’s level of debt, is calculated as the ratio of total
liabilities to total assets. The balance sheet amounts used to determine leverage are those of yearend 2013. This method to measure leverage was also applied by a.o. Chakroun & Matoussi
(2012), Oxelheim & Thorsheim (2012) and André, Walton & Yang (2012).
47
BIG_4it, which is a dummy variable, relates to a firm’s auditor. Firms audited by a Big Four audit
firm (i.e. KPMG, PwC, Deloitte and EY) are assigned a value of 1, while firms audited by a nonBig Four firm (e.g. BDO, Mazars and Baker Tilly Berk) are assigned a value of 0. In this
research sample, only 15 out of 111 firms are audited by a non-Big Four firm.
The variable CROSSit, which is also a dummy variable, assigns a value of 1 to cross-listed firms
and a value of 0 to other firms. Being cross-listed means that a firm is listed on two or more
stock exchanges. Also firms trading on foreign OTC (over-the-counter) markets, predominantly
in the U.S., are labeled as being cross-listed.
BOARD_SIZEit measures the number of members of a firm’s Board of Directors as of December
31, 2013. The large majority of the sampled firms has a two-tier corporate governance structure,
implying that there is both a Board of Directors and a Supervisory Board. However, some firms
have a one-tier corporate governance structure, meaning that they do not have a separate
Supervisory Board, but only a Board of Directors. Within the Board of Directors, these firms
normally make a distinction between independent directors and executive directors. Unlike
executive directors, independent directors are not involved in the day-to-day operations of the
firm. Therefore, they are regarded as the supervisory body of the Board of Directors. Just like a
normal Supervisory Board, they monitor the managers (executive directors). As a result, for onetier corporate governance structure firms, this study applies only the number of executive
directors on the Board of Directors as a substitute for board size. All studies discussed in Section
3 which included board size as a variable in their regression also measured board size as the
number of Board of Directors members (e.g. Sheu et al., 2008; and Schiehll et al., 2013).
AGEit corresponds to listing age, which is the number of years since a firm’s initial listing.
Listing age as a proxy for firm age is often applied in academic literature (e.g. Pástor &
Veronesi, 2003; Fama & French, 2004; Chun, Kim, Morck & Yeung, 2008). Shumway (2001)
argues that listing age is the best measure of firm age, as it is one of the milestones of a firm’s
life. Furthermore, listing age is a popular method because it is easy to measure. It also exhibits
reality, as firms with a rich history are often listed longer.
48
Another method to measure a firm’s longevity is to simply take the firm age. However, the
problem with this method is that for almost all companies there is not one single firm age, as
most of them have experienced many mergers and acquisitions throughout their lives. Therefore,
it is hard to determine the year the firm was founded.
Two firms in the sample, both new style audit report issuers, are not listed. In order to keep the
results as unbiased as possible, this study simply takes the average of the listing age of all new
style audit report issuers for these two firms, which corresponds to a listing age of 31 years.
MRKT_CONCit is an indicator of the competition in a firm’s market. This variable measures the
market concentration in a firm’s industry by taking the sum of the market shares of the four
largest firms in the market. Market concentration is used as a measure for competitive pressure.
Namely, the higher the total market share of the four largest firms, the more concentrated the
market is. Bikker & Haaf (2002) found that a highly concentrated market is associated with
lower competitiveness. Also in other studies, concentration measures often serve as proxies for
competitive pressure (Cetorelli, 1999; Berger et al., 2004). Since it is hypothesized that there is a
negative association between competitive pressure and the issuance of the new style audit report,
it is expected that there is a positive relation between MRKT_CONC and the disclosure of the new
style audit report.
The numbers for the variable MRKT_CONCit are based on U.S. data, as there are no European or
Dutch data available. The U.S. data seem to be usable for this thesis, as they exhibit
resemblances to the Dutch market. For example, the market share of the four largest delivery
service firms in the U.S. is 94%. This market is highly concentrated in the Netherlands as well
(Consumer Postal Council, 2014). On the other hand, the market share of the four largest U.S.
firms in electronic equipment is just 14.5%. The electronics sector has always been known to be
highly competitive, also in the European market (CBI, 2014). The classification of firms into
sectors is done based on the ICB Classification Benchmark (ICB) system. The ICB system is
“used globally to divide the market into increasingly specific categories, allowing investors to
compare industry trends between well-defined subsections” (Euronext, 2014). The ICB system
assigns 4-digit numbers to firms (e.g. 6535). The first digit stands for the industry. This digit
49
only represents a broad indication of a firm’s industry. The second, third and fourth digit are
applied to make a firm’s classification more specific. These digits correspond to, respectively, a
firm’s ‘supersector’, ‘sector’ and ‘subsector’. According to Euronext (2014), firms can be
classified into 10 industries, 19 supersectors, 41 sectors and 114 subsectors. To measure market
concentration, each firm is carefully classified based on its sector or subsector. For each ICB
sector/subsector, a similar market is found in the database, which provides the corresponding
market shares.
The variable FREEFLOATit measures the amount of freefloat shares as a percentage of total
outstanding shares. Thomson One (2014) calculates freefloat as shares outstanding less the sum
of positions held by strategic entities (i.e. corporations, holdings and individuals) and
government agencies. A firm’s freefloat is defined as “the portion of its shares that can be
publicly traded” (Financial Times Lexicon, 2014).
The percentage of freefloat shares is usually seen as an indicator of ownership dispersion
(Demsetz, 1968). Therefore, it is applied as a substitute for ownership dispersion. A small
freefloat percentage implies that the percentage of shares publicly available for trading is low. A
large part of a firm’s share capital is namely concentrated in the hands of institutional and
strategic investors. This share capital is locked, meaning that it is not available for trading. A
high amount of locked, institutionally-owned shares normally implies that there is low ownership
dispersion. Therefore, it is safe to assume a positive relation between the percentage of freefloat
shares and ownership dispersion, as this variable was also used as a proxy for ownership
dispersion by Gamerschlag et al. (2011).
Two firms in the sample are not listed, so they do not have any shares outstanding. Again, with
the aim to diminish this problem, the average of the proportion of freefloat shares of the new
style audit report issuers is taken for these two firms.
The last independent variable, SECTORit, classifies all sampled firms into different industries.
This arrangement is based on the ICB system. Because of the limited amount of observations in
this study, firms are classified based on only the first digit of their ICB code. This means that the
50
111 firms in the sample of this study are classified into ten different industries. However, none of
the sampled firms is part of ICB7000 (Utilities). So actually, the firms are classified into nine
industries, namely Oil & Gas, Basic Materials, Industrials, Consumer Goods, Health Care,
Consumer Services, Telecommunications, Financial and Technology. Because of the low amount
of observations in ICB1 and ICB6000 (respectively Oil & Gas and Telecommunications), this
study merges the industries Oil & Gas and Basic Materials into one industry called ‘Materials’
and considers Telecommunications as part of Consumer Services. Health Care has also been
added to Materials. Because none of the four firms in the Health Care industry has issued a new
style audit report, this variable fails to provide a result when running a logistic regression. Since
the main activity of the majority of the sampled firms in the Health Care sector is biotechnology,
which is about creating new products by using raw (often chemical) materials and organisms,
these firms have been placed in the Materials sector. This leaves us with six different industries
the firms can be classified into. The frequency of firms per sector can be found in Table 5.
Of course, also the intercept (α0) and the error term (Ɛit) are included in the regression model. All
variables are summarized in Table 3. The data source for each variable is also provided in this
table.
Table 3: Description of variables
Variable
Description
Data source
1 if a firm has voluntarily issued a new PwC (2014a); hand-collected
NEWit
style audit report; 0 otherwise
Total revenue (€)
Calculated based on the 2013
REVit
Annual reports
Leverage, calculated as the ratio of Calculated based on the 2013
LEVit
total liabilities to total assets
Annual reports
1 if a firm is audited by a Big Four PwC (2014a); hand-collected
BIG_4it
auditor; 0 otherwise
1 if a firm is listed on more than one Hand-collected
CROSSit
stock exchange; 0 otherwise
BOARD_SIZEit
AGEit
MRKT_CONCit
The size of the Board of Directors
(two-tier firms); the amount of
executive directors on the Board of
Directors (one-tier firms)
Listing age
The total market share held by the four
51
Thomson One (2014); handcollected; 2013 Annual reports
Hand-collected
United States Census
Bureau
FREEFLOATit
SECTORit
5.3
largest firms in an industry
The ratio of freefloat shares to total
shares outstanding
A firm’s sector (materials, industrials,
consumer goods, consumer services,
financials and technology)
(2007)
Thomson One (2014)
Industry Classification
Benchmark (ICB) system
(Euronext, 2014)
Research model
This research is conducted by means of a regression analysis, applying the logistic regression
model. This model can only be applied in case of a binary dependent variable, which is a
variable that can just take two values, in this case 0 or 1. According to the Institute for Digital
Research and Education (2014a), an institute developed by UCLA, there are six assumptions that
have to be met when running a logistic regression: 1) the true conditional probabilities are a
logistic function of the independent variables, 2) no important variables are omitted, 3) no
extraneous variables are included, 4) the independent variables are measured without error, 5)
the observations are independent, and 6) the independent variables are not linear combinations of
each other.
There are some notable differences between a logistic regression and an OLS regression. Where
an OLS regression predicts a continuous outcome variable, meaning that the dependent variable
can take all possible values, a logistic regression predicts a dichotomous variable. It measures the
probability that the dependent variable is equal to 1 (i.e. Y=1), given the values of the
independent variables. Moreover, the coefficients in a logistic regression are interpreted
differently. In an OLS regression, the regression coefficient of the independent variable equals
the change in the dependent variable when there is a one unit change in the independent variable.
A logistic regression looks at odds ratios in order to interpret the regression results. Suppose that
the regression coefficient of an independent variable equals 0.25. In that case, the odds ratio is
1.28, which is calculated by taking the exponential function of 0.25 [= exp (0.25)]. This means
that the likelihood that the dependent variable equals 1 is 1.28 times more likely when the value
of the independent variable increases by 1 unit. A regression coefficient of zero equals an odds
ratio of 1, meaning that there is no difference. This shows that the relation between logistic
regression coefficients and odds ratios holds. Furthermore, the fit of the model is expressed
52
differently in a logistic regression. In an OLS regression, the R-squared is used to determine the
fit of the model. However, a logistic regression applies a chi-squared test to measure whether the
model is a good fit. Specifically, the chi-squared test measures “the fit of the observed values to
the expected values” (Crossman, 2014). When the probability of the chi-squared test is lower
than 0.05, it usually implies that the model is a good fit. Lastly, while OLS assumes that the
residuals are normally distributed, this does not hold for a logistic regression (Crossman, 2014).
The binary logistic regression model is chosen for this research as it is the only model that is
specifically constructed for regressions with a dummy dependent variable. Therefore, the binary
logistic regression model is most likely to provide unbiased regression results. This decision is
supported by empirical research. By applying Monte Carlo simulation, Beck (2011) examined
which of the two statistical models (i.e. logistic and OLS) is best to use in case of a binary
dependent variable. The author showed that in most scenarios, a logistic regression proved to be
a better fit. Hence, he concluded that it is safer to use a logistic regression instead of an OLS
regression in case the dependent variable is binary. Pohlmann & Leitner (2003) also compared
the OLS method with logistic regression by evaluating the differences of the results obtained on
common data sets. The authors conclude that both research models can be used in case the
dependent variable is binary. However, they found that the logistic model yields more accurate
predictions of dependent variable probabilities, making the logistic model superior to the OLS
model. As a result, the authors state that the logistic model should be favored over the OLS
method when the dependent variable is binary. Furthermore, Park (2009) is of opinion that in
case of a categorical dependent variable, which is a variable that can only take a limited number
of possible values, the OLS method can no longer produce the best results, as it makes the
research results biased and inefficient.
The regression model contains all variables discussed previously, plus the intercept and the error
term. NEWit is the dependent, explanatory variable. The logistic regression model is constructed
as follows:
NEWit = α0 + β1*REVit + β2*LEVit + β3*BIG_4it + β4*CROSSit + β5*BOARD_SIZEit + β6* AGEit
+ β7*MRKT_CONCit + β8*FREEFLOATit + ∑βk*SECTORit + Ɛit
53
5.4
Descriptive statistics
Table 4: Descriptive statistics
Variable
NEW
REV (x 1,000,000)
LEV
BIG_4
CROSS
BOARD_SIZE
AGE
MRKT_CONC
FREEFLOAT
N
111
111
111
111
111
111
111
111
111
Min
0
0.069
0.01
0
0
1
1
0.075
0.01
Max
1
57,665
1.27
1
1
9
131
0.94
1
Mean
0.2703
3,541
0.5731
0.8739
0.6486
2.8108
25.559
0.3721
0.6759
St. dev.
0.4461
8,220
0.2430
0.3335
0.4796
1.5107
21.509
0.1836
0.2830
Median
0
508.5
0.56
1
1
2
18
0.358
0.75
Skewness
1.0346
0.9150
-0.0583
-2.2523
-0.6228
1.1821
2.1107
0.9478
-0.6987
* Stata assumes a perfect normal distribution at a kurtosis of +3. Because the reference normal distribution often has
a kurtosis of zero, the kurtosis is adjusted by -3 (DeCarlo, 1997).
The descriptive statistics of all variables, except the industry variables, are provided in Table 4.
For each variable, the number of observations (N), the minimum and maximum value, the mean,
standard deviation, median, skewness and kurtosis are given. Skewness is the degree to which
the different observations of a variable point into one direction, applying the perspective of a
normal distribution. Suppose that 80 out of 111 observations are on the left side of the null-point
of the normal distribution. In that case, the skewness of the variable is negative. However, when
80 out of 111 observations are on the right side of the null-line, the skewness is positive. Balanda
& MacGillivray (1988) define kurtosis as “the location- and scale-free movement of probability
mass from the shoulders of a distribution into its centre and tails.” A positive kurtosis means that
there is an even distribution of observations of a variable, which corresponds to a sharp peak.
The higher the value of the kurtosis, the sharper this peak. In case of a negative kurtosis, many
observations are concentrated toward the mean, which implies a flat top. A kurtosis of zero,
meaning that it is neither negative nor positive, corresponds to a perfect normal distribution. For
a graphical illustration of the different degrees of kurtosis, see Figure 1 on the next page.
54
Kurtosis*
-0.9296
18.2009
-0.0459
3.0729
-1.6122
1.7114
5.9381
0.6545
-0.5466
Figure 1: Levels of kurtosis
(Source: Signal Trading Group, 2014)
As can be seen in Table 4, 27.0% of firms have issued a new style audit report. This percentage
corresponds to 30 out of 111 firms. Almost two-thirds of the sampled firms are cross-listed
(64.9%), and an even larger majority is audited by a Big Four firm (87.4%).
What is notable is the broad range of values for listing age (1 to 131), although the mean is quite
normal, with a listing age of 25.6 years. Another remarkability is that the maximum value of the
variable LEV is 1.27, meaning that there is a firm with more liabilities than assets, which is the
result of a negative equity.
Table 5: Frequency of sector variables
Variables
Absolute
13
SECTOR_MATERIALS
29
SECTOR_INDUSTRIALS
11
SECTOR_CONSGOODS
14
SECTOR_CONSSERVICES
28
SECTOR_FINANCIALS
16
SECTOR_TECHNOLOGY
Total
111
Frequency
Relative (%)
11.71
26.13
9.91
12.61
25.23
14.41
100
As can be seen in Table 5, the distribution of firms to different sectors is quite diversified. No
sector contains more than firms or less than 10 firms. The sector INDUSTRIALS contains most
observations, while the least amount of firms are included in the sector CONSGOODS.
55
Table 6: Expected signs of the independent variables
Independent
Expected sign
variables
(+)
REV
(+)
LEV
(+)
BIG_4
(-)
CROSS
(+)
BOARD_SIZE
(+)
AGE
(+)
MRKT_CONC
(+)
FREEFLOAT
Table 6 provides the expected signs of all independent variables (except the sector variables), as
predicted by the hypotheses developed in Section 4. CROSS is the only variables for which a
negative relation with the dependent variable is expected. The remaining independent variables
are projected to signal a positive association with the dependent variable.
5.5
Statistical testing
Several statistical tests will be performed in the next section, in correspondence with the tests
performed by Zunker (2011) and André et al. (2012). The ‘usual suspects’ heteroskedasticity and
multicollinearity are tested, as well as the distribution of the residuals, the normality of the data
distribution, and the robustness of the regression. Also a chi-squared test will be performed, as
this study applies a logistic regression model.
Heteroskedasticity occurs “when the variance of the errors varies across observations” (Long &
Ervin, 2000). Researchers should try to avoid heteroskedasticity, as it leads to an overestimation
of standards errors, and hence, an underestimation of the t-statistics of regression parameters
(Studenmund, 2010). Smith (2011) states that the significance tests may therefore be inefficient.
However, the regression coefficients are still unbiased in case there is heteroskedasticity.
Heteroskedasticity will be tested by performing the Breusch-Pagan/Cook-Weisberg test. This is
one of the most well-known and applied methods when testing for heteroskedasticity.
Multicollinearity occurs when multiple independent variables are highly correlated. In case of
substantial multicollinearity, the regression coefficients may be “both biased and inconsistent”
56
(Smith, 2011). Multicollinearity causes considerable changes in the regression coefficients when
small adjustments are made to the data or the regression model. This distorts the reliability of the
results. Multicollinearity will be tested by measuring the mean Variance Inflation Factor (VIF) of
the independent variables. When the mean VIF is below the often applied threshold of 10, it
implies that there is no problematic multicollinearity (e.g. Hair Jr., Anderson, Tatham & Black,
1995; Kennedy, 2003).
The normality of the data distribution will be tested by performing the Shapiro-Wilk W test.
Specifically, it tests whether a sample comes from a normally distributed population.
A chi-squared test will also be performed. This test is part of the logistic regression model output
in Stata. It assesses the goodness of fit of the regression model. It will also be looked at whether
the residuals are normally distributed. However, since it is not necessary in a logistic regression
that the residuals are normally distributed, no severe conclusions can be attached to this statistic.
Lastly, there will be a robustness test. When the coefficients and p-values of the explanatory
variable do not change much in the robust regression compared to the initial regression, it is an
indication that the regression coefficients are robust. When this is the case, it is seen as evidence
that the significant coefficients exhibit a true causal relationship with the dependent variable (Lu
& White, 2014).
57
6. Results
This section provides all results. First of all, the correlation between the variables is shown and
discussed. In sub-section 6.2, the statistical tests are provided. These are the BreuschPagan/Cook-Weisberg test for heteroskedasticity, the Variance Inflation Factor (VIF) test for
multicollinearity and the Shapiro-Wilk W test for the normality of the data distribution. Also the
Kernel density estimate of the distribution of the residuals will be provided. In sub-section 6.3,
the results of the logistic regression can be found. These results will be analyzed in sub-section
6.4. Finally, sub-section 6.5 analyzes whether the results of the logistic regression are robust.
The tables and figures in this section are subtracted from Stata 13, with the exception of the
correlation matrix, which was constructed using Microsoft Excel.
6.1
Correlation
Table 7: Correlation matrix
Variables
NEW
1
-0.0175
LEV
0.0116
BIG_4
0.1701
CROSS
-0.0620
BOARD_SIZE
0.0361
AGE
0.1461
MRKT_CONC
0.1088
FREEFLOAT
0.2025
SECTOR_MATERIALS
-0.0955
SECTOR_INDUSTRIALS 0.1922
SECTOR_CONSGOODS
-0.0661
SECTOR_CONSSERVICES 0.1354
SECTOR_FINANCIALS
-0.0265
SECTOR_TECHNOLOGY -0.1920
REV
LEV
BIG_4
BOARD_
CROSS
SIZE
1
0.1795
0.1591
0.2714
0.2891
0.0793
0.0405
0.1744
0.1611
-0.0295
-0.0408
0.0910
-0.0148
-0.1436
1
0.0059
0.1037
0.1658
-0.1243
0.0047
0.0819
-0.0150
0.1476
-0.1438
0.0322
0.0561
-0.1483
1
0.4025
0.1868
0.0391
0.1020
0.1776
0.1384
0.1642
-0.0556
-0.1009
-0.0293
-0.1531
1
0.2713
0.0201
0.1521
0.3799
0.1507
0.0081
-0.0717
-0.1183
0.1233
-0.1278
AGE
SECTOR SECTOR SECTOR SECTOR_ SECTOR SECTOR
MRKT_C FREEFL _MATERI _INDUST _CONSG CONSSE _FINANC _TECHN
ONC
OAT
ALS
RIALS OODS RVICES
IALS OLOGY
NEW
REV
1
-0.0404
0.1085
0.2721
0.0645
-0.0070
-0.2189
0.0117
0.1420
-0.0507
1
-0.0920
0.0306
-0.1260
0.0285
0.2702
-0.0302
0.0236
-0.1509
1
0.0498
0.0503
-0.0903
0.0977
0.0196
-0.0551
0.0334
1
0.1057
-0.0176
-0.0434
-0.0061
0.0724
-0.1216
1
-0.2166
-0.1208
-0.1384
-0.2115
-0.1495
1
-0.1972
1
-0.2259 -0.1260
1
-0.3454 -0.1926 -0.2207
1
-0.2441 -0.1361 -0.1559 -0.2384
One of the most notable positive correlations (0.2891) exists between REV and BOARD_SIZE. It
can be theorized that larger firms have more resources available for the appointment of a large
58
1
board. Big firms might also be in need of a larger board, as there are probably more issues to
discuss and decisions to be made.
The variable REV also exhibits a high correlation coefficient with CROSS (0.2714), which implies
that large firms are more prone to list their shares on another stock exchange. Also this
correlation coefficient is perfectly understandable. When a firm grows larger, it might consider
issuing shares on the local stock exchange. The same procedure holds when a firm is already
listed. When a firm continues to grow, it starts thinking about expanding and attracting more
capital, by, for example, listing on a foreign stock exchange.
The most notable positive correlation (0.4025) can be found between the variables BIG_4 and
CROSS. Firms with a Big Four auditor are generally larger than firms with a non-Big Four
auditor, which is also implied by the correlation coefficient between REV and BIG_4 (0.1591).
The theory behind this positive correlation is the same as for the correlation between CROSS and
REV, which was discussed above. Larger firms, which have a higher probability of having a Big
Four auditor, are more likely to issue shares on a foreign stock exchange in order to attract new
capital.
Besides the industry-related correlations, the most negative correlation (-0.1243) could be found
between AGE and LEV. An explanation could be that start-up firms make large capital
investments. The returns on these investments are often earned years later. Therefore, these firms
might have a higher leverage ratio, as the start-up investments are recorded as liabilities on their
balance sheet.
6.2
Results of the statistical tests
In this sub-section, the results obtained from the statistical tests are explained and discussed.
Table 8 provides the results of the Breusch-Pagan/Cook-Weisberg test for heteroskedasticity.
When prob>chi2 is higher than 0.05, the variance of the error term is constant, implying that
there is homoscedasticity. However, when prob>chi2 is lower than 0.05, there is
heteroskedasticity. In this case, the probability equals 0.5282. There is no heteroskedasticity.
59
Table 8: Breusch-Pagan/Cook-Weisberg test for heteroskedasticity
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: REV LEV BIG_4 CROSS BOARD_SIZE AGE MRKT_CONC FREEFLOAT SECTOR_MATERIALS
SECTOR_INDUSTRIALS SECTOR_CONSGOODS SECTOR_CONSSERVICES SECTOR_FINANCIALS
chi2(13)
Prob > chi2
=
=
11.99
0.5282
Table 9 provides the test for multicollinearity. Normally, a threshold of 10 is applied when
analyzing whether multicollinearity exists among the independent variables (e.g. Hair Jr. et al.,
1995; Kennedy, 2003). When the mean VIF is higher than 10, substantial multicollinearity
exists. As can be seen, the mean VIF of the independent variables is 4.01. Because the mean VIF
is lower than 10, it can be concluded that there is no multicollinearity among the independent
variables.
Table 9: Variance Inflation Factor (VIF) test for multicollinearity
Variable
VIF
1/VIF
BIG_4
FREEFLOAT
LEV
BOARD_SIZE
MRKT_CONC
CROSS
SECTOR_IND~S
SECTOR_FIN~S
AGE
SECTOR_MAT~S
SECTOR_CO~ES
SECTOR_CO~DS
REV
8.64
7.49
6.12
5.57
4.84
4.14
2.98
2.76
2.64
1.88
1.83
1.81
1.40
0.115755
0.133505
0.163379
0.179503
0.206700
0.241405
0.335993
0.362764
0.378148
0.531368
0.547669
0.552292
0.712189
Mean VIF
4.01
The Shapiro-Wilk W test, provided in Table 10, tests whether the sample population is normally
distributed. The sample population of the large majority of the variables is normally distributed,
as their value of prob>z is lower than 0.05. Only the sample populations of LEV and CROSS are
non-normally distributed. Overall, it is safe to say that the sample population is normally
60
distributed, as almost none of the variables exhibits non-normality of the distribution of the
sample population.
Table 10: Shapiro-Wilk W test for the normality of the data distribution
Shapiro-Wilk W test for normal data
Variable
Obs
W
NEW
REV
LEV
BIG_4
CROSS
BOARD_SIZE
AGE
MRKT_CONC
FREEFLOAT
SECTOR_MAT~S
SECTOR_IND~S
SECTOR_CO~DS
SECTOR_CO~ES
SECTOR_FIN~S
111
111
111
111
111
111
111
111
111
111
111
111
111
111
0.97215
0.47145
0.98096
0.90249
0.99282
0.91911
0.80236
0.93066
0.94595
0.88925
0.96974
0.86615
0.89872
0.96716
V
z
2.509
47.626
1.716
8.786
0.647
7.289
17.808
6.248
4.870
9.979
2.727
12.061
9.126
2.959
2.053
8.619
1.205
4.848
-0.972
4.431
6.425
4.088
3.532
5.133
2.238
5.555
4.933
2.420
Prob>z
0.02005
0.00000
0.11417
0.00000
0.83448
0.00000
0.00000
0.00002
0.00021
0.00000
0.01261
0.00000
0.00000
0.00775
In Figure 2, the distribution of the residuals can be found. The red line represents a normal
distribution, while the blue depicts the distribution of the residuals in this research. It can be seen
that the peak of the distribution is higher than under a normal distribution. The blue line
resembles a normal distribution. However, the density is still quite large when the Pearson
residuals are high. One of the assumptions of an OLS regression is that the residuals are
normally distributed. However, this is not the case when it concerns a logistic regression.
Therefore, no conclusions can be derived from this figure.
Figure 2: Kernel density estimate of the distribution of the residuals
.4
.2
0
Density
.6
.8
Kernel density estimate
-2
0
2
4
Pearson residual
Kernel density estimate
Normal density
kernel = epanechnikov, bandwidth = .24
61
6.3
Discussion of the results
Table 11 provides the regression results. To get a good understanding of the table, the unknown
concepts at the top of the table, which are specific to a logistic regression, are explained first.
LR chi2(12) is the likelihood ratio chi-squared. The number between brackets corresponds to the
number of independent variables included into the model. LR chi2(12) is related to Prob > chi2,
as Prob > chi2 is the p-value associated with the likelihood ratio chi-squared. Prob > chi2 is a
chi-squared test. An LR chi2(12) of 29.16 in combination with a Prob > chi2 of 0.0037 means
that the model as a whole represents a significantly better fit than in case the same model would
not have any independent variables included. This usually implies that the independent variables
included into the regression model are appropriately chosen for this specific research (IDRE,
2014b).
The log likelihood represents the goodness of fit of a model. It is related to Pseudo R2, which is
an easier method to determine a model’s goodness of fit. Therefore, the log likelihood will not be
discussed in detail. Pseudo R2 represents McFadden's pseudo R-squared, also referred to as rhosquared. Rho-squared is not the same as the R-squared in an OLS model, which is the proportion
of variance in the dependent variable that can be explained by the independent variables. Rhosquared can be calculated as one minus the log likelihood of the fitted model divided by the log
likelihood of the null model. In mathematical terms:
Rho-squared = 1 – (log likelihood fitted model / log likelihood null model)
McFadden (1977) explains that the values of rho-squared “tend to be considerably lower than
those of the R2 index”. He states that values between 0.2 and 0.4 for rho-squared mean an
excellent fit of the model. In the paper by Domencich & McFadden (1975), it is argued that
values of rho-squared between 0.2 and 0.4 correspond to an R-squared of 0.7 to 0.9 in OLS
regressions. Since the value of rho-squared in this model is 0.2251, it could be concluded that
this regression represents a good fit. However, because rho-squared does not have the same
62
meaning as the R-squared in an OLS regression, the IDRE (2014c) warns that this statistic
should be interpreted with “great caution”.
Table 11: Regression results
Logistic regression
Number of obs
LR chi2(12)
Prob > chi2
Pseudo R2
Log likelihood = -50.191422
NEW
Coef.
REV
LEV
BIG_4
CROSS
BOARD_SIZE
AGE
MRKT_CONC
FREEFLOAT
SECTOR_MATERIALS
SECTOR_INDUSTRIALS
SECTOR_CONSGOODS
SECTOR_CONSSERVICES
SECTOR_FINANCIALS
_cons
-2.33e-11
-.2371045
2.055591
-1.514175
-.0652838
.0207455
2.501943
3.165748
1.078152
2.542577
.5414863
2.586435
1.85595
-7.074296
Std. Err.
3.95e-11
1.129845
1.171547
.6607983
.1921651
.0121089
1.486169
1.186549
1.380664
1.219023
1.459848
1.296886
1.222936
1.914304
z
-0.59
-0.21
1.75
-2.29
-0.34
1.71
1.68
2.67
0.78
2.09
0.37
1.99
1.52
-3.70
P>|z|
0.555
0.834
0.079
0.022
0.734
0.087
0.092
0.008
0.435
0.037
0.711
0.046
0.129
0.000
=
=
=
=
111
29.16
0.0037
0.2251
[95% Conf. Interval]
-1.01e-10
-2.45156
-.2405991
-2.809315
-.4419204
-.0029876
-.4108943
.8401552
-1.627901
.1533371
-2.319764
.0445863
-.5409602
-10.82626
5.42e-11
1.977351
4.35178
-.2190338
.3113529
.0444785
5.41478
5.491342
3.784204
4.931818
3.402736
5.128284
4.25286
-3.32233
This thesis distinguishes between three significance levels: 1%, 5% and 10%. The 1% and 5%
significance levels are widely applied and recognized in academic research. Results with a 10%
significance level have to be taken with caution, as the 10% significance level is less commonly
used in academic studies. However, it has been decided also to recognize the results significant
at 10% as being significant, instead of labeling them as insignificant. First of all, quite some
results in this study are not significant at the 5% level but are significant at the 10% level.
Recognizing the 10% significance level gives the readers of this thesis more detailed information
about the strength of the relation between the dependent and the independent variables. Besides,
it seems inappropriate to label variables with a p-value of 0.06 the same as variables with a pvalue of 0.90, i.e. both insignificant.
63
H1: Firm size is positively associated with the voluntary disclosure of the new style audit report.
As can be seen in Table 11, firm size (REV) is not significantly related to the voluntary
disclosure of the new style audit report. In contrast to what was hypothesized, firm size even
exhibits a slightly negative relation with the dependent variable. This means that H1 is rejected.
There is no significant relation between the two variables.
H2: There is a positive association between leverage and the voluntary disclosure of the new
style audit report.
There is also no significant association between leverage (LEV) and NEW, the dependent
variable. On average, highly leveraged firms are slightly less likely to issue a new style audit
report than firms with a lower leverage ratio, although this relation is non-significant. As a result,
H2 is rejected.
H3: There is a positive association between Big Four-audited firms and the voluntary disclosure
of the new style audit report.
Conform H3, there is a significantly positive association between having a Big Four auditor
(BIG_4) and the issuance of the new style audit report. This relation holds at a significance level
of 10%. It is possible to interpret the regression parameter by computing the exponential function
of the parameter. That results in the odds ratio. The exponential function of the regression
coefficient of BIG_4 (2.056) is 7.81. So the odds ratio shows that firms with a Big Four auditor
are 7.81 times more likely to issue a new style audit report than firms with a non-Big Four
auditor.
H4: There is a negative association between cross-listed firms and the voluntary disclosure of
the new style audit report.
There is a significantly negative association between CROSS and the voluntary disclosure of the
new style audit report at a significance level of 5%. The probability that a cross-listed firm issues
a new style audit report is 4.55 times lower compared to a single-listed firm. This number
represents the odds ratio. In case of a negative regression coefficient, 1 has to be divided by the
exponential function of the regression coefficient of CROSS (-1.514), which is 0.22. This result is
64
conform H4, but in contrast to what theory says about the relation between being cross-listed and
voluntary reporting.
H5: Board size is positively associated with the voluntary disclosure of the new style audit
report.
BOARD_SIZE does not exhibit a significant relationship with the dependent variable, which
means that H5 is rejected. Although a positive association was hypothesized, this result is not
that surprising, as previous studies were mostly inconclusive about the relation between board
size and voluntary disclosure. With an extra board member, it becomes only 1.04 times less
likely that a firm engages in issuing a new style audit report. As previously mentioned, this ratio
is calculated by dividing 1 by the exponential function of the parameter coefficient.
H6: Age is positively associated with the voluntary disclosure of the new style audit report.
At a significance level of 10%, there is a positive relation between the listing age of a firm (AGE)
and the voluntary disclosure of the new style audit report. This is in accordance with the
direction specified by H6, so H6 is confirmed.
H7: Competitive pressure is negatively associated with the voluntary disclosure of the new style
audit report.
Competitive pressure is significantly negatively associated with the voluntary disclosure of the
new style audit report, as there is a positive relation between MRKT_CONC and NEW at a
significance level of 10%. This is conform H7, so as a result, this hypothesis is confirmed. From
this result, it can be concluded that firms in markets with lower competitive pressure are more
likely to issue a new style audit report.
H8: Ownership dispersion is positively associated with the voluntary disclosure of the new style
audit report.
It is found that there is significantly positive association between ownership dispersion and the
voluntary disclosure of the new style audit report, as the proxy for ownership dispersion
(FREEFLOAT) exhibits a positive relation with NEW at a significance level of 1%. Therefore, H8
can be confirmed.
65
H9: Associations exist between the voluntary disclosure of the new style audit and the industry of
firms.
There
are
six
sector
variables,
of
which
five
are
included
in
the
regression.
SECTOR_TECHNOLOGY is excluded from the regression and therefore used as the benchmark,
which is common practice when examining industry effects. From the regression results, it can
be
derived
that
firms
in
the
industrials
and
consumer
services
sector
(i.e.
SECTOR_INDUSTRIALS and SECTOR_CONSSERVICES) issue significantly more new style audit
reports than firms in the technology sector. These results hold at a 5% significance level. For the
other sectors, no significant associations can be found. Therefore, H9 is confirmed, as two
significant industry effects have been found.
Concluded, BIG_4, AGE and MRKT_CONC are significantly positively associated with the
dependent variable at a 10% level. FREEFLOAT is significantly positively related to the issuance
of the new style audit report at a 1% significance level. On the other hand, there is a significantly
negative association between CROSS and NEW at a significance level of 5%. At a significance
level of 10%, there is also a significantly negative relation between competitive pressure and the
voluntary disclosure of the new audit report. Furthermore, at a 5% level, it was found that firms
in the sectors ‘Industrials’ and ‘Consumer Services’ disclose significantly more new style audit
reports than firms in the sector ‘Technology’, which served as the benchmark. Summarized, H1,
H2 and H5 are rejected, meaning that the results show no significant association in the expected
direction for these hypotheses. However, H3, H4, H6, H7, H8 and H9 are confirmed, as for these
hypotheses there is a significant relationship in the pre-specified direction.
6.4
Analysis
Big Four auditor
There is a significantly positive relation between having a Big Four auditor and the voluntary
disclosure of the new style audit report. Previous empirical research provides overwhelming
evidence of a strong positive relation between voluntary disclosure and having a Big Four
auditor, but the relation between the disclosure of the new style audit report and having a Big
Four auditor is only significant at 10%. A reason for this could be that, although they consult
66
with and get advice from their auditor, the firms themselves still have the final word about
whether or not issuing a new style audit report. Still, although at 10%, there is a significantly
positive association between issuing the new style audit report and having a Big Four auditor. It
is an indication that Big Four audited firms, in cooperation with their auditor, spark innovative
reporting, as these firms and their auditors seem to be the driving force behind the new style
audit report.
Cross-listing
The significantly negative relation for cross-listed firms is the result of the inclusion of nonDutch firms in the sample, which are almost per definition cross-listed, engaging less in
voluntarily disclosing the new style audit report. As explained in Section 4, non-Dutch firms are
probably less aware of the new style audit report and its advantages. This result proves that this
thought is likely to be the explanation for the negative relation between CROSS and NEW. So
although the studies in Section 3 only found significantly positive associations between a crosslisting and voluntary disclosure, this result is therefore not unexpected. An alternative
explanation can be given applying the theory of Graham et al. (2005). They stated that attaining
more analyst coverage is one of the main reasons for firms to engage in voluntary disclosure. It
seems safe to assume that cross-listed firms have more analyst coverage, as, because of their
cross-listing, they have more international exposure in a variety of countries. Non-cross-listed
firms are more likely than cross-listed firms to have a lack of analyst coverage. Therefore, noncross-listed firms might be more eager to voluntarily issue a new style audit report, in order to
attract more analyst coverage.
Firm age
The significantly positive relation for the variable AGE strengthens the thought that the market
expects a higher level of voluntary disclosure from older firms, as theorized by Coebergh (2011).
As explained in Section 2, Graham et al. (2005) found that one of three main reasons managers
engage in voluntary disclosure is to increase or maintain the reputation of their firm. This result
implies that older firms take more responsibility in taking care of their reputation by responding
to the needs of society, which corresponds to the legitimacy theory. The positive association is in
line with previous empirical research, as the discussed studies in Section 3 found three
67
significantly positive associations against zero significantly negative associations between
voluntary disclosure and firm age.
Competitive pressure
There is a significantly negative relation between competitive pressure and voluntary issuing the
new style audit report, although only at a 10% significance level. Evidence of previous literature
on the relation between competitive pressure and voluntary disclosure was mixed, so it is not
unexpected that the significance level of this relation is only 10%. This result can be explained
by the proprietary cost theory, which theorizes that firms in industries with high entry barriers
are more affected when there is a newcomer, putting pressure on their profits. As a result, they
are more willing to satisfy their stakeholders, by, for example, providing the new style audit
report. An alternative theory explained in Section 4, arguing that firms in competitive markets
experience higher stakeholder pressure to disclose voluntary information in order to earn or keep
a competitive advantage, is not supported by this result.
Ownership dispersion
The most significantly positive relation exists between ownership dispersion and the voluntary
issuance of the new style audit report, at a significance level of 1%. Although a positive
association was hypothesized, it is quite surprising that this relationship is this strong, as
previous literature on the relation between ownership dispersion was quite mixed; three studies
found a significantly positive result, while two studies obtained a significantly negative result.
This association can be explained by the theory of Chau & Gray (2002), who state firms with a
dispersed ownership structure have more shareholders, therefore facing more public pressure to
issue voluntary information. Again, there are common grounds with the legitimacy theory.
Another explanation for this positive relationship can be provided by the agency theory. A high
degree of ownership dispersion often implies that there is a low amount of institutional
ownership. Institutional owners have normally more inside information than the rest of
shareholders do, because they own a larger part of the firm’s share capital. So when ownership is
dispersed, there is likely to be more information asymmetry between shareholders and
management. Information asymmetry is one of the two main pillars of the agency theory.
Because of this higher degree of information asymmetry, management might feel more need to
68
voluntarily disclose the new style audit report when ownership is dispersed. This type of
innovative reporting might also make management win the trust of their shareholders, thereby
reducing monitoring costs, and subsequently agency costs, in the future.
Insignificant relations with the dependent variable were found for the independent variables REV,
LEV and BOARD_SIZE. Firm size, the degree of leverage and the size of the board are not
associated with the voluntary disclosure of the new style audit report.
Firm size
It was theorized that large firms have more resources and feel more pressure to issue voluntary
information, because of their higher public visibility. Large firms are also more likely to issue
new shares by means of a Seasoned Equity Offering (SEO) in order to attract more capital.
Disclosing the new style audit report would lead to less uncertainty about firm performance by
capital providers. However, no evidence for these theories was found when it concerns the
relation between firm size and the issuance of the new style audit report. An explanation for this
result could be that large firms have many other channels to communicate with the public.
Instead of communicating information via the new style audit report, big firms might, more so
than small firms, provide useful voluntary information to their investors via communication
channels like conference calls and press meetings. Another reason for this insignificant relation
is provided by the positive accounting theory, and more specifically by the bonus plan
hypothesis. Recalling the information from Section 2, this hypothesis assumes that managers
engage in voluntary disclosure out of self-interest, because they want to increase their own
compensation. According to Schaefer (1998), CEOs of large firms have a lower proportion of
stock-based compensation relative to total salary than CEOs of smaller firms. Elaborating on this
thought, it could be stated that it is more important for CEOs of small firms rather than large
firms that the share price of their firm’s stock increases. One way to do so is by pleasing their
shareholders by, for example, voluntarily disclosing the new style audit report. An innovative
reporting strategy might have a positive effect on the share price, which would increase
compensation especially for CEOs of small firms, who therefore might have more incentives to
issue the new style audit report. Relating the negative association between firm size and the
proportion of stock-based compensation with the bonus plan hypothesis might explain why there
69
is an insignificant relation between firm size and the voluntary disclosure of the new style audit
report. Still, the insignificant relation between firm size and the voluntary disclosure of the new
style audit report is unexpected. Namely, the discussed articles in Section 3 found sixteen
significantly positive associations against zero significantly negative associations between firm
size and voluntary disclosure.
Leverage
The positive direction of the hypothesis for the relation between leverage and the disclosure of
the new style audit report was mainly based on the agency theory. Higher leverage would lead to
more monitoring of management by the shareholders, hence resulting in more pressure for
management to show their good intentions, by for example disclosing the new style audit report.
An argument in favor a negative association between leverage and voluntary disclosure was
provided by the signaling theory. Firms with low leverage might be more willing to disclose
voluntary information in order to signal their superior performance. However, from the results, it
can be concluded that both theories were not able to explain the relation between leverage and
the disclosure of the new style audit report. This result is not that surprising, as the previous
studies discussed in Section 3 found mixed results on the relation between leverage and
voluntary disclosure; six found a significantly positive relationship, while four times a
significantly negative association was found.
Board size
The expected positive relation between board size and the issuance of the new style audit report
could be explained by the monitoring role of the Supervisory Board. A large Supervisory Board
is associated with a large Board of Directors. Hence, there are more resources to monitor the
board, and to evaluate individual directors on their performance. Most directors might have
incentive packages, meaning that they are rewarded for good performance and punished for bad
performance. Issuing an innovative reporting concept like the new style audit report in the
Annual Report, might lead to a better evaluation from Supervisory Board. However, from the
results it can be concluded this this is not the case. A reason for this insignificant relation might
be that the Supervisory Board normally is very close with the Board of Directors, as the
members of the Supervisory Board are appointed by the Board of Directors. This could be
70
detrimental for the monitoring function of the Supervisory Board. As with leverage, based on the
articles in Section 3, there was no overwhelming evidence of the hypothesized positive relation
between board size and voluntary disclosure. As three studies found a significantly positive
relation and two found a significantly negative relation, this insignificant association might not
come as a total surprise.
Industry
The fact that there are significant industry effects for the sectors Industrials and Consumer
Services supports the institutional theory, and more specifically the notice of mimetic
isomorphism. This theory relies on the notion that firms tend to mimic the practices of
comparable firms, for example firms in their own industry. Since certain industries display a
higher level of issuing the new style audit report than others, this theory seems applicable. Since
previous studies have mostly used other industry classification schemes to test for significant
industry effects, it is hard to compare the industry results of this study to previous studies.
However, it seems quite surprising that the sector Technology is least associated with the
voluntary disclosure of the new style audit report. Firms in the technology business are often
known to make their money by coming up with innovative concepts and products, so one would
think that these firms would embrace an innovative reporting concept like the new style audit
report. However, from the results it seems like the innovativeness of firms in the technology
sector does not hold for their reporting practices.
6.5
Robustness test
Table 12 represents the robust logistic regression. According to Shevlyakov & Vilchevski
(2001), robustness is the “stability of statistical inference under the variations of the accepted
distribution models.” That is, the robust logistic regression tests whether the results still hold
when there are small deviations from normality. The exact scenario under which this robust
logistic regression is ran is auto-generated by Stata.
As can be seen in Table 12, the coefficients have not changed severely. This indicates that there
is a true causal relationship between the significant independent variables and the dependent
71
variables. All except two variables are still significant at the level of the initial logistic
regression. In the robust logistic regression, MRKT_CONC is not significant at the 10% level
anymore, while the sector variable SECTOR_CONSSERVICES is now significant at the 10% level
instead of the 5% level. However, because the changes in p-values are only very slight and the
regression coefficients have changed minimally, it can be concluded that the initial logistic
regression is representative for this research.
Table 12: Robust logistic regression
Logistic regression
Number of obs
Wald chi2(12)
Prob > chi2
Pseudo R2
Log pseudolikelihood = -50.191422
NEW
Coef.
REV
LEV
BIG_4
CROSS
BOARD_SIZE
AGE
MRKT_CONC
FREEFLOAT
SECTOR_MATERIALS
SECTOR_INDUSTRIALS
SECTOR_CONSGOODS
SECTOR_CONSSERVICES
SECTOR_FINANCIALS
_cons
-2.33e-11
-.2371045
2.055591
-1.514175
-.0652838
.0207455
2.501943
3.165748
1.078152
2.542577
.5414863
2.586435
1.85595
-7.074296
Robust
Std. Err.
3.05e-11
.9468835
1.171306
.7000787
.1869522
.0115199
1.525741
1.104607
1.319834
1.164183
1.76844
1.361782
1.187867
1.972296
z
-0.77
-0.25
1.75
-2.16
-0.35
1.80
1.64
2.87
0.82
2.18
0.31
1.90
1.56
-3.59
P>|z|
0.444
0.802
0.079
0.031
0.727
0.072
0.101
0.004
0.414
0.029
0.759
0.058
0.118
0.000
=
=
=
=
111
.
.
0.2251
[95% Conf. Interval]
-8.31e-11
-2.092962
-.2401261
-2.886304
-.4317034
-.001833
-.4884554
1.000759
-1.508676
.26082
-2.924593
-.082609
-.4722268
-10.93993
3.64e-11
1.618753
4.351307
-.1420456
.3011359
.043324
5.492341
5.330738
3.664979
4.824335
4.007565
5.255479
4.184127
-3.208666
The next section presents the conclusions of this study. In this section, the results will be
summarized and the limitations of the research will be discussed. In addition, opportunities for
further research are brought forward.
72
7. Summary and conclusion
This section provides a summary of the thesis, the main results, and recommendations for further
research.
The objective of this thesis was to examine the firms characteristics associated with the voluntary
disclosure of the new style audit report. Therefore, in the introduction, the following main
research question was constructed:
What are the firm characteristics associated with the voluntary issuance of the new style audit
report in the Dutch stock market?
Based on the research performed in this thesis, the answer to the main research questions is as
follows: ownership dispersion, firm age and having a Big Four auditor are the firm
characteristics significantly positively associated with the voluntary issuance of the new style
audit report in the Dutch stock market, while competitive pressure and a cross-listing are
significantly negatively related to the voluntary disclosure of the new style audit report.
Furthermore, the sectors Industrials and Consumer Services display a significantly positive
relation with the disclosure of the new style audit report.
Summary
After introducing the subject of this thesis in Section 1, in Section 2, the attributes of the new
style audit report were explained. In contrast to the old format audit report, the new style audit
report usually includes paragraphs on 1) key audit matters/areas of focus, 2) materiality and an
overview of the scope of the audit, and 3) a firm’s going concern. When at least two out of three
paragraphs were included into a firm’s audit report, the firm was considered to be a new style
audit report adopter. Furthermore, Section 2 discussed theories that could be related to voluntary
disclosure practices. These included the agency theory, signaling theory, capital need theory,
legitimacy theory, positive accounting theory, institutional theory and litigation cost theory.
73
Section 3 provided a review of empirical studies focusing on the factors associated with
voluntary disclosure. Size, profitability, a Big Four Auditor and leverage were the characteristics
found to be most often significantly associated with voluntary disclosure. The former three
factors pointed towards a positive association, while evidence on the relation between leverage
and voluntary disclosure was mainly mixed. Out of these four ‘top variables’, only profitability
was not included in the regression model, because of the substantial yearly changes in
profitability ratio for many (small) firms in the research sample. The other variables included
into the research model yielded either positive or mixed results in previous research. The
evidence on the relation of voluntary disclosure with being cross-listing (4 positive, 0 negative)
and firm age (3 to 0) was convincingly positive, while the factors board size, ownership
dispersion (both 3 to 2) and competitive pressure (1 to 1) yielded mixed evidence in prior
research.
In Section 4, the hypotheses were constructed. In order to test the hypotheses, a logistic
regression model was constructed in Section 5, measuring the relation between the issuance of
the new style audit report and the hypothesized firm characteristics. Besides the research model,
also the research sample, variables, descriptive statistics and statistical tests were discussed in
Section 5.
Results
Section 6 provided the main results of this study. First of all, a correlation matrix was
constructed. No high correlation coefficients (-0.5 > r > 0.5) between the variables could be
detected, which is generally a good sign. After that, several statistical tests on the regression
model were performed. These included tests for multicollinearity, heteroskedasticity and the
normality of the data distribution, and a graph depicting estimates of the distribution of the
residuals. Again, no severe problems were detected, indicating that the regression model is wellfitted. The results of the logistic regression showed that there are significantly positive
associations between the disclosure of the new style audit report and listing age, having a Big
Four auditor (both at a 10% significance level), and ownership dispersion (at 1%). Significantly
negative relations with the issuance of the new style audit report were found for competitive
pressure (10%) and being cross-listed (5%). Insignificant associations with the disclosure of the
74
new style firms in the sectors Consumer Services and Industrials are significantly positively
related to the disclosure of the new style audit report. As a result, three out of nine hypotheses
had to be rejected, while six out of nine hypotheses were confirmed by the regression results.
Analysis
In the analysis part of Section 6, it was attempted to link the results to existing theories, mostly
discussed in Section 2. Especially the legitimacy theory can be linked to the voluntary disclosure
of the new style audit report. The significantly positive associations found for the factors firm
age and ownership dispersion can be explained by this theory. According to the legitimacy
theory, the public expects rather from older than younger firms that they engage in voluntary
reporting. Older firms feel more pressure to comply with the public’s expectations, for example
by issuing the new style audit report. Also firms with a dispersed ownership structure are likely
to face more public pressure when it concerns voluntary disclosure, because they have a larger
amount of shareholders. The association with ownership dispersion, however, can also be
explained by the agency theory. High ownership dispersion implies little institutional ownership.
Institutional owners often have more inside information about the firm, as they normally own a
large part of the firm’s shares. When ownership is dispersed, it means that shareholders have less
inside information. This results in a higher information asymmetry between management and
shareholders, so there is more need for management to regularly inform their shareholders about
the firm. This can be done by voluntary disclosure, and more specifically by issuing the new
style audit report. The significantly negative association of competitive pressure with the
issuance of the new style audit report was substantiated by the proprietary cost theory. According
to this theory, the profits of firms in high entry barrier industries, which are associated with little
competitive pressure, are more hurt by the entrance of new firms into the industry. Therefore, for
these firms it is more important to please their stakeholders. One way to this is by providing
more voluntary disclosures. It was analyzed that the insignificant relation between firm size and
the voluntary disclosure of the new style audit report might have to do with the bonus plan
hypothesis of the positive accounting theory. Previous research has provided evidence that the
total compensation of CEOs of small firms is composed of a relatively higher proportion of
stock-based compensation compared to CEOs of large firms. CEOs of small firms might think
that they can satisfy their shareholders by disclosing the new style audit report, which, in turn,
75
might increase the price of their stock. Subsequently, this would increase the CEO’s
compensation. The significant industry effects are in line with the institutional theory of mimetic
isomorphism, which argues that similar firms tend to copy other firm’s practices.
Comparison with previous research
The majority of the significant results obtained in this thesis is conform previous empirical
studies examining the factors related to voluntary disclosure, discussed in Section 3. The
significantly positive associations for having a Big Four auditor and firm age were supported by
previous empirical evidence. For leverage and board size, previous empirical evidence was
mixed, although slightly leaning towards a positive relation, so it was not that surprising that
both variables were found to be insignificantly related to the issuance of the new style audit
report. However, previous literature on competitive pressure and ownership dispersion was also
mixed, but this time, a significant association was found for both variables. The significantly
negative association between being cross-listed and the issuance of the new style audit report
was in contrast to what previous research said. This result could be explained by the theory that
non-Dutch firms, which are almost by definition cross-listed in this study, are less aware of the
new style audit report. The insignificant association for firm size was surprising looking at
previous research, which found overwhelming evidence of a positive association with voluntary
disclosure.
Recommendations
This thesis examines whether there are significant associations between firm characteristics and
the disclosure of the new style audit report, but it does not tell whether there is causality between
the variables, as it was not the objective of this study to detect causal connections. However, it
cannot be ruled out that there might be causal relationships between some significant variables
and the voluntary disclosure of the new style audit report. Assuming there is causality, a few
recommendations to certain parties of interest are listed. First of all, it might be interesting for
standard-setters that this thesis provides evidence that Big Four audited firms are currently more
engaged with the new style audit report than firms audited by a non-Big Four firms. It is a sign
that Big Four auditors are already quite familiar with the new style audit report, while most nonBig Four auditors are not. Before making the new style audit report obligatory, it might be wise
76
for the IAASB to provide training and guidance on the new style audit report to non-Big Four
audit firms. It is of highest importance to get non-Big Four auditors acquainted with the
regulations of the new style audit report, in order to preserve audit report quality in the future.
Moreover, as the new style audit report is an innovative concept, it is important for investors to
know which types of firms tend to engage in or restrain from groundbreaking initiatives like the
new style audit report. Innovativeness in reporting can be linked to innovativeness in business.
As innovative firms are often believed to have good growth prospects, these firms are attractive
targets for investors.
Limitations
There are some limitations to this research. For example, the size of the research sample is quite
small, as it only includes 111 observations. Normally, this reduces the power of the results and
makes it more difficult to obtain significant statistics. Luckily, this research has provided quite
some significant results, but it is a factor to consider when the sample size is small. Furthermore,
the data about firms’ competitive pressure were drawn from the U.S. market. Although the U.S.
data probably exhibit the reality on the European market, it might influence the results.
Further research
Because the new style audit report is still a brand new concept, there are plenty of opportunities
for further research on this topic. It would be interesting to examine the differences between the
future performances of voluntary new style audit report adopters compared to non-adopters.
Think about figures like revenue growth, cost of capital and profitability growth. Moreover, in
case the IAASB delays obliging the new style audit report beyond 2015, the firm characteristics
associated with the voluntary issuance of the new style audit report can be also researched for
other countries. Now that many Dutch firms have introduced the new style audit report in 2014,
it seems likely that non-Dutch firms will follow this example in the coming years.
77
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Appendix
Table 13: The number of significant associations (articles Section 3)
Determinant of voluntary
disclosure
Size
Profitability
Leverage
Big 4 auditor
State ownership
Board size
Managerial ownership
Ownership dispersion
Cross-listed
CG strength
Institutional ownership
Firm age
Assets-in-place
Foreign ownership
Economic performance
Listing age
Board compensation
Competitive pressure
Role duality
Family-controlled
Number of significantly
positive associations
16
8
6
6
3
3
2
3
4
4
3
3
3
3
2
2
2
1
1
0
85
Number of significantly
negative associations
0
2
4
1
3
2
3
2
0
0
1
0
0
0
1
0
0
1
1
2
Total
16
10
10
7
6
5
5
5
4
4
4
3
3
3
3
2
2
2
2
2
Table 14: List of sampled firms per index
AEX
AMX
ASCX
Other listed firms
Non-listed firms
ABN AMRO
PGGM
Aegon
Ahold
Akzo Nobel
ArcelorMittal
ASML
Aalberts
Accell
Air France-KLM
Aperam
Arcadis
AMG
Acomo
Ballast Nedam
BE Semiconductor
Beter Bed
Boskalis
Corio
Delta Lloyd
DSM
Arseus
ASM International
BAM
BinckBank
Brill
Crown Van Gelder
Cryo-Save
Docdata
Fugro
Gemalto
Heineken
ING
Brunel
Ten Cate
Corbion
Eurocommercial
DPA
Grontmij
Groothandelsgebouwen
Heijmans
Aareal
Accsys
Ajax
AND International
Atrium EUR Real
Estate
Batenburg Techniek
Bever Holding
Boussard & Gavaudan
Brookfield Asset
Management
Core Laboratories
Ctac
Dico International
Eurocastle
KPN
Exact
HES Beheer
Galapagos
OCI
Imtech
ICT Automatisering
HAL Trust Unit
Philips
Nieuwe Steen
Investments
Nutreco
PostNL
Sligro Food Group
TKH Group
TomTom
USG People
Vastned
Vopak
Wereldhave
KasBank
Holland Colours
Kendrion
Nedap
Neways
Oranjewoud
Ordina
Stern Group
Telegraaf Media Group
Value8
Wessanen
Hunter Douglas
Hydratec
Inverko
Kardan
Lavide Holding
Leo Capital Growth
Macintosh
MTY Holdings
Nedsense
New Sources Energy
Pharming
Porceleyne Fles
RoodMicrotec
Roto Smeets Group
SnowWorld
Source Group
TIE Kinetix
UNIT4
Van Lanschot
Volta Finance
Yatra Capital
Randstad
SBM Offshore
TNT Express
Unibail Rodamco
Wolters Kluwer
Ziggo
86
Table 15: Classification of firms into sectors (based upon the ICB system*)
Basic
Industrials
Consumer
Consumer
Financials
Materials
Goods
Services
Technology
Akzo Nobal
ArcelorMittal
DSM
Boskalis
OCI
Philips
Heineken
Accell
Corbion
Ahold
KPN
Wolters Kluwer
Aegon
Corio
Delta Lloyd
Fugro
SBM Offshore
Aperam
Randstad
TNT Express
Aalberts
Nutreco
Acomo
Docdata
ING
Unibail Rodamco
BinckBank
Arseus
Arcadis
Wessanen
Ziggo
Air France-KLM
Sligro Food
Group
Beter Bed
Crown Van
Gelder
Cryo-Save
Core
Laboratories
Galapagos
Holland Colours
BAM
Dico International
Brill
Nieuwe Steen Investments
ASML
Gemalto
ASM
International
Exact
TomTom
BE
Semiconductor
ICT
Automatisering
Ordina
Brunel
Ten Cate
Hunter Douglas
MTY Holdings
Vastned
Wereldhave
Ctac
Inverko
Imtech
PostNL
Porceleyne Fles
Groothandelsgebouwen
KasBank
Lavide Holding
Nedsense
Pharming
TKH Group
Stern Group
Telegraaf Media
Group
Ajax
AND
International
Macintosh
Value8
SnowWorld
Aareal
Atrium EUR Real Estate
Bever Holding
Boussard & Gavaudan
Brookfield Asset
Management
Eurocastle
HAL Trust Unit
Kardan
Leo Capital Growth
Source Group
Van Lanschot
Volta Finance
Yatra Capital
ABN AMRO
New Sources
Energy
RoodMicrotec
TIE Kinetix
UNIT4
USG People
Vopak
AMG
Ballast Nedam
DPA
Grontmij
Heijmans
HES Beheer
Kendrion
Nedap
Neways
Oranjewoud
Accsys
Batenburg
Techniek
Hydratec
Roto Smeets
Group
Eurocommercial
PGGM
* Examples of the main activities of firms in each sector  Basic Materials: Oil equipment and services, specialty chemicals,
biotechnology. Industrials: Heavy construction, industrial transportation, industrial machinery, electronic equipment. Consumer
goods: Leisure goods, food producers, furnishings. Consumer services: Telecommunications, media, airlines. Financials: Banks,
asset management, investment services. Technology: Hardware and equipment, software and computer services, semiconductors.
87