Erasmus Universiteit Rotterdam 1
Master`s Thesis
Capacity: Accounting, Auditing & Control
Course: Master Thesis
Supervisor: dr. C.D. Knoops
Co-reader: E.A. de Knecht RA

Erasmus Universiteit Rotterdam
Master`s Thesis
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Preface
This thesis is the final product of the Master Audit, Accounting and Control, in which I was enrolled at the Erasmus University Rotterdam. I would like to use opportunity to thank a whole bunch of people and an organization for supporting me towards the end goal, namely the completion of this thesis.
First I would like to thank my supervisor, dr. C.D. Knoops, for supporting me with good feedback, his critical comments and timely response to questions. This most definitely contributed to the quality of this thesis. Second, I would like to thank Ernst and Young, location
Naaldwijk, for the facilities they offered; an office and a laptop available to work on, four times a day the luxury of having coffee or tea and nice colleagues that are interested in what it is that I was investigating in this thesis. This was really helpful in terms of productivity.
Furthermore, I would like to thank my parents and other members of the family, as well as close friends who helped me by giving moral support to keep up the pace and complete my study and my thesis within the nominal duration.
Before you, you will see the result of months of work in investigating the relationship between the quality of corporate governance and the quality of disclosures regarding future-oriented information.
Friday, April 10, 2020
Peter van Geest

Erasmus Universiteit Rotterdam
Master`s Thesis
3
Abstract
In this thesis the relationship between the quality of corporate governance and the quality of disclosures concerning future-oriented information is examined. The HWK Horwath report, which is a report that describes the factors that constitute the quality of corporate governance and ranks Australian companies according to these factors – is used as a source to determine the quality of corporate governance of Australian companies. With respect to determining the quality of disclosures, a derived model of the Jenkins Report (AICPA, 1994) in order to perform an index study is used in this thesis. This model contains information elements that investors would like to see in annual reports, such as opportunities and risks, management`s plans and forecasted operating and financial data. The stated hypotheses in this theses, namely that there exists a relationship between the quality of corporate governance and the quality of disclosures and that the quality of disclosures influences the quality of corporate governance are confirmed by using statistical analysis in the form of correlation matrices and a regression model. With respect to the control variables size, profitability, debt ratio, or industry, there was no significant relationship, meaning that these factors were of no significant influence on the quality of disclosures with respect to future-oriented information.

Erasmus Universiteit Rotterdam
Master`s Thesis
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Table of Contents
PREFACE
ABSTRACT
1.
INTRODUCTION
1.1
R ESEARCH RELEVANCE
1.2
R ESEARCH QUESTION
1.3
M ETHODOLOGY
1.4
S AMPLE
1.5
S TRUCTURE
2.
INTRODUCTION TO CORPORATE GOVERNANCE
2.1
I NTERNAL FACTORS
2.2
E XTERNAL FACTORS
2.3
M EASUREMENT OF THE QUALITY OF CORPORATE GOVERNANCE
3. INTRODUCTION TO (VOLUNTARY) DISCLOSURES
3.2
B ENEFITS OF ( VOLUNTARY ) DISCLOSURES
3.3
M EASUREMENT OF THE QUALITY OF DISCLOSURES
3.3.1
I NDEX STUDIES
3.3.2
C ONTENT ANALYSIS
3.3.3
A NALYSTS RATINGS
3.4
F ACTORS THAT HAVE AN INFLUENCE ON DISCLOSURES IN GENERAL
4. ENGAGING IN THE DISCLOSURE OF FORWARD LOOKING (VOLUNTARY) INFORMATION
4.1
E NGAGE IN PROSPECTIVE INFORMATION
4.2
A RGUMENTS TO ENGAGE IN DISCLOSURES ABOUT FUTURE INFORMATION
5. LITERATURE REVIEW
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3
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27
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5.1
I NTRODUCTION
5.2
R ELATED LITERATURE
5.3
C ORPORATE G OVERNANCE F ACTORS THAT I NFLUENCE (V OLUNTARY ) D ISCLOSURES
5.3.1
I NDEPENDENT NON EXECUTIVE DIRECTORS
5.3.2
A UDIT COMMITTEE AND DIRECTORS ` SHAREHOLDINGS AND STOCK OPTIONS
5.3.3
O WNERSHIP STRUCTURE AND EARNINGS FORECAST
5.4
C ONCLUSIONS
Erasmus Universiteit Rotterdam
Master`s Thesis
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6. HYPOTHESIS AND RESEARCH DESIGN
6.1
I NTRODUCTION OF THE HYPOTHESIS
6.2
I NTRODUCTION IN THE RESEARCH STRATEGY
6.3
S AMPLE S TATISTICS
6.4
M EASUREMENT OF THE QUALITY OF CORPORATE GOVERNANCE
6.5
D EFINING THE DISCLOSURE MODEL
6.6
V ALIDATION OF THE MODEL
6.7
S TATISTICAL ANALYSIS
6.8
S UMMARY
7. STATISTICAL ANALYSIS
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7.1
D ESCRIPTIVE STATISTICS
7.2
O UTCOME OF THE MODELS
7.2.1
C ORRELATION MATRIX
7.2.2
R EGRESSION A NALYSIS
7.3
M ODEL ASSUMPTIONS
8. RESULTS AND DISCUSSION
9. LIMITATIONS
10. SUGGESTIONS FOR FUTURE RESEARCH
11. CONCLUSIONS
REFERENCES
APPENDICES
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Master`s Thesis
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1.
Introduction
This thesis deals with how good corporate governance has influence on the companies`
(voluntary) disclosures regarding prospective information. Corporate governance is about proper governance of operations. Disclosures are important instruments for management to communicate the performance and the governance of the firm to the outside world, i.e. investors and other stakeholders. Disclosures can be either regulated or voluntarily, meaning that they are obliged by law or not. In the latter case, the disclosures are voluntarily. Regulated disclosures are critical for the functioning of an efficient capital market (Healy & Palepu, 2001). Firms can, in addition to these regulated disclosures, engage in voluntary disclosures. These voluntary disclosures can take place through annual reports, half-year and quarterly releases, conference calls, press releases etc. Disclosures are not easily classifiable being either voluntary or required.
It is not always clear if companies comply with regulation when they provide information. Law and regulation do often have escape possibilities which makes it hard to distinguish between regulated and voluntary disclosures. This thesis therefore aims at measuring the quality of the disclosures in general, regardless of specific elements being obliged by law or not. In order to assess the quality of the disclosures, a model will be used that is derived from the Jenkins report
(American Institute Chartered Public Accountants, 1994) which comprises of information elements that investors would like to have. This report as well as the model that is used in order to assess the quality of disclosures will be elaborated further on in this thesis.
1.1 Research relevance
Prior studies have investigated the relationship between the quality of corporate governance and (voluntary) disclosures, but have not explicitly focused on disclosures regarding prospective information, nor have they specifically focused on specific elements regarding this future-oriented information. For example, information concerning the future with respect to opportunities and risks, management`s plans and forecasted operating and financial data. This research is about Australian companies. Australian firms are chosen because interesting studies

Erasmus Universiteit Rotterdam
Master`s Thesis concerning this topic in Australia are widely available. Previous research of Beekes and Brown
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(2006) on the topic of disclosures and corporate governance has been performed in Australia.
The informativeness of disclosures was measured by different proxies and compared to the quality of corporate governance. Investigating to what extent the quality of corporate governance influences the disclosures and thus has a positive effect on the capital market is relevant to, amongst others, regulators, researchers, and investors. Researchers and investors can build on this, and use this knowledge. Regulators can create new regulation that helps to improve the efficiency of the capital market and thus establish an improvement in overall welfare.
1.2 Research question
This thesis will answer the main question whether the quality of corporate governance is associated with the quality of disclosures related to prospective information as published by companies in their annual reports. There will also be looked at the predictive power of the quality of corporate governance to the quality of the disclosures concerning prospective information. The terms prospective and future-oriented information will be used interchangeably. In answering the main research question, multiple sub-questions will be answered: what determines the quality of corporate governance? Which incentives do companies have to engage in voluntary disclosures? What is the point or what is the relevance of these kind of disclosures and what are the incentives to improve the quality of these disclosures?
1.3 Methodology
In this thesis, Australian firms will be used to test the hypothesis whether there is an association between the quality of corporate governance and the quality of voluntary disclosures concerning future oriented information. An Australian report, the WHK Horwath Report, will be used to determine the quality of corporate governance. The WHK Horwath Report ranks
Australia’s largest companies on their corporate governance structure and policies. A randomly taken sample from these ranked firms will be used. With respect to the quality of the disclosures regarding future information, an index study will be performed by using a model that is derived from the Jenkins Report. This report consists of information elements that investors would like

Erasmus Universiteit Rotterdam
Master`s Thesis to see in annual reports. Using an index study means that specific elements in an annual report
8 are searched for in annual reports. They are scored on the basis of being present or not by a predetermined model. The score that can be derived from this model then represents the quality of the disclosure. After determining the quality of the disclosures, statistical analysis in the form of correlation matrices and a regression analysis will be performed to determine if there exists a relationship between them.
1.4 Sample
A random sample of 59 of the 250 that are investigated by the HWK Horwath report based on their quality of corporate governance companies is drawn. The companies in the HWK Horwath report are all listed at the Australian Security Exchange (ASX). This report is used as a source in this thesis in establishing the quality of corporate governance. The larger the sample size, the more it represents the population. The confidence interval however, is not linearly related to the sample size, meaning that taking large samples has diminishing returns in terms of the degree to which the sample is representative. In this thesis a random sample of 59 companies will be used, of which 55 were of useful value to the model. A further elaboration on this will be given further on in this thesis. The population consists of 250 Australian listed firms that are active in different industries. The required sample size according to a rule of thumb provided by Field
(2005) shows that the sample is sufficient to draw conclusions about large effects. Field (2005) refers to Miles and Shevlin (2001). He states that with a sample size that is according to the rule of thumbs, a high level of power is achieved. The sample size used in this thesis is according to the required sample size determined by Miles and Shevlin (2001) and it gives a good representation about the population.
1.5 Structure
The thesis is structured as follows. In the second chapter the concept of corporate governance and how corporate governance is measured, will be explained; the internal and external factors of corporate governance will be introduced to get familiar with the factors that constitute

Erasmus Universiteit Rotterdam
Master`s Thesis corporate governance. The third chapter introduces (voluntary) disclosures and incentives
9 companies have to engage in (voluntary) disclosures will be elaborated in chapter four. Chapter five will provide a literature study in order to get understanding of the prior research that dealt with the relationship between corporate governance and (voluntary) disclosures. The next chapter is about the research design and strategy and will also introduce the main hypotheses.
This thesis will end with the results, the analysis, the limitations, suggestions for future research, and conclusions.
2.
Introduction to Corporate Governance
In this chapter a framework of corporate governance will be provided to obtain understanding of what corporate governance constitutes of according to different researchers and which factors influence the quality of corporate governance. Furthermore, the method of how the quality of corporate governance is measured will be introduced.
Defining corporate governance can be pretty obvious, as it is just about proper governance of corporations. Corporate Governance has multiple definitions that depend of the view on the world that one has. For example, Shleifer & Vishny (1997) define corporate governance in terms of economic interest of the participants. They refer to corporate governance as a way by which suppliers of finance to corporations “… assure themselves of getting a return on their investments.” Zingales (1998) defines this quite similarly as he defines corporate governance as”
… the complex set of constraints that shape the ex-post bargaining over the quasi-rents generated by the firm.” Gillan & Starks (1998) define corporate governance as “the system of laws, rules and factors that control operations at a company.” According to Gillan (2006) researchers often view corporate governance as mechanisms that fall into two groups: the group internal and the group external to the firms. Gillan (2006) used this last definition to design a framework of corporate governance. The broad perspective of what constitutes corporate governance incorporates elements that had not previously been seen as being part of corporate governance, but at a minimum affects corporate governance and thus is included in their

Erasmus Universiteit Rotterdam
Master`s Thesis framework. The internal as well as the external factors are described below to get familiarized
10 with the most important elements that constitute corporate governance.
2.1 Internal factors
According to Gillan (2006), the internal factors consist of:
Board of directors: According to Gillan (2006), many view boards of directors as the lynchpin of corporate governance. The board`s role due to the tasks they have regarding providing strategic direction and monitoring, is considered to be very important. Besides this, the size of the board and the degree of independence play a central role in the research to date
(Rosenstein & Wyatt, 1990). The board of directors is expected to be independent because of conflicts of interests that could otherwise arise. Other research examines the role of CEO duality on corporate governance (Baliga et al., 1996), the effect of specific board characteristics by Ferris et al. (2003) and the effect of financial expertise on the quality of corporate governance (Agrawal and Chadha, 2005). CEO duality exists if the chief executive of a corporation doubles as chairperson of the board of directors;
Managerial incentives: managerial compensation policies can help to align the interests of the owners and the managers. Equity based compensation to accomplish this purpose was agreed up on by researchers and practitioners during the 1990`s (Jensen & Murphy, 1990);
Capital structure: the capital structure can be of influence to corporate governance. Debt can act as a self-enforcing governance mechanism. The issuance of debt holds managers to generate cash to meet interest demands and convenants that they have agreed with debt holders. Debt can thus mitigate the potential agency-costs of free cash flows (Jensen, 1986);
Bylaw and charter provisions: these are governance features that serve as potential barriers to the market for corporate control. Shareholder rights plans (also known as poison pills) allow firms to issue additional shares to existing shareholders, however not to the hostile block holder seeking control of the company;
Internal control systems: this factor is mentioned by Gillan (2006), but not further explained.
For instance, the COSO internal control framework can be seen as an internal factor of

Erasmus Universiteit Rotterdam
Master`s Thesis
11 corporate governance as well. Under this Control-Integrated framework, internal control is defined as a process, affected by an entity of a board of directors, management, and other personnel. It is designed amongst other purposes to make sure that there is compliance with laws and regulation.
2.2 External factors
Next to the internal factors, Gillan (2006) also defines external factors that influence corporate governance. Firms do no not operate in a vacuum but operate under legal constraints. These external factors comprise of:
Law and regulation: aspects of legal and regulatory environment are integrally related to corporate governance;
Markets o Capital markets: ownership structure has influence on the way corporate governance is structured. Institutional ownership for example is of influence to moderate executive compensation (Hartzell & Starks, 2003); o The market for corporate control: this is regarded as the ultimate corporate governance mechanism. Managers compete in the product market and therefore the assets (companies) go to the highest value used and inefficient managers are disciplined. Managers that do not work efficiently with assets are expected to create less value for the company and thus become a prey to companies with managers that do maximize value; o Labor markets: governance and organizational structure are associated with the employment relationships and the labor market for executives. Labor market forces and reputation concerns have a disciplining function on managers and board members (Jensen & Meckling, 1976). Solid performance of managers has the potential to lead to better future opportunities for individuals;

Erasmus Universiteit Rotterdam
Master`s Thesis
12 o Product markets: competition amongst firms in terms of products is associated with corporate governance (Allen & Gale, 2000), as it directly and unambiguously lowers the shareholders` marginal cost of inducing managerial effort (Baggs & De Bettignies,
2007);
Capital market information and analysis: capital market information has influence on different aspects of corporate governance. Security analysts for example can reduce agency costs by monitoring corporate management and provide this information about firms to the market. This thus reduces the agency costs associated with the separation of ownership and control;
Market for services: these are the services that outside parties can provide to a company.
Recent work on this focuses on the relationship between firms and their external auditor. In particular, whether or not payments from firms to external auditors for non-audit services compromise the integrity of the audit process, as some critics suggest was the case with
Arthur Andersen and Enron. According to Gillan (2006), Frankel et al. (2002) conclude that payment for non-audit services can compromise auditor independence;
Private sources of external oversight: the two private sources of external oversight are the media and plaintiffs` bar- or lawsuits. According to Dyck et al. (2008), the media play an important role with respect to corporate governance. They show the effect of media reporting on corporate governance. Publishing of articles related to this topic increases the probability of reverting a corporate governance violation by five percentage points. In addition, Farber (2005) finds that firms after charged with fraud by the SEC will improve their corporate governance during the following three years.

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Master`s Thesis
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2.3 Measurement of the quality of corporate governance
In this section an explanation will be given on how the quality of corporate governance will be derived. Different methods will be explained to provide some familiarity with how one can measure the quality of corporate governance. Rating agencies assess corporate governance quality by analyzing annual reports and meeting with management and other officials. The section below will describe how the ratings are derived and will introduce the WHK Horwath model (2008) that will be used in this thesis.
Measuring the quality of corporate governance can be quite a delicate job to do. Internal and external factors like the ones mentioned above need to be taken into account, as well as existing regulations and recommendations/best practices. Rating agencies are specialized in this field and they provide ratings of the quality of the corporate governance of different companies.
Bauer et. al (2003) makes use of proxies, namely: 1) Ownership and structure, 2) Financial stakeholder rights and relations, 3) Rating agencies as he used the Standard & Poor`s Corporate
Governance score (2002) to determine the effect of corporate governance on firm`s credit ratings.
Standard & Poor`s Corporate Governance score (2002) evaluates the quality of corporate governance of a company by 4 main financial transparency and information disclosure items and 4) Board structure & influence. The corporate governance score that is assigned to each company reflects the opinion of Standard & Poor`s of the extent to which a company adopts and conforms to codes and guidelines of good practices of corporate governance overall. The score in this case, will be a result of a Likert scale (1 to 10) that determines to which degree the company will be rewarded for particular components. The Standard & Poor`s ratings also include meeting with the management and other officials to evaluate the criteria they have outlined as being important.
Proxies are used more often to determine the quality of corporate governance. Drobetz et. al
(2003) used 30 proxies that were divided into 5 categories. The proxies they used were not yet legally required and need to be considered as the best international market perspective from an

Erasmus Universiteit Rotterdam
Master`s Thesis investors` point of view. The identification of their proxies was sourced from the German
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Corporate Governance Code (GCGC), which represents essential capital markets law for the management and supervision of German listed firms as well as recommendations and suggestions derived from internationally recognized standards of ”good corporate governance”.
If firms deviate from recommendations, they must disclose it in their annual financial statements.
In this thesis, the focus is on Australian firms. With respect to corporate governance ratings, the
WHK Horwath report provides this information. The measure that will be used in this thesis is sourced from the Horwath reports (Horwath, 2008). The Horwath measure is primarily structural in nature, reflecting amongst other things the independence of the board, its chair and its principal committees. Many of the factors included in the model that is used in this report are similar to those in the Australian Security Exchanges’ (ASX) Corporate Governance Council
Report. However, the corporate governance assessment model that is developed is based upon a combination of factors indentified in national and international best practice guidelines and research studies. As mentioned before, central to the model is the need for companies to have appropriate levels of independence on the Board of Directors, their associated committees and from their external auditor. The elements of the WHK Horwath report are to some extent linked to the internal factors that were described by Gillan (2006). The WHK Horwath report is less extensive than Gillan (2006) is in his research. The methodology used in the Horwath report is similar to the one used by Standard & Poor`s. However, different criteria are used as regulations and best practices differ between countries. Another difference with rating agencies such as
Standard & poor`s is that the Horwath report only focuses on information in annual reports; no interviews with management or other officials were held to obtain knowledge about specific corporate governance aspects.
The Horwath Report contains each company’s ranking (1 to 250) and the rankings are also summarized according to a five-star system. The corporate governance structures of the five-star companies were outstanding, and without question, met best practice standards. These

Erasmus Universiteit Rotterdam
Master`s Thesis companies demonstrated independence in all key areas, including their Board of Directors, audit
15 committees, remuneration committees and nomination committees. The board and related committees met regularly and disclosure on related party transactions was clear and unambiguous. As the disclosure of related party transactions, which can be defined as a business deal or arrangement between two parties who are joined by a special relationship prior to the deal, is also of influence in determining the quality of the corporate governance, this should be taken into account when the conclusions are drawn. In a way the dependent variable consist partly of the independent variable(s). This will be dealt with in the chapter limitations.
The level of non-audit fees paid to the external auditor was within acceptable parameters, and/or a rigorous policy was in place with respect to the provision of non-audit services by the external auditor. In addition, there was a documented code of conduct, rigorous policies on risk management and share trading, and disclosure relating to corporate governance was clear and unambiguous. At the other extreme, a one-star rating indicates the company’s corporate governance structures were lacking in several areas which were considered as important. Forty of the 250 companies surveyed, were awarded a five-star rating while 10 companies, 4% of the sample, were rated one-star.
The WHK Horwath report is chosen to be used as a source for assessing the quality of corporate governance in this thesis. The criteria used in this report partly overlap the factors of Gillan
(2006) and are designed according to the ASX Corporate Governance Council Report and national and international best practices. As it contains national as well as international best practices, the model is an appropriate way to determine the relative difference between the quality of firms` corporate governance that are investigated. The Horwath report (2008), Bauer et. al (2003) and Drobetz et. al (2003) all used key elements that they acquired from either rating agencies or best practices and derived their score from the rating agencies or their own framework build in accordance with these key elements.

Erasmus Universiteit Rotterdam
Master`s Thesis
In the studies of Bauer et al. (2003) and Drobetz et al. (2003) as well as in the Horwath report,
16 proxies are used. Certain key elements are determined to be of importance to the quality of corporate governance. Determining the proxies and examining them one by one seems like a good way to determine the quality of corporate governance. However, determining proxies might not be enough to accurately come to the quality of corporate governance. Which elements are important is not always clear and often not taken into account. Drobetz et al. (2003) assigned equal weight as they had not attempt to identify relatively more important items. However, this does contribute to the transparency and gives room for easy interpretation. Bauer et al. (2003) used the Standard & Poor`s rating, which does account for the relative importance of certain proxies. In the case of the Horwath report, after a request to one of the authors for the used method in their report, different weights are assigned to the proxies that are used.

Erasmus Universiteit Rotterdam
Master`s Thesis
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3. Introduction to (voluntary) disclosures
In this chapter, the concept of disclosures and voluntary disclosures will be elaborated in order to obtain understanding. Furthermore, the motives for voluntary disclosures and ways these disclosures can be measured will be presented.
As had been stated in the introduction, corporate disclosures are critical for the functioning of an efficient capital market (Healy & Palepu, 2001). Firms can provide disclosures through the regulated reports, footnotes, management discussion and analysis and other regulatory filings.
Some firms, in addition to the regulated corporate disclosures, engage in voluntary disclosures, in the sense that they can disclose more information than they are legally obliged to. These can take place through annual reports, but also half-year reports, quarterly releases, conference calls, press releases and other corporate reports.
The basis for the regulated disclosures can be found in the information problem that is also referred to as the ‘lemons problem ‘. This information problem arises from the fact that there is information asymmetry and conflicting incentives between entrepreneurs and savers. However, according to Healy & Palepu, (2001), there are solutions to this problem. An example of such a solution is optimal contracts between entrepreneurs and investors. These optimal contracts can provide incentives for full disclosure of private information, and thereby mitigating the problem of asymmetry.
In this thesis, I investigate whether there is a relationship between good corporate governance and the quality of disclosure with respect to future information. It does not seem strange to assume that the way corporations are governed is associated with the quality of disclosures that corporations engage in, in order to share their privately held information to the outside world: the structure of the board, the management ownership, degree of independence of the board of directors and other internal and external factors mentioned in the previous chapter are assumed

Erasmus Universiteit Rotterdam
Master`s Thesis to have influence on the amount, the type, and the quality of disclosures a company engages in.
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A further elaboration on this assumption will follow after the literature review.
As stated before, the quality of all disclosures – regulated and voluntary - is assessed. Rules and regulation may prescribe information that has to be disclosed, but can be conditional. This means that they only have to disclose the information if certain conditions are present. Examples of these conditions are: if material, then disclose and if relevant then disclose. Often, regulation also includes implicit recommendations for certain information items. For instance, article 2:391 of the Dutch Civil Code paragraph 2 contains a passage that obliges companies to disclose information about future developments regarding circumstances which can influence the revenue and profitability of a company. However, this information has only to be disclosed if it is in the interest of the company. If a company is of the opinion that this is not the case, it can choose to not disclose this information without having to back this up with evidence. Only assessing voluntary disclosures on specific information elements therefore does not seem like an accurate way. It is for this reason that all disclosures concerning future oriented information are assessed on quality.
3.1 Incentives for engaging in (voluntary) disclosures
Firms can engage in providing voluntary information to stakeholders as for example investors, but what are their incentives? According to Healy & Palepu (2001), there are six main forces that affect the decision of management to engage in this practice of providing voluntary information, these are described below:
Capital market reasons: managers who anticipate capital market transactions have incentives to disclose (voluntary) information in order to lower the cost of external financing. Managers can thus reduce their costs of capital by reducing the information asymmetry by reducing information risk for investors through engaging in voluntary disclosures (Barry & Brown,
1985; Botosan, 1997);
Corporate control contests: voluntary disclosure theories test hypotheses that, given the risk of job loss that are the result of poor performance, i.e. earnings and stock performance,

Erasmus Universiteit Rotterdam
Master`s Thesis
19 managers use (voluntary) disclosures to reduce the likelihood of undervaluation in order for them to explain away bad earnings performance;
Stock compensation: managers can be directly rewarded by a variety of stock-based compensation plans. These compensation plans can be a reason why managers want to disclose information voluntarily and can be of influence on the timing of the (voluntary) disclosures (Aboody & Kasznik, 2000).
Litigation: the threat of shareholder litigation can have opposing effects on the disclosure policy of the firms. Legal actions for example for untimely or inadequate disclosures can encourage firms to disclose more voluntary information in order to avoid this. On the other hand, particularly forecasting information coming from managers might be negatively influenced if there is a climate where litigation is more commonplace. If managers believe that the legal system penalizes forward-looking information that is presented and made in good faith, they will be more reluctant to disclose this kind of information;
Proprietary costs: firms have incentives not to disclose information that will reduce their competitive advantage, even if these (voluntary) disclosures reduce the cost of capital as stated before. This depends on the nature of the competition. Examples are threats of entry, existing competitors etc. Verrecchia (1983) states that the incentive to disclose information is a decreasing function of the potential proprietary costs attached to a disclosure and an increasing function of the favorableness of the news in a disclosure. However, there has been little evidence that supports the propriety costs hypothesis. Watts (1986) extended the propriety costs hypothesis by including other potential externalities from information disclosure such as potential political costs by disclosing information and contracting costs which may in turn affect voluntary disclosure. Political cost can occur when companies put themselves in the spotlight. For example, high profit firms can attract media and consumer attention, which in turn could lead to higher taxes and/or other regulation;
Management talent signaling: managers are believed to strive to a high market value of the firm. In order to achieve this, they have to attract and report to investors. Managers, by voluntarily disclosing information, can reveal their type in terms of their ability (Trueman,
1986). This influences the investors` perception of the managers and his ability to anticipate

Erasmus Universiteit Rotterdam
Master`s Thesis
20 to future change, which will lead to a higher market value. However, research supporting or refuting this hypothesis has not been found yet.
As we have just examined the six factors given by Healy & Palepu (2001), assuming that there is a relationship between corporate governance and general voluntary disclosures would be a plausible one. In the next section, the benefits of voluntary disclosures will be summed up and explained.
3.2
Benefits of (voluntary) disclosures
In the previous section, we have defined possible incentives for firms to engage in (voluntary) disclosure activities. We have recognized some of the benefits firms can accomplish by engaging in disclosures. Apart from the fact that firms can potentially benefit from these particular disclosures, the economy as a whole benefits in terms of overall welfare. As stated before, disclosures can help to improve the efficiency of the capital market. The economic consequences of (voluntary) disclosures can be explained by three potential capital market effects: improved
liquidity in the stocks in the capital market, reductions in the costs of capital, and increased following by financial analysts (Healy & Palepu, 2001).
With respect to the improved liquidity, Verrecchia (1983) argues that disclosure reduces the information asymmetry among informed and uninformed investors. If firms have high levels of disclosures, investors can be relatively confident that any stock transaction occurs at a ‘fair price’. This in turn increases the liquidity of the firm`s stock. Gelb & Zarowin (2002) show that firms that have high disclosure ratings have higher stock price associations with contemporaneous and future earnings relative to firms that have low disclosure ratings. This suggests that disclosure strategies affect the speed of the transfer of information into stock prices. In addition to this, a significant negative relationship between analysts` ratings of firm disclosures and bid-ask spreads has been documented. This implies that the ‘willingness to pay’ of different investors converges when information is of better quality (Welker, 1995).

Erasmus Universiteit Rotterdam
Master`s Thesis
With respect to the reduced cost of capital we can conclude that firms with high levels of
21 disclosure, and thus a low information risk for investors, are likely to have lower costs of capital than firms with low disclosure levels. Botosan (1997) supports this view by providing evidence consistent with the cost of capital hypothesis. She finds a negative relationship between the cost of equity and the extent of voluntary disclosures. Furthermore, Botosan and Plumlee (2002) support this view and state that if managers provide greater disclosure in annual reports that they benefit in terms of lower cost of equity. However, they do find that the timeliness of the disclosures is associated with higher cost of equity capital. They estimated that the magnitude of the effect is 1.3 percentage point difference between the most and the least forthcoming firms.
With respect to increased following by financial analysts, voluntary disclosures decreases the costs of information acquisition for the analysts and increases the amount of information they can use. According to Graham et al. (2005), this leads to more analysts following the firm.
A note has to be made to the above findings, as there are limitations to the outcome of the above named studies. The most important limitation of the findings is the potential endogeneity, which means that there is a possible bias. This may be caused by self-selection, as firms may be engaging more in voluntary disclosures when they are performing well. It might not be unreasonable to think that firms that perform well provide more information about the future in comparison to firms that are less profitable or even experience losses. However, one could also reason the other way around or could even see a non-linear relationship between the degree of profitability and voluntary disclosures. The sample that will be used in this thesis consists of
ASX listed firms, which generally taken perform well over time. Another example is that cost of disclosure as well as management reputation impact on both cost-of-debt capital and disclosure.
Neither is directly observable to the researcher and when omitted from the empirical analysis causes endogeneity bias (Nikolaev and Van Lent, 2005). Furthermore, Nikolaev and Van Lent
(2005) found that disclosure is positively and significantly associated with unobservable firm specific factors that cause heterogeneity. This reinforces their claim that the association between disclosures and the cost of capital is partially driven by the disclosure variable that reflects the omitted firm-specific factors.

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3.3
Measurement of the quality of disclosures
As has been stated in chapter 3.1, there are many incentives to provide voluntary disclosures in general. In this thesis, the terms voluntary disclosures and disclosures are used often. As it is not always possible to determine if a disclosure is voluntary or not as has been explained earlier in this thesis, the focus therefore will be only on the quality of disclosures.
This chapter deals with how to measure the quality of those disclosures. Beattie et al. (2004) have researched which methods are being used and they explain the differences between the methods of measuring the quality of disclosures. These methods will be discussed below in order to gain some insight on how other researchers have tackled the problem of measuring the quality of disclosures. In the next chapter the research strategy will be defined and a choice will be made on how to best evaluate the quality of voluntary disclosures regarding prospective information.
3.3.1 Index studies
A disclosure index is created with the purpose of measuring the level of disclosure. With this index, predefined disclosure items can be found and scored. Disclosure index studies have an assumption that the amount of disclosure on specified topics proxies for the quality of disclosure.
Binary coding schemes are used and the presence of an item is recorded (Beattie et al. (2004).
This binary coding schema can be extended by incorporating ordinal measures (frequently three levels). In this way, there can be made a difference for the ‘quality’ of the specific disclosures that are assessed. For instance, quantified disclosure scores 2, qualitative disclosure scores 1 while no disclosure scores 0. This is the approach adopted by Botosan (1997). With her selfconstructed index, she measured the voluntary disclosure level of 122 companies within the machine industry. The index study that Botosan constructed in 1997, was based on the recommendations of users of annual reports as these recommendations were provided by the
Jenkins report (AICPA, 1994), the SRI International (1987) survey of investor information needs, and the Canadian Institute of Chartered Accountants (1991) study of the annual report. She used five categories of information and assigned points to each category, and additional points were

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Master`s Thesis attributed if quantified information was provided. She observed that ‘disclosure quality is also
23 important but very difficult to assess.’ With this in mind, researchers acknowledge that quantity and quality are positively related.
A review of the use of indices to measure disclosures is given by Marston & Shrives (1991). They distinguished between items that were obliged by law and items that were not obliged by law and attributed weighting to certain items by the use of surveys amongst relevant groups. They asked about the importance of each item and based their weighing on this. Beattie et al. (2004) found that weighted and non-weighted scores present similar results when a large number of elements are used. Scoring can take several forms. Often, as is the case in this thesis, a nominal score to indicate whether the items are present or not, or an ordinal level score is used. The latter can be of more use as the specificity of the item can be determined this way. According to
Marston and Shrives (1991) “the index score can give a measure of the extent of disclosure but not necessarily the quality of disclosure.” In their research, they conclude that although the disclosure indices involve some subjectivity in terms of judgment, it is a valuable research tool that will be used in the future as long as company disclosures are a focus of research.
A final example Beattie et al. (2004) gives is about a study that is conducted by Robb et al. (2001).
They conducted a topic-based analysis of non-financial disclosures, as again, recommended by the Jenkins report mentioned earlier in this section. They defined non-financial disclosure as
“qualitative information included in annual reports, but outside of the four financial statements and related footnotes.” The categories used in their disclosure scoring sheet are based on the list of non-financial information items desired by users included in the database of materials used by the Jenkins Committee. The Jenkins report (AICPA, 1994) has surveyed investors – as they are primarily the users of annual reports - to find out what it is that they want to see in annual report; which elements do they find important. These items were divided into six categories, three forward looking and three historical topics, and for each item a score of 1, 2 or 3 was assigned. A score value of 1 stands for no disclosure, 2 for some disclosure and 3 for extensive disclosure. These scores are aggregated to obtain a total disclosure score. With respect to the

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Master`s Thesis outcome, they find differences in disclosure levels for particular non-financial information
24 categories, explained by firm size, industry classification, degree of geographic dispersion, and country of domicile.
3.3.2 Content analysis
Another method to research is the so-called content analysis; these are thematic analysis.
Content analysis is a research tool used to determine the presence of certain words within texts.
Presence, meanings and relationships are quantified and analyzed, and inferences are made.
Often computer software is used. With this method, the entire text is analyzed and the text units are classified into categories. In fact, the disclosure index studies, according to Beattie et al.
(2004), are based on principles that also count for this method, namely that: the classifications need to be reliable, different people need to code the text in the same way. And of importance is also the way that the variables are created from the classification procedure in a way that they represent what the researcher had intended to represent. This analysis can be done by humans or computer-aided. If the latter is chosen, then there are limitations to this method. Words for example, can have different meanings and do not always represent the same in every context. If humans have to hand-collect this, than this method is very time-consuming. A certain method can be of more informative value regarding quantitative as opposed to qualitative.
According to Beattie et al. (2004), Krippendorf (1980) identified three types of reliability. The reliability of this method is identified by the stability, which is the extent to which the same coder is consistent over time when coding the same content; the reproducibility, which means that coders produce the same results when coding the same content; and the accuracy, which is the extent to which the classification of the text corresponds to a standard or norm. Since stability is a weak measure of reliability and standard coding seldom exist, the most frequently reported measure is inter-rater reliability, which is the degree of agreement amongst the raters.

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3.3.3 Analysts ratings
These are ratings based on analysts’ perceptions of the quality of disclosure. Till 1997 the
Association of Investment Management Research (AIMR) produced rankings for U.S. companies
(Beattie et al., 2004). These reports according to Beattie et al. (2004) provide an overall measure of corporate communications with investors. Typically, 27 industries on average are covered, with an average of 17 companies being evaluated by 13 analysts in each industry. Furthermore, there were separate ratings for annual and quarterly published information and other published information and investor relations. The AIMR discontinued its disclosure rankings in 1997 and other countries do not have similar rankings. However, apart from the advantages, disadvantages of this method are also present. Lang & Lundholm (1993), according to Beattie et. al (2004), assume that the ratings measure ‘disclosure informativeness’. They acknowledge that
‘a disadvantage of the financial analysts following data is that they are based on analysts’ perceptions of disclosure rather than direct measures of actual disclosure. Healy & Palepu (2001) criticize these rankings on three grounds: 1) the lack of clarity as to whether the analysts on the panels take the ratings seriously 2) the unclear basis on which firms are selected for inclusion and 3) the potential biases that analysts bring to the ratings. Apart from these disadvantages, if the data are available, then this is far less time consuming than hand collecting the data. The ratings are therefore an easy method to use. Apart from this, analysts might have a pretty good idea of what they want to see in annual reports and might be in a good position to judge the quality and therefore represent the quality of an annual report quite accurate in their ratings.
3.4 Factors that have an influence on disclosures in general
When measuring the quality of the voluntary disclosure with respect to prospective information, and to associate this with the quality of corporate governance, we need to account for factors that are also associated with voluntary disclosure with respect to prospective information. In a study by Aljifri & Hussainey (2007) five main variables on the extent of forward-looking information disclosure in annual reports were investigated. They revealed that profitability and

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Master`s Thesis debt-ratio have a significant influence on the disclosure level, whereas sector type, size and
26 auditor size did not. According to Aljifri & Hussainey (2007), Ahmend and Courtis (1999) surveyed prior literature and they find a significant relationship between sector type or industry and disclosures in countries as the USA, Canada and Sweden. Also of particular interest is that the Horwath report also concludes that there is a difference between the sectors and their respected quality of corporate governance. Differences in disclosure policies by firms in different industries are intuitively plausible, as industries might cope with different degree of information asymmetry. With respect to the relationship between the debt-ratio and the disclosures, Jensen and Meckling (1976) argue that because more highly leveraged firms incur more monitoring costs, they seek to reduce these costs by disclosing more information to satisfy the need of creditors. However, according to Aljifri & Hussainey (2007), empirical evidence on the association between the two variables is mixed. Empirical evidence about the relationship between profitability and disclosures is also mixed. An explanation why a positive relationship would exist would be that managers of highly profitable firms might provide greater information to increase investors` confidence to increase their own compensation, according to
Aljifri & Hussainey (2007). Audit size is important as it is argued that auditors can play an important role in improving firms’ overall reporting strategies. Big firms are expected to be of a higher quality than smaller audit firms. With respect to the size of the company, according to
Hassan et al. (2006) there are a number of explanations for a positive association. Large companies might have more resources to afford producing information for users of annual reports. Large companies might be of interest to different users of annual reports including government agencies. A last explanation of why size might be associated with disclosures is that agency costs are higher for large companies because shareholders are widespread.
In line with the research of Aljifri & Hussainey (2007), specific industries will also be taken into account. In order to provide reliable results, these variables should be taken into account and act as control variables. In this way the effect of the quality of corporate governance is isolated and can be tested. Apart from the general factors that have been discussed above concerning their influence on disclosures, the economic crisis accompanied by uncertainty is also expected

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Master`s Thesis to have an influence on the disclosures. Especially disclosures that are future oriented are
27 believed to be influenced by uncertainty about the economy.
4. Engaging in the disclosure of forward looking (voluntary) information
In this chapter an elaboration on how firms can engage in voluntary prospective information will be presented. Also, the relevance of prospective information will be discussed as this legitimizes my research of the effects of the quality of corporate governance on this kind of information that is given out by companies.
4.1 Engage in prospective information
Companies can use many different media to communicate their information to the outside world. They can communicate through for example annual reports, half-year and quarterly releases, conference calls, press releases, etc. This thesis will only focus on the annual reports as this information is widely available and a derived framework of the Jenkins report is used to determine the disclosures of certain elements that ought to be stated in the annual report, according to the users of financial statements. Companies can disclose future-oriented information in two ways. They can project and forecast information. A forecast can be done in the sense that a specific profit is expected in the future. However, projections are based more on assumptions that are made concerning that future. The projection might be based on critical assumptions that can be exogenous in nature. Fiscal policy of governments, the growth rate of the economy, the oil price and so forth. Projections therefore seem to be giving more information about how the expectation is formed. Companies take these assumptions into account and scenario-analysis, for example different scenarios in terms of state of the world economy, could be very helpful in determining what outcomes are possible. According to De Mooij (2003), forecasting short-run economic developments is difficult; predicting the long-run is impossible.
For the long-run, it is therefore more useful to develop scenarios. Scenarios are feasible and

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Master`s Thesis consistent views on the future. They do not aim to predict the future, but rather to sketch
28 alternative futures. The model used in this thesis encompasses predictions as well as forecasts.
The model consists of elements that can be scored on quantitative basis such as revenue forecasts and more qualitative elements – developments or expectations - based on projections.
4.2 Arguments to engage in disclosures about future information
In the previous chapters, the incentives for voluntary disclosures were presented. However, this thesis deals with disclosures that are more specific. To legitimate the fact that this thesis will investigate what the relationship is between corporate governance and these specific disclosures, we first have to establish the importance of these specific disclosures. Hereafter some arguments on why this kind of disclosure are relevant will be presented.
According to Aljifri and Hussainey (2007), there are many advantages for companies to engage in specific forward-looking information in annual reports. According to Aljifri and Hussainey
(2007), Kieso and Weygandt (1995) argue that forward-looking information will be helpful to investors in their investment decision-making process. Healy and Palepu (2001) and Walker
(1997) provide comprehensive reviews of this literature. They argue that the absence of forwardlooking information may lead investors to base their belief on inaccurate information from other sources than the company. They further argue that the economic environment we are living in is too dynamic to solely rely on historical information only. Apart from the arguments in favor, academic researchers provide some arguments against the publication of forward-looking disclosures. First, because of the uncertainty associated with the future, it might be difficult to predict with accuracy. According to Aljifri and Hussainey (2007), inaccurate forecasts might lead to lawsuits; this is consistent with the litigation cost hypothesis (Field et al. 2003). Litigation might reduce managers` incentives to provide forward-looking information. According to Healy and Palepu (2001), forward-looking disclosures might provide useful information to competitors and, hence, might affect its competitive position in product markets; this is consistent with the proprietary cost hypothesis.

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5. Literature review
5.1 Introduction
In this chapter an overview will be given on the prior research that has been done and is available regarding the relationship between the quality of corporate governance and the
(voluntary) disclosures.
Prior studies show that there is a relationship between the corporate governance and (voluntary) disclosures. These studies reflect on important thinking in this area that will impact my work on this topic and provides a background for the importance of my research question. However, there are quite some differences in the way these prior researches measure the quality of corporate governance and the level or the extent of voluntary disclosures. The main findings of these prior studies will be summarized as well as the relationship between the prior researches.
5.2 Related literature
A study by Beekes and Brown (2006) shows that Australian firms that are better governed, have more informative disclosures. In their study they used the HWK Horwath report (2002) to determine the quality of corporate governance and came to the conclusion that better-governed firms do make more informative disclosures: better-governed firms make more price-sensitive disclosures, they have a larger analyst following, analysts’ consensus forecasts for bettergoverned firms are less biased and more accurate and, presumably as a consequence, valuerelevant information about better-governed firms is more timely in the sense that price discovery is faster. The article of Beekes and Brown (2006) was of particular interest in that it uses the HWK Horwath report as a source to determine the quality of corporate governance.

5.3 Corporate Governance Factors that Influence (Voluntary) Disclosures
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In this section, a selection of the available literature is presented that focuses on which factors
30 that constitute corporate governance have an influence on the voluntary disclosures that companies engage in.
5.3.1 Independent non-executive directors
With respect to the characteristics that define good corporate governance, Cheng & Courtenay
(2006) find that when they used a direct measure for voluntary disclosure – a self-constructed index developed in Luo et al. (2006) – that there exists a significant relationship between boards with a larger proportion of independent non-executive directors and high levels of voluntary disclosure. Specifically, boards with a majority of independent directors have higher levels of disclosure than firms that do not have a majority of independent directors. Furthermore they also show that board size and duality, as explained in chapter 2.1, are not associated with the level of voluntary disclosure. Gul & Leung (2004), on the contrary, find that CEO duality is associated with lower voluntary disclosures.
5.3.2 Audit committee and directors` shareholdings and stock options
A study by Arcay et al. (2005) finds that apart from the proportion of independent directors on the board, the appointment of an audit committee and director’s shareholdings and stock option plans are positively related to voluntary disclosure. They also observe that these governance practices are partly significantly influenced by the ownership structure of the firm. In contrast with the results of Gul & Leung (2004), Arcay et al. (2005) do not find a relationship between
CEO duality and the level of voluntary disclosures. Gul & Leung (2004) came to the conclusion that when the proportion of outside expert directors is higher, the negative association between
CEO duality and corporate disclosures is weaker. In addition, besides the influence on the level of voluntary disclosures, the types of disclosures also differ. As Aboody & Kasznik (2000) find evidence that CEOs of firms make opportunistic disclosures that maximize the scheduled awards as for example stock option compensation, which was also a finding of Arcay et al.
(2005). With respect to voluntary disclosures, they suggest that top executives have

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31 have an effect in the personal monetary gain of executives.
5.3.3 Ownership structure and earnings forecast
In line with the results of Arcay et al. (2005), Eng & Mak (2003) come to the conclusion that the ownership structure and board composition has influence on voluntary disclosure. They characterize the ownership structure by managerial ownership, blockholder ownership and government ownership, and board composition is measured by the percentage of independent directors. They see managerial ownership and blockholder ownership as two major corporate governance mechanisms that help control the agency problems, and thus can be helpful in aligning the incentives of the managers and the company. Fama (1980) argues that the board of directors is the central internal control mechanism for monitoring managers. The structure of the ownership determines the level of monitoring and thereby the level of disclosure, this structure is assessed by the proportion of shares held by managers and block holders. The findings of
Arcay et al. (2005) were that lower managerial ownership is associated with increased voluntary disclosure and that blockholder ownership is not related to disclosure. Leung & Horwitz (2004) find that high concentrated board ownership explains the extent of low voluntary segment disclosure. He also states that this negative relationship is even stronger when the performance of the firm is very poor.
In addition to the association between management ownership and voluntary disclosure,
Ruland et al. (1990) hypothesize that firms that are engaged in earnings forecasts – a form of voluntary disclosure - have a higher proportion of outside ownership than other firms. As
Jensen & Meckling (1976) put it, when managers share ownership falls, outside shareholders will increase monitoring of managers behavior. Arcay et al. (2005) further conclude that ownership concentration is negatively associated with the adoption of practices of good governance. The positive association between corporate ownership structure and disclosure can be explained by the adaption of rules of good governance. This in turn will strengthen the disclosure policy of the company. However, Leung & Horwitz (2004) further conclude that when executive ownership becomes too concentrated, the executives control the firm`s

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32 problem between manager and stockholder then shifts to conflicts between the controlling owners and minority shareholders. In their research they show that discretionary segment disclosure is non-linearly related to executive director ownership. When executive director ownership rises from 1% to 25%, voluntary segment disclosure rises. However, a rise above 25% resulted in a decline of such disclosures. This indicated that at higher levels of board ownership the agency problem shifts from the managers/shareholder conflict – as is usually the case – to a difference between the controlling and minority shareholders.
5.4 Conclusions
Examining the related literature, we can thus conclude that there is some consensus of what constitutes the quality of corporate governance and how this affects the voluntary disclosures.
Possible limitations are that the related studies that have been named above are of different geographical areas, implying that we should be cautious with generalizing these conclusions.
Below you will find a table that summarizes all the findings of the prior related research used in this chapter.
As stated before in this thesis, the aim is to investigate whether good corporate governance is associated with voluntary disclosures that firms engage in. The literature review has provided some insights on how the quality of corporate governance is measured and determined. The just mentioned studies show amongst some others, relationships between independent nonexecutives, CEO duality, the presence of an audit committee, managerial ownership, the different type of ownership structures and voluntary disclosures. By carefully examining these factors, they all have a common factor, namely independence. Key figures – such as amongst others – the board of directors and the audit committee, within companies should be free of conflict of interest. They foster the degree of independence within a company. It is the factor

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Master`s Thesis independence that is of vital importance in the remaining of this thesis as it is of great influence
33 on the quality of corporate governance, as will be explained in more detail in the next chapter.

Authors and title Object of study Sample used Methodology Overview of results
Beekes and
Brown (2006)
Do bettergoverned
Australian firms make more informative disclosures?
(Cheng &
Courtenay, 2006)
Board
Composition,
Regulatory
Regime and
Voluntary
Disclosure
(Gul & Leung,
2004a))
Board leadership, outside directors expertise and voluntary corporate disclosures.
(Aboody &
Kasznik, 2000)
CEO stock option awards and the timing of corporate voluntary disclosures
(Arcay et al.,
2005)
This study investigates if corporate governance quality is related to the information flows from a company and how the stock market and its agents respond. They specifically study links between the “quality” of a firm’s corporate governance and the informativeness of its disclosures.
This study examines the association between board monitoring and the level of voluntary
Disclosure.
This study examines the linkages between board leadership structure in terms of
CEO duality, the proportion of expert outside directors on the board and voluntary corporate disclosures.
This study investigate whether CEOs manage the timing of their voluntary disclosures around stock option awards.
This study examines the relationships among corporate characteristics,
250 Australian firms rated in the
2002 Horwath
Corporate
Governance
Report
104 firms listed on the Singapore
Stock Exchange at the end of the year 2000.
385 Hong Kong companies
572 firms from
Standard & Poor's
ExecuComp database and 2039 stock option awards.
They considered a number of pricesensitive documents released to the share market, four properties of analysts’ EPS forecasts, and the speed with which share price reflects the net effect of value-relevant information
Impounded in share price over the year.
A self-constructed empirical measure that captures the cross-sectional variation of voluntary disclosure levels over the sample of firms are being used.
A two-stage (OLS)
Regression analysis is used to determine the relationship between board leadership structure, experts outside directors and voluntary disclosures.
They document changes in share prices and analyst earnings forecasts around option awards that are consistent with their conjecture.
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They found that bettergoverned Australian firms do make more informative disclosures. Five, specific predictions were supported: better-governed firms make more price-sensitive disclosures, they have a larger analyst following, analysts’ consensus forecasts for bettergoverned firms are less biased and more accurate and, presumably as a consequence, value-relevant information about bettergoverned firms is more timely in the sense that price discovery is faster.
Firms with a higher proportion of independent directors on the board are associated with higher levels of voluntary disclosure.
Board size and CEO duality are not associated with voluntary disclosure, but boards with a majority of independent directors have significantly higher levels of voluntary disclosure as compared to firms with balanced boards.
The extent to which managers will disclose more corporate information is likely to be affected by the composition and the quality of the board of directors. The results show that CEO duality is associated with lower voluntary disclosures and that firms with a higher proportion of outside expert directors are associated with lower voluntary disclosures.
Their findings suggest that
CEOs make opportunistic voluntary disclosure decisions that maximize their stock option compensation.
34
Empirical evidence supporting this
They created a disclosure index and related this to
The results show that a firm’s size, along with some mechanisms of corporate

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Corporate
Characteristics, governance rules and the extent of voluntary disclosure in
Spain the governance structure of the firm, and its disclosure policy.
(Leung &
Horwitz, 2004)
Director
Ownership and
Voluntary
Segment
Disclosure: Hong
Kong Evidence
To examine if there is a relationship between disclosures above a certain benchmark to the ownership structure of corporate boards.
(Eng & Mak,
2003)
Corporate governance and voluntary disclosure
This paper examines the impact of ownership structure and board composition on voluntary disclosure investigation has been gathered from a sample
(117) of Spanish firms listed on the
Madrid Stock
Exchange the characteristics of the governance structure of the firm. The used
ANOVA and
Kruskall-Wallis to test their expectations.
376Hong Kong
Listed companies for 1996 after exclusion of companies that did not disclose segment information or had missing data.
The sample is drawn from firms listed on the Stock
Exchange of Singapore
(SES) as at the end of 1995. The total sample contained 158 firms with complete data for analysis that covered all the nine industry sectors.
The study uses voluntary segment disclosure above the benchmark minimum as a proxy for transparency and examines its relationship to the ownership structure and composition of corporate boards in Hong Kong
They regress the disclosure score on ownership variables and board composition after controlling for debt, firm size, growth opportunities, industry, analyst following, auditor reputation, profitability and stock performance. governance such as the proportion of independents on the board, the appointment of an audit committee, and directors’ shareholdings and stock option plans, are positively related to voluntary disclosure.
We have also observed that these governance practices are significantly influenced by cross-listings and by the ownership structure of the firm
They find that high
(concentrated) board ownership explains the extent of low voluntary segment disclosure and this negative relationship is stronger when firm performance is very poor and the contribution of nonexecutive directors to enhance voluntary segment disclosure is effective for firms with low director ownership but not for concentrated-ownership firms.
The results show that ownership structure and board composition affect disclosure. We find that lower managerial ownership and significant government ownership are associated with increased disclosure.
Block holder ownership is not related to disclosure. An increase in outside directors reduces corporate disclosure.
They also find that larger firms and firms with lower debt had greater disclosure.

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6. Hypothesis and research design
6.1 Introduction of the hypothesis
In this thesis, the presence of a relationship between the quality of corporate governance and the quality of voluntary disclosures regarding prospective information will be investigated. As mentioned before, the quality of corporate governance is believed to have an association and an influence on the quality of future-oriented disclosures. Based on the literature review and the factors that have an influence on the quality of disclosure, the first hypothesis will test whether the quality of corporate governance is positively associated with the quality of disclosures with respect to future-oriented information. The positive direction is chosen as it intuitively seems correct. Previous outcomes of studies in the literature review back up this intuition as for example – amongst other associations - there is a negative association between CEO duality and disclosures and a positive association between the presence of an audit committee and disclosures. The second hypothesis goes a step further, as it tests whether the quality of corporate governance has influence on the quality of the disclosures.
The first hypothesis: There exists a positive relationship between the quality of corporate governance and
the quality of disclosures with respect to prospective information.
The second hypothesis will test whether the quality of corporate governance influences the quality of disclosures regarding future oriented information.
The second hypothesis: The quality of corporate governance positively influences the quality of the
disclosures with respect to prospective information.

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6.2 Introduction in the research strategy
In this section, the strategy will be presented. Firstly a description about the sample will be
37 given. Secondly, the methodology of measuring the quality of corporate governance will be presented. The remaining part will describe the index model that is used to determine the quality of the disclosures aimed at prospective information, the validation of this model and the regression-analysis that will be used will be presented.
6.3 Sample Statistics
The sample that will be used in this thesis is derived from the WHK Horwath report. In this report, a total of 250 companies are investigated. The companies are active in 12 different industries, of which the financial sector, mining, the metal industry, the oil industry and retail are more present than the other industries in this sample as well as in the population. Of these
59 companies that were investigated, 15 were experiencing losses for the year 2009 and only 5 companies had a balance sheet that was debt free. Four companies have been excluded from the sample, as they can be classified as outliers. Grubb`s test for detecting outliers was performed.
Companies that deviated more than 3.5 standard deviations from the mean were excluded from the model. These companies, due to incidental losses, were experiencing major losses compared to their results of previous years. The companies that are excluded were AED OIL, Deep Yellow,
Goodman Group and Australian Agricultural Company. With respect to AED OIL, development costs, assets write-down and impairment-write downs negatively influenced the result. Previous years showed different results. Deep Yellow showed similar incidental results.
For this reason also Deep Yellow is excluded from the sample. Goodman Group and Australian
Agriculture also experienced major impairment losses which decreased their net profit after tax dramatically.
In the WHK Horwath report, scores are given in terms of stars and ranks to point out the quality of the corporate governance of a firm. The population showed that 40 companies were rated as 5

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38 rated one star, which is the lowest score that could be achieved. As the companies are all given a rank in this report, the rank will be the indicator of the quality of corporate governance.
The population that has been examined consists of 250 stock ASX listed firms in Australia. Stock listed firms do differ somewhat in size, however, they are quite large firms that could show similar characteristics. This could cause an endogeneity problem as stated before in this thesis.
Companies that are large and successful might be willing to disclosure more future-oriented information. But, as explained earlier, one could also reason the other way around. Of importance is that there is awareness concerning this endogeneity problem. With respect to the conclusions that follow in this thesis, this endogeneity problem should be taken into account.
6.4 Measurement of the quality of corporate governance
As mentioned earlier, the quality of corporate governance will be assessed by using the WHK
Horwath report. Companies can be compared on their compliance with corporate governance rules or in the degree to which they are in line with what previous studies have recommended, based on their achieved rank in the report. The rank of the company will indicate the quality of the corporate governance and will be used in the statistical analysis in the next chapter. The higher the absolute rank, the lower the quality of corporate governance. The rank of a company is determined by the quality of corporate governance, compared to the quality of other corporate governance of the other companies. Further explanation concerning the ranking is discussed in chapter 2.
6.5 Defining the disclosure model
This section deals with how we define the disclosure model. Important is why firms engage in voluntary disclosures; this is explained in chapter three and four. An index study will be applied, as there will be looked for predefined information elements that can be scored. A binary coding scheme will be used to record the item as present or not. As a basis to measure the

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39
(2001) will be used in order to determine the quality of the disclosures regarding future nonfinancial information. This research is based on Anglo-American countries such as Australia,
Canada, and the United States. This model is derived from Jenkins Committee report entitled:
Improving Business Reporting—A Customer Focus (AICPA). The model that will be used to assess the quality of the disclosures is derived from Robb (2001). The model of Robb (2001) in turn is derived from the Jenkins report. By applying the derived model of Robb (2001), a comparison can be made in order to assess the quality of the disclosures regarding future information, regardless if this information is presented voluntarily or not. As mentioned before scores, one or zero, will be attributed to each element in the model and will add up to a total score that will represent the quality of the non-financial disclosure concerning the future. The disclosure model is presented below:

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Forward looking information model:
(A) Opportunities and risks, including those resulting from key trends:
Risk in terms of ability of companies to enter the industry or threats of substitutes or services, changes in bargaining power of customer or suppliers;
Information about the economy, the markets, competition or technology that could have an influence on the company;
Recent changes in environment; nature and timing of company`s response;
Opportunities or risks specified for segments of the company.
(B) Management's plans, including critical success factors:
Major goals, strategy of the company;
Acknowledgement of the critical success factors to achieve the major goals and the strategy of the company;
Methods of conducting the business: how will the goals of the company be achieved, provided that the critical success factors are present.
(C) Forecasted Operating and Financial Data:
Beneficial or detrimental circumstances in which the company is involved and that may increase or decrease cash flows, profitability or revenue in the future;
Changes in the financial position of the company in terms of refinancing, emissions etcetera;
Quantitative forward looking information with respect to revenue and profit;
Forward looking information per segment.
(D) Comparison of actual business performance to previously disclosed opportunities, risks, and managements` plans
Come back to previous opportunities and risks, including those from key trends or management's plans, including critical success factors.
The companies that are represented in the WHK Horwath report that are randomly selected will be analyzed with this model. This model acts as an instrument to distinguish companies based on their quality of disclosures aimed at forward looking information. Apart from the last subitem, all sub-items will be granted an equal amount of points as there is no objective way to weigh the information items based on their respective importance. Every main element A, B and
C can be granted with a maximum of 10 points, item D a maximum of 5 points. A maximum of
35 points can be achieved if the company can be scored on all items in the model. The exact scoring can be found in appendix 10. The weighing of the three main elements thus are the

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41
The fourth element though seems naturally less valuable in terms of contributing to the quality of forward looking information than the other three main elements as it also has only one sub element that it can be scored on. For this reason only five points are attributed to the presence of information that concerns a comparison of actual business performance to previously disclosed opportunities, risks, and managements` plans. The scores that are attributed to the companies are used to compare the quality of disclosures related to future-oriented information within this group of companies. Next to the comparison of the quality of disclosures, these scores could also be used as a basis for determining trends.
6.6 Validation of the model
An important step before the empirical research begins and statistical analysis are made, is to verify if the model that will be used is a valid one. The model used in this thesis is a derived from both the Jenkins report and the model that is created by Robb et al. (2001). Robb et al.
(2001) based their model, which is a more comprehensive model as it is aimed to capture all non-financial disclosures, on the Jenkins report as well. The Jenkins report that was commissioned by the American Institute of Public Accountants (AICPA) in 1994 to recommend techniques by which business reporting could be improved. The Jenkins Committee had extensive meetings with financial analysts, and based on their recommendation that business disclosure should be more about their plans, opportunities and risks and other business reporting information of key business processes. Although the model dates back to 1994, new initiatives to adjust this model were not very successful (Knoops, 2010). Based on a management change perspective, which implies a judgment according to a framework that consist of seven questions, of which some questions were formulated as followed: what is the problem? What is the solution? What is the desired result? Who is responsible for implementing the solution?
What is the motivation of the implementation? Eleven models, including the AICPA report dating back from 1994, were analyzed based on the seven question management change perspective. These proposed models were, according to the approach mentioned above of little added value. This is concluded in a project that has just been finished by the Institute of

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Chartered Accountants England and Wales (ICAEW). These conclusions legitimize the use of
42 the AICPA report dating from 1994 to analyze annual report of 2009.
6.7 Statistical analysis
In order to test the hypotheses, a correlation matrix and regression analysis will be used. There will be tested if the quality of good corporate governance - measured by rank in the Horwath report - is associated with the quality of disclosures with respect to prospective information. A higher absolute rank means that the quality of corporate governance is lower. The higher the absolute rank on the list, the lower the quality of corporate governance. The lowest absolute value is 1, this means that the company is ranked on the 1 st place and thus has the highest quality of corporate governance compared to the other companies.
The regression, taking into account the control variables as discussed in chapter 3, will look as follows:
Description of the variables: o Profitability will be measured as net income/ revenue; o Debt ratio will be calculated by dividing the debt by the total assets; o The type of industry, this is a dummy variable. There are 12 different industries, which leads to 11 dummy variables.
With respect to the above disclosure score, heterogeneity should be taken into account.
Conclusions that are drawn should be interpreted carefully as there exists a heterogeneity problem. There might be other factors that can influence the willingness to disclose futureoriented information.

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6.8 Summary
In this chapter the research strategy is pointed out. An index model for disclosure has been introduced which comprises the elements : opportunities and risks, including those resulting from key trends; management's plans, including critical success factors; forecasted operating and financial data and comparison of actual business performance to previously disclosed opportunities, risks, and management's plans . The quality of corporate governance will be assessed by the rank the company has according to the data of the Horwath report. The index score of the model that has been derived from Robb (2001), will be brought into relationship with the quality of corporate governance, using correlation matrices and a regression analysis, taking into account the control variables.
7. Statistical Analysis
In this chapter the analysis will take place. First there will be some descriptive statistics about the sample. Hereafter the outcome of the models will be presented and the critical assumptions of the regression model will be tested.
7.1 Descriptive statistics
As mentioned before, a sample of 59 of the ASX listed companies in Australia is drawn randomly from the 250 companies that the Horwath report investigated based on their quality of corporate governance. From this sample, 55 companies provided useful data, as 4 companies needed to be excluded because they provided data that causes outliers. Further analysis of these outliers resulted in the fact that all these companies experienced large incidental losses due to impairments of write-offs. A sample is used because this is more efficient and, if complying with standard rules of statistics concerning the degree of representativeness, will reflect the population. Field (2005) refers to an investigation by Miles and Shevlin (2001). They produce

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44 number of predictors one uses in the regression. With respect to the required sample size, a sample of 55 is sufficient to predict large effects and thus legitimizes the size of sample that is randomly drawn in this thesis.
Furthermore, some characteristics of the sample will be discussed next. With respect to the variety of industries within the sample, the sample consists of 12 different industries. The companies are assigned to an industry by using the Australian and New Zealand Standard
Industrial Classification (ANZSIC), 2006. It is interesting that the mining sector in this
Australian sample is by far the biggest industry, followed with a great distance by the manufacturing industry. Appendix 1 shows the different industries, along with the frequency and the percentage of the total companies the industry represents.
Fifty-nine annual reports of fifty-nine companies are examined. Their respected scores concerning the disclosure, the profitability, size, the quality of corporate governance (rank), and debt are summarized in appendix 2, sorted on the type of industry they are in.
The annual reports of the companies listed above were examined on the basis of a model that was introduced earlier in this thesis. The element ‘score’ represents that quality of disclosures concerning future oriented information. With respect to the information elements that companies could score on, appendix 3 will give an overview on the percentage of companies that disclosed these specific information elements. Please note that elements like information about the economy, the strategy and beneficial or detrimental circumstances were scored very often. Companies were more reluctant in giving information about the other information elements that investors would like to see.
Below you will find the descriptive statistics concerning the sample of the Australian listed firms. The average profitability of the sample was 6,3 %, the companies scored 0,56 on average for their disclosures, and had an average debt to total assets ratio of 21%.

Debt Ratio
Profitability
Rank
Score
Size
Stars
Valid N (listwise)
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Descriptive Statistics
N
Statistic
55
55
55
55
55
55
55
Minimum Maximum
Statistic
.00
-.73
1.00
.21
8.00
1.00
Statistic
.72
.78
Mean
Std.
Deviation Variance
247.00 139.6000 10.68681 79.25547 6281.430
.79
248.00
5.00
Statistic
.2108
.0632
.5607
121.6545
3.3818
Std. Error Statistic
.02283 .16932
.03020
.01848
.22397
.13706
Statistic
.029
.050
.019
9.10427 67.51906 4558.823
.16614 1.23215 1.518
7.2 Outcome of the models
In this section the outcomes of the correlation matrix and the regression analysis will be presented. First the correlation between the quality of disclosures and the quality of corporate governance is determined, while taking into account the control variables. The results of the regression model will be presented afterwards, as there is some evidence in the literature that the quality of corporate governance can be of influence on the quality of the disclosure. Beekes and Brown (2006) state that better governed firms have more informative disclosures, indicating that there might be a causal relationship between the two factors.
The significance level is set to 5%. This chapter mainly discusses the outcome of the model and briefly gives an explanation of what the findings mean. In the following chapters all results will be explained and compared to the known literature about this subject.
7.2.1 Correlation matrix
The correlation matrix, appendix 4, shows that without taking into account any control variables, there exist a negative correlation of -.699 between score and rank. Score stands for the quality of disclosures and rank for the position the company has on the rank list. The lower the absolute number of the rank, the higher the quality of corporate governance is. This correlation

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Master`s Thesis is also highly significant (2-tailed) as the p value is 0.000. However, more conclusions from the
46 matrix can be drawn.
Score is highly significant, as respective significance levels of .000 and .015 are the outcome of this correlation matrix, correlated with rank (-.699) and size (-.277). The lower the score, the higher the rank and the higher the company scores on size. Besides these relationships, rank is significantly positively correlated (p = .001) with size (.041).
Figure 1
Size
Rank
Score
Figure 1 as well as the statistics makes clear that size and rank are negatively and significantly correlated with score, but size and rank are also significantly positively correlated with each other.
To be sure if there exists a correlation between rank and score, control variables should be taken into account. In appendix 5, the correlation between rank and score is again highly significant and negative as was the case without taking into account the control variables. By taking into account the control variables size, profitability and debt, the correlation between score and rank is -.667. Appendix 6 shows the effect when the above named control variables plus the type of industry is taken into account. Dummy variables are used. The correlation between score and size is still highly significant at a 5 % level with a p-value of .000 and a correlation value of -.594.
The control factors thus somewhat lowered the negative correlation between size and rank.
However, the effect was small and the correlation is still present and highly significant.

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7.2.2 Regression Analysis
In addition to the association that has been established in the previous section using a correlation matrix, a regression analysis will be executed in order to test whether the quality of corporate governance influences the quality of disclosures aimed at future-oriented information.
A hierarchical regression analysis has been performed first in order to obtain knowledge of which model should be used in explaining the variance between the quality of disclosures. Table
1, 2 and 3 illustrate the additional explaining power of the different independent variables that are included in the model. It can be concluded that the explaining power of the control variables size, debt and profitability are not significant. Adding the different industries as control variables in the form of dummy variables also do not show a significant increase in explanatory power. The F-change measures the additional explaining power of one extra variable in the model. All the control variables do not seem to have a significant F change, as p>0.05. This means that in fact the control variables do not explain significant more variance in the score of the companies and do not even have to be included in the model.
Table 1
Model Summary(e)
Model
1
2
3
4
R
.699(a)
.699(b)
.699(c)
.702(d)
R
Square
.489
.489
.489
.493
Adjusted
R Square
.479
.469
.459
.453
Std. Error of the Estimate
.09892
.09986
.10084
.10140 a Predictors: (Constant), Rank b Predictors: (Constant), Rank, Size c Predictors: (Constant), Rank, Size, Profitability d Predictors: (Constant), Rank, Size, Profitability, Debt e Dependent Variable: Score
Change Statistics
R
Square
Change F-change df1 df2
.489 50.678 1 53
.000
.000
.004
.000
.001
.431
1
1
1
52
51
50
Sig. F
Change
.000
.991
.974
.515
Durbin-
Watson
1.861

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Table 2
Model Summary(c)
Model
1
2
R
.699(a)
.699(b)
R
Square
.489
.489
Adjusted
R Square
.479
.469 a Predictors: (Constant), Rank b Predictors: (Constant), Rank, Profitability c Dependent Variable: Score
Std. Error of the
Estimate
.09892
.09986
Change Statistics
R Square
Change
F
Change df1 df2 Sig. F Change
.489 50.678 1
.000 .001 1
53
52
.000
.977
Durbin-
Watson
Sig. F
Change
1.884
Table 3
Model Summary(c)
Model
1
2
R
.699(a)
R
Square
.489
Adjuste d R
Square
.479
Std. Error of the
Estimate
.09892
Change Statistics
R Square
Change
F
Change
.489 50.678 df1
1 df2
53
Sig. F
Change
.000
Durbin-
Watson
Sig. F
Change
.744(b) .554 .426 .10382 .065 .556 11 42 .853 2.048 a Predictors: (Constant), Rank b Predictors: (Constant), Rank, Manufacturing, Personel, Accomo, Transport, Construct, Property, Agri, Health, Cult,
Fin, Retail c Dependent Variable: Score
Model 4 in table 1 explains 70.2 percent of the variation. Note that this is only slightly more than model 1, which explains 69,9 percent of the variation. Only the independent variable rank explains the quality of disclosures significantly, as this β rank ≠ 0. β rank in fact is < 0 and highly significant as p < .000. β rank is -.001, which means that if the rank increases with one (the company gets higher on the list in terms of absolute value), the score decreases with 0.01. An increase in rank means a lower quality of corporate governance according to the Horwath report. A company placed on the 250 th place has a higher (absolute) rank but has a lower quality of corporate governance than a company placed on the 1 st place. Lower quality of corporate

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Master`s Thesis governance means a lower disclosure score according to this model. Table 4 shows a 95%
49 confidence interval for β rank. In this figure the lower bound -.002 and the upper bound -.001 are presented and these figures mean that β rank must lie somewhere between -.002 and -.001 with 95% certainty. Table 3 further shows that the increase of eleven dummy variables in order to state the industry effect, only explains 4.5 percent more variation than the situation where no industry control variables are taken into account. This, according to table 3, does not contribute in explanatory power in a significant way as the significant F-change is >0.05. The variables therefore are not taken into account further on in this thesis.
Table 4
Model
1 (Constant)
Unstandardized
Coefficients
B
.729
Rank
2 (Constant)
Rank
Size
3 (Constant)
-.001
.730
-.001
-2.61E-006
.730
Rank
Size
-.001
Profitability
4 (Constant)
Rank
-4.29E-006
-.002
.717
-.001
Size
Profitability
Debt
-7.47E-007
.003
.054 a Dependent Variable: Score
Std. Error
.027
.000
.032
.000
.000
.033
.000
.000
.063
.039
.000
.000
.064
.082
Coefficients(a)
Standardized
Coefficients
Beta t Sig.
26.815 .000
-.699 -7.119 .000
22.821 .000
-.699 -6.475 .000
-.001 -.012 .991
21.900 .000
-.698 -6.392 .000
-.002 -.019 .985
-.003 -.032 .974
18.484 .000
-.695 -6.323 .000
.000 -.003 .997
.004 .042 .967
.067 .656 .515
95% Confidence Interval for B
Lower Bound B Upper Bound
.675 .784
-.002
.666
-.002
.000
.663
-.002
-.001
.794
-.001
.000
.797
-.001
.000
-.128
.639
-.002
.000
-.125
-.111
.000
.124
.795
-.001
.000
.131
.219
Now that the differences between the models, namely the extended, less extended and single variable model, are illustrated, a choice can be made on which model to base the conclusions on.
As the incremental explanatory power of industry is low and because a larger number of explanatory variables make the model less robust as explained earlier, this explanatory variable

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50 thesis for the analysis is illustrated below as model 4 in table 1 and table 4.
7.3 Model assumptions
The regression model has a number of assumptions which should be tested in order to interpret the results of the regression in a proper way. These assumptions are explained below and the results to whether or not these assumptions are met will be presented.
Field (2001) in making statistics accessible has done this by writing a book called ‘Discovering
Statistics Using SPSS (2005).’ This book, as SPSS is used in this thesis for the statistical part, has been of great value in interpreting all the statistics used.
Assumption that should be met when using a regression method:
Variable types: all predictors are quantitative or categorical: assumption is met;
Non-zero variance: all the predictors have a variation that is greater than zero: assumption is met;
No perfect multicollinearity: there is no perfect linear relationship between the two or more predictor variables. This is identified by looking at the correlation matrix and the
Variance Inflation Factor (VIF). The correlation matrix does not show correlations that are above .80 or .90. According to Field (2005), Myers (1990) suggests that a VIF of 10 is a good value to become somewhat worried. As can be seen in appendix 7, all the VIFvalues are < 10. The assumption thus is met;
Predictors are uncorrelated with ‘external variables’: These are variables that have not been included in the regression model which influence the outcome variable. This assumption means that there should be no external variables that correlate with the predictive variables. If this is the case, than the conclusions that will be drawn become unreliable. The literature in this thesis has pointed out what variables effect disclosure.
These variables are taken into account as this reduces the chance of predictors being correlated with external variables. This assumption therefore is met;

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Homoskedasticy: at each level of the predictor variables, the variance of the residual terms should be constant. All the residuals should have the same variance as no pattern could be detected. The assumption is met and is presented in appendix 9.
Independent errors: for any two observations the residual terms should be uncorrelated.
This is sometimes described as lack of autocorrelation and this can be tested with the
Durbin-Watson test. It tests whether adjacent residuals are correlated. A very conservative rule of thumb is that the value of Durbin-Watson should lie between 1 and
3. In this case, there is no cause for concern. The value of Durbin-Watson in this research is 1.861, which does not cause for concern. The assumption therefore is met;
Normally distributed errors: It is assumed that the residuals in the model are random, normally distributed values with a mean of 0. The mean of the predicted variable score is close to 0. Appendix 8 provides the necessary information; the standard predictive value of the mean is 0.000. The assumption therefore is met;
Independence: It is assumed that all of the values of the outcome variable are independent. Each value in this research comes from a separate entity. This assumption therefore is met;
Linearity: The values of the outcome variable for each increment of the predictor(s) lie along a straight line. It is assumed that the relationship is a linear one. A scatter plot in appendix 9 acknowledges this assumption with respect to the main predictive variable rank. Other scatter plots are also presented in this appendix 9. They do not all show a linear relationship, but do not explain much of the variance in the variable score. The assumption is met.
Even when all the above assumptions are met according to Field (2005) – which is the case in this research – the conclusion that the regression model is perfectly identical to the population cannot be drawn. An unbiased model does tell me that on average the regression model from the sample is the same as the population model. It is possible that the sample may not be the same as the population model, but the likelihood of them being the same is increased.

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8. Results and Discussion
The literature review in the first half of this thesis showed that there was evidence that the
52 factors that constitute the quality of corporate governance – defined by different elements such as board ownership, independence, and ownership structure – have influence on the amount and the quality or informativeness of (voluntary) disclosures. With respect to the results, there exists a positive correlation between the quality corporate governance and the quality of disclosures regarding future-oriented information. Controlling for the variables that influences disclosures according to the literature stated in this thesis still resulted in a highly significant
(p<0.000) negative correlation of -.594. Rules that determine at what height of correlation we can speak of a high correlation are somewhat arbitrary in nature. Though, the first hypothesis is confirmed and we cannot conclude that -.594 is a low value of correlation. There exists a relationship between the quality of corporate governance and the quality of disclosures concerning future-oriented information.
Apart from the relationship between the quality of corporate governance and the quality of disclosures, there has been also tested for influence that the quality of corporate governance has on the quality of disclosures. A regression analysis is executed to investigate if this was the case.
The regression analysis, executed multiple times with different control variables, showed that the quality of corporate governance is significantly of influence on the quality of disclosures regarding future-oriented information. The regression analysis shows a significant negative relationship between score and rank, which means that the higher a company scores in terms of the rank, the lower the quality of disclosures will be. A lower score in rank means a higher quality, as the 1 st position on the ranking list is a more favorable position than the 250 th position as explained in the previous chapter. The second hypothesis can thus be confirmed as well.
The control variables debt and profitability were taken into account as previous studies mentioned in chapter 3 have labeled these variables as significant of influence to disclosures related to future-oriented information. Industry has also taken into account, which is in line with the study of Aljifri & Hussainey (2007). The variables debt and profitability in this thesis were of

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53 significant but is far less insignificant than the other control variables. The β of debt however, despite not being significant at a 5% level, corresponds with the sign – although the confidence interval does not confirm that the sign is positive - of the β in the research of Aljifri & Hussainey
(2007). According to Aljifri & Hussainey (2007), Jensen and Meckling (1976) argue that because more highly leveraged firms incur more monitoring costs, they seek to reduce these costs by disclosing more information to satisfy the need of creditors. However, empirical evidence concerning this association is mixed according to their research. For example, Hossain et al.
(1994) find a significant association; the agency theory stands central in his research. However,
Raffournier (1995) has found no support for the proposed association between the two variables.
In this thesis, this is also the case. Raffourniers (1995) research is performed on Swiss listed companies using an index study, as is the case in this research. However, the index study did not consist of the same elements as in this research, as a sample of listed companies of 1991 was used; the Jenkings report used in this thesis was given out on 1994. The research of Aljifri &
Hussainey (2007) was done in a different geographical area, namely in the United Arab Emirates
(UAE), a developing country situated in the Western region of Asia, which has an open economy with a high per capita income and a sizable annual trade surplus, as is the case with
Australia. Apart from the different geographical area, key descriptive statistics also differ. The latter might result in different key descriptive statistics. The standard deviation was lower and the mean of the debt-ratio was lower for the sample of Australian firms, indicating less variance between the companies with respect to this aspect. Thus, Australian firms experience less leverage which could implies less monitoring costs. This in turn could explain differences in disclosure. However, there is a difference in terms of measurement of the disclosure score which do not favor comparison. Aljifri & Hussainey (2007) used word analysis in their research, which differs from the methodology used in this research and they only included four different industries. This research included 12. As geographical areas, industries taken into account, and the methodology differ in this study, comparison of the results concerning whether it is significant of influence on the disclosures or not is not entirely correct. Future research based on

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54 be generalized.
Furthermore, profitability cannot be labeled as being a significant predictive variable as p>0.05.
According to Aljifri & Hussainey (2007), Ahmed and Courtis (1999) argue that empirical evidence on the association between disclosure and profitability is mixed and provides conflicting results. Some studies find a significant positive association, while others find no such relationship or even find a negative relationship. Apart from the fact that prior research concerning this relationship in Aljifri & Hussainey (2007) found significant positive and negative relationships, the annual reports of 2009 might not represent a fair view and this thesis thus cannot be compared to these prior studies. The annual profit of 2009 for the sample could be somewhat lower than previous years. As the financial crisis triggered an economic crisis, profits should be somewhat affected. 93.22% of the companies in the Australian sample provided information about beneficial or detrimental circumstances in which the company is involved that may increase the cash flows, profitability or revenue in the future. Apart from this, a large part of the companies also indicated that 2009 was a tough year. The static approach - only using annual reports of 2009 – might not be enough to justify comparison with studies performed in different economic times.
With respect to the industry variable, i.e. the dummy variables introduced in order to control for different conditions between industries, no significant relationship was found. Intuitively, the expectation was that different industries might disclosure different items. Of the 59 companies that were analyzed initially, 28.8 percent consisted of mining-related companies. This sector was almost twice as large as the manufacturing sector. With respect to the composition of companies listed on the stock exchange market, Australia might differ as mining is a big sector in this country. According to a literature review - which contains somewhat dated studies - of Aljifri &
Hussainey (2007), the significance of industry differs between countries. The relationship is significant in countries as the USA, Canada and Sweden, but insignificant in Nigeria, New
Zealand and in Spain. As to why this is the case, is not answered in this thesis and this brings new possibilities for future research. The industry variable has been excluded from the model

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55 dummy variables would make the model less reliable.
Taken together, the two hypotheses in this thesis are confirmed. Taking into account control variables, the quality of corporate governance is associated with the quality of disclosures concerning future-oriented information. With respect to the influence that the quality of corporate governance has on the quality of the disclosures, the analysis point out that improving the quality of corporate governance will improve the quality of disclosures with respect to future-oriented information.
9. Limitations
In this thesis the quality of disclosures with respect to future-oriented information is assessed using a model that is derived from the Jenkins report. However, as not the entire Jenkins report is used, and no degree of importance has been given, subjectivity has to be taken into account.
All main elements of the derived model are granted the same amount of points. No difference is made between elements that might be of more importance than other elements.
With respect to the conclusions drawn about the influence the quality of corporate governance has on the quality of disclosure regarding future-oriented information, we have to interpret them carefully. This research is a static one, in the sense that only one year of annual report is analyzed. Multiple years of research could show the trends of the quality of corporate governance and the quality of disclosures together. Note that these trends will only hold for the relative position of companies to each other as this is what is measured in this thesis.
Conclusions based upon this data of multiple years would be more robust.
The static approach in this thesis, as just one year (2009) has been taken into account, is also of influence on the other control factors that are used. Profitability or debt ratio`s can differ from year to year. Especially profitability is subjected to volatility in times economic downturns and can even differ between industries. However, as no multicorrelation was found, the conclusion

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56 appendix also do not show that this is the case. Though, as the profitability had a very high p- value, no real differences is expected when taking on a dynamic approach, i.e. an average profit over a couple of years.
Endogeneity, as discussed earlier in this thesis, has to be taken into account. The sample might be biased, as self-selection has taken place. Only the most successful companies are left and are listed on the stock market. It might not be unreasonable to think that well performing firms have a higher propensity to disclose information concerning future developments. There might be a positive relationship between profitability and the quality of disclosures. However, the analysis did not find a significant relationship. A note has to be made because only one year is examined.
Examining multiple years would therefore lead to more robust conclusions concerning the potential positive relationship between these variables. However, with respect to the relationship, as also stated before in chapter 3.2, the reasoning can be also the other way around.
Companies with bad results, in financial distress or with a negative reputation might want to disclose information to diminish the information asymmetry between investors and the management of the company, in order to restore the perceived trust in their company. The results therefore should be interpreted with caution.
Heterogeneity is also a factor which should be taken into account. The annual reports that are analyzed are all of the year 2009. The global economic crisis as a consequence of the financial crisis affects companies in a negative way. Almost all companies did mention the crisis or the economic developments they were acting in as the descriptive statistic part in this thesis highlighted. However, there might be more reluctance towards providing more future-oriented information when there is uncertainty. As this affects the total score of all companies, the score derived from the sample might have led to different values had there not been an economic crisis and thus more uncertain economic developments. Apart from the propensity to disclose information about future projects, investments etc., there might be fewer disclosures because of the economic crisis and uncertain circumstances. Even if the propensity to disclose was high, the

Erasmus Universiteit Rotterdam
Master`s Thesis quantity of noteworthy disclosures could be lower. This score should therefore be interpreted
57 with caution.
This research is conducted on Australian companies. As this is a different geographical area and an Anglo-Saxon country as opposed The Netherlands, the relevance for Dutch listed companies is somewhat lower. However, as the rules of accounting information coming from regulators seem to converge over time and investors` information needs are becoming more the same over time, the conclusions drawn are to a high degree generalizable. However, further research on this topic should be done in order to give more certainty.
Finally, the Horwath report that is used in this thesis as a source for the quality of corporate governance has a limitation that should be taken into account. As amongst some other elements that constitute the quality of corporate governance the disclosures of related party transactions are also of influence on the quality of corporate governance, the explanatory variable ‘rank’ also encompasses some of the variable of which it predicts, namely the quality of the future-oriented disclosure. This related party transaction disclosure does not have an influence on the quality of corporate governance that is of such importance that the model therefore is incorrect. Even if the disclosure of related party transactions is highly associated with the disclosure of futureoriented information, the effect – based on the fact that there are allot of factors that determine the quality of corporate governance in the Horwath report – will be not be a cause for concern as the model will not be influenced in such a way that the drawn conclusions in this thesis will be incorrect.

Erasmus Universiteit Rotterdam
Master`s Thesis
58
10. Suggestions for future research
This research has only focused on Anglo-American countries. In a way this is a limitation, as other non-Anglo-American countries might have other preferences in terms of information need, i.e. investors could respond different to questionnaires on what kind of information they want to see in annual reports. Examining if the results on this thesis can be generalized can be done by comparing this research with future research on non-Anglo-American countries.
Furthermore, this thesis is mainly a static research as it does not take into account any changes in time. By investigating the changes in time, other factors – factors as heterogeneity – could be excluded from the results. Factors such as the financial crisis or economic upturns could cause companies to alter their reluctance/propensity to disclose high quality information about the future.
A final suggestion would also be to check whether reports, such as the Jenkins report, have an influence in the quality of disclosures. Perhaps more companies disclose items with higher quality because they are aware of the fact that investors or other stakeholders would like to see this information to base their opinion on about a company.
This subject is of increasing importance as forward looking information is mostly not quantitative but qualitative as was the case in this thesis. Non-financial information is gaining in terms of importance to financial information. Investors and other stakeholders want to see what is behind the figures and this partly explains the trend upwards.

Erasmus Universiteit Rotterdam
Master`s Thesis
59
11. Conclusions
In this thesis, the relationship between the quality of corporate governance and the quality of disclosures with respect to future-oriented information has been examined for Australian ASX listed firms using their annual reports of 2009. The quality of future-oriented information was assessed by a self-performed index study containing a model that is fit to score based on, amongst some others, opportunities and risks, management`s plans and forecasted operating and financial data. With respect to the quality of corporate governance, the WHK Horwath report (2008) is used as a source to determine the quality. Using statistical analysis in the form of correlation matrices and a regression model, the two hypotheses in this thesis are confirmed.
This means that there exists a positive relationship between the quality of corporate governance and the quality of future-oriented disclosures, and that the quality of corporate governance has an influence with respect to disclosures concerning future-oriented information. With respect to the relationship, a highly significant positive relation was found. This implies that when the quality of corporate governance is high, this is associated with a high score on disclosures regarding future-oriented information. The regression analysis points out that rank has predictive value on the score of the future-oriented disclosures and show that the upper bound and the lower bound lay between -.002 and -.001 with 95 % certainty. The results in this thesis are based upon Australian ASX-listed companies. Therefore, generalizations should be, if made, with caution.

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62

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63
Appendices
1 Accommodation, Cafes and Restaurants 3 5,1%
2 Agriculture, Forestry and Fishing 3 5,1%
3 Construction
4 Cultural and Recreational Services
2
3
3,4%
5,1%
5 Finance and Insurance
6 Health and Community Services
7 Manufacturing
8 Mining
7 11,9%
4 6,8%
9 15,3%
17 28,8%
9 Personal and Other Services
10 Property and Business Services
11 Retail
12 Transport and Storage
Total companies
1 1,7%
1 1,7%
7 11,9%
2 3,4%
59 100,0%
Appendix 1

Erasmus Universiteit Rotterdam
Master`s Thesis
64
Appendix 2
Company name
Goodman Group
Lend Lease
Sunland Group
Australian Agricultural Company
Gunns
Timbercorp
Adelaide Brigton
Brickworks
APN News & Media
Prime Television
Ten Network Holdings
AXA Asia Pacific
Bank of Queensland
Count Financial
Insurance Australia Group
IRESS Market Technologies
Peet
Suncorp-Metway
Australian Pharmaceutical
CSL
InvoCare
Pharmaxis
Billabong
Cabcharge Australia
Coca Cola Amatil
Downer EDI
Emeco Holdings
Incitec Pivot
Metcash
Reece Australia
Transfield Services
AED OIL
Aquila Resources
CBH Resources
Centennial Coal
Coal & Allied
Score Rank Size Profitability Debt Ratio Industry
0,71 124 24 -1,12 0,49 1
0,71 76 18
0,33 217 121
0,64 173 178
0,38 198 129
0,55 189 186
0,71 1 93
0,55 195 99
0,50 175 73
0,43 241 232
0,62 195 139
0,71 93 86
0,71 142 98
0,64 135 171
0,79 11 26
0,55 135 136
0,50 156 152
0,55 93 15
0,69 198 194
0,64 48 19
0,64 106 191
0,69 26 195
0,50 149 59
0,57 192 118
0,79 26 41
0,50 84 83
0,50 222 138
0,71 10 58
0,64 166 64
0,21 245 75
0,57 175 85
0,43 214 202
0,40 243 141
0,50 149 233
0,64 76 151
0,50 198 47
0,03
0,03
-0,05
0,22
0,06
-0,02
-3,75
-0,28
0,03
0,01
0,23
0,13
-0,06
0,09
0,05
0,10
-0,73
0,08
0,25
-0,16
-0,10
0,21
0,22
0,17
0,03
0,25
0,07
-0,05
0,11
-1,15
0,08
0,12
0,12
0,51
0,09
0,23
0,30
0,24
0,54
0,09
0,25
0,24
0,10
0,03
0,01
0,10
0,45
0,08
0,19
0,26
0,44
0,48
0,19
0,02
0,41
0,25
0,04
0,21
0,12
0,00
0,00
0,47
0,72
0,05
0,28
0,27
0,25
0,01
0,19
0,36
8
8
7
7
7
7
7
7
7
7
6
7
6
6
5
6
5
5
5
5
5
5
4
4
3
4
2
3
2
2
1
1
8
8
8

Crane Group
Deep Yellow
Fortescue Metals
Gindalbie Metals
Iluka Resources
Lynas Corporation
Mineral Deposits
Mineral Resources
Murchison Metals
Newcrest Mining
Pan Australian Res
Woodside Petroleum
Skilled Group
Oakton
Ansel
David Jones
GWA International
JB Hi-Fi
Premier Investments
Spotless Group
Super Cheap Auto
Flight Centre
Qantas Airways
0,71 1 143
0,40 234 193
0,57 145 33
0,24 225 234
0,57 26 114
0,45 244 181
0,48 236 248
0,71 221 242
0,24 245 95
0,71 124 37
0,48 239 158
0,64 93 8
0,50 156 206
0,29 227 224
0,64 1 100
0,62 11 80
0,57 206 123
0,64 52 134
0,40 247 166
0,64 106 142
0,62 61 230
0,64 145 102
0,50 102 25
0,17
0,02
0,10
0,07
0,42
0,01
0,07
0,09
0,02
-4,19
0,28
0,78
-0,19
-0,72
-0,04
0,08
0,07
0,04
0,25
0,02
0,04
0,02
0,01
Erasmus Universiteit Rotterdam
Master`s Thesis
65
0,16
0,00
0,08
0,14
0,28
0,37
0,45
0,30
0,17
0,00
0,58
0,00
0,17
0,00
0,11
0,09
0,23
0,14
0,07
0,25
0,30
0,07
0,27
10
11
8
9
8
8
8
8
8
8
8
8
8
8
8
11
11
12
12
11
11
11
11

Erasmus Universiteit Rotterdam
Master`s Thesis
Appendix 3
Opportunities and risks, including those resulting from key trends
Risk in terms of ability of companies to enter the industry or threats of substitutes or services, changes in bargaining power of customer or suppliers; 13,56%
Information about the economy, the markets, competition or technology that could have an influence on the company;
Recent changes in environment; nature and timing of company`s response;
94,92%
64,41%
Opportunities or risks specified for segments of the company.
Management's plans, including critical success factors:
Major goals, strategy of the company;
Acknowledgement of the critical success factors to achieve the major goals and the strategy of the company;
Methods of conducting the business: how will the goals of the company be achieved, provided that the critical success factors are present.
Forecasted Operating and Financial Data:
33,90%
94,92%
62,71%
84,75%
Beneficial or detrimental circumstances in which the company is involved and that may increase or decrease cash flows, profitability or revenue in the future;
Changes in the financial position of the company in terms of refinancing, emissions etcetera;
Quantitative forward looking information with respect to revenue and profit;
Forward looking information per segment.
Comparison of actual business performance to previously disclosed opportunities, risks, and management's plans
93,22%
30,51%
16,95%
49,15%
Come back to previous opportunities and risks, including those from key trends or management's plans, including critical success factors. 3,39%
66

Correlations
Erasmus Universiteit Rotterdam
Master`s Thesis
67
Appendix 4
Score
Rank
Size
Profitabil ity tailed)
N
Accomo Pears on
Correl ation
Sig.
(2tailed)
Agri
N
Pears on
Correl on
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2-
Pears on
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
Pears
Constru ct
Cult ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
1 .699
-
(**)
.332
55
.100
-
.103
.277
-
(*)
55
.699
-
(**)
.000 .041
55 55
1
.394
(**)
.000
55
-
.277
(*)
55
.394
(**)
.041
55
.009
-
.018
.946
55
-
.053
.702
55
-
.138
.315
55
.465
55
.003
55
.898
55
.017
.902
55
.003
55
1
55
-
.216
.270
55
.133 .104
.455
55
.113
55
-
.151
.450
55
-
.074
.589
55
-
.076
.196 .095
.579 .152 .492
.009
-
.053
.1
-
38
.100 .0
-
76
.2
12
.21
9
.946
55
.702
.3
15
55 55
-.018 .017
.898
55
-.216
.113
55
1
.902
.1
33
.3
32
55 55
-
.151
.270
.1
04
.4
50
55 55
-
.029
.0
31
.465
.5
79
.1
20
55 55 55
-.103
.1
96
-
.1
47
.455
.1
52
.2
83
55 55 55
-.074
.0
95
-
.1
37
.589
.4
92
.3
20
55 55 55
.224 .1
-
30
.1
34
55
-.029
.833
.8
25
55 55
1 .0
-
38
.833
55
.031
.100
.3
43
.3
29
55 55 55
-.038 .0
-
47
-
.0
74
.7
84
55 55
-
.038
1
.784
.7
35
.5
90
55 55 55
-.038 .0
-
47
-
.0
74
.39
2
55
.01
6
.825
55
.784
55 55
.784
.7
35
.5
90
55 55 55
.224
-
.038
.0
-
38
1 .0
-
47
-
.0
74
.100
55
.784
.7
84
55 55
-.130
-
.047
.0
-
47
.343 .735 .7
.7
35
.5
90
55 55 55
-.047
.735
1
-
.0
92
.5
.10
9
55
.16
-
1
.24
1
55
.11
8
.69
3
55
.06
-
7
.62
.69
3
55
.05
-
4
.90
9
55
.05
-
4
.69
3
55
.05
-
4
-.017 .(a) -.061 .276(
-
*)
.08
8
.015
.1
03
.904
55
.008
.954
55
.042
55
.
55
.659
55
.042
.52
5
55 55
.(a)
.
55
.028
.210
55
.151
.127
.20
-
4
.
55
.837
55
.270
.13
6
55 55
-.275(*) .(a) .172 .208
.10
1
.46
5
55 55
-.012 .(a) -.030 .006
.03
6
.933 . .829 .963
.79
7
55
-.086
55
.(a)
55
-.026
55 55
-.026 .07
-
4
.533
55
-.086
.
55
.848
55
.848
.59
0
55 55
.(a) -.026 -.026 .07
-
4
.533
55
-.086
.
55
.848
55
.848
.59
0
55 55
.(a) -.026 -.026 .07
-
4
.533
55
.
55
.848
55
.848
.59
0
55 55
-.106
.440
.(a) -.033 -.033 .09
-
2
. .813 .813 .50
.784
55 55
-.038
.784
.6
66
55 55
-.038 .1
-
27
.784
.3
55
55 55
-.047
.735
.1
39
.0
60
.1
82
.1
.911
.4
53
55 55
-.040 .0
-
54
.773
.6
98
55 55
-.169
-
.0
19
.218
.8
91
55 55
-.041 .1
-
10
.767
.4
26
55 55
-.038
.2
02
Correlations

Fin
Health
Manufac turing
Mining
N
Personel Pears on
Correl ation
Sig.
(2tailed)
N
Property Pears on
Correl ation
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
Retail
Transpo rt
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
Pears on
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
Pears on
Debt
Correl ation
Sig.
(2tailed)
N
Pears on
Correl ation
Sig.
(2tailed)
N
55
.212
.120 .283 .320
55
.219
.109 .241 .392
55
-
.017
.904 .954 .042
55
.(a) .(a) .(a)
.
55
-
.061
.659 .837 .210
55
.276
-
(*)
.042 .270 .127
55
.088
.525 .136 .465
55
.015
.911 .773 .218
55
.103
55
-
.147
55
-
.161
55
.008
55
.
55
.028 .172
55
.151 .208
55
-
.204
55
-
.040
55
-
.054
55
-
.137
55
.118
55
.275
-
(*)
55
.
55
55
55
.101
55
-
.169
55
-
.019
.453 .698 .891
55
.134
55 55
-
.074
.329 .590
55
.016
55 55
-
.054
.909 .693
55
-.012
55 55
-
.086
.933 .533
55
.(a)
.
55
-.030
55 55
.(a)
.
55 55
-
.026
.829 .848
55
.006
55 55
-
.026
.963 .848
55
.036
55 55
-
.074
.797 .590
55
-.041
55 55
-
.038
.767 .784
55 55 55
-.110 .202
.426 .139
35
.0
-
74
.5
90
.0
-
54
.6
93
.0
-
86
.5
33
.(a
)
.
.0
-
26
.8
48
.0
-
26
.8
48
.0
-
74
.5
90
.0
-
38
.7
84
.0
60
.6
66
55 55 55
-.074
.590
.0
-
92
.5
05
05
1
55 55 55
-.054
.693
.0
-
67
.6
26
-
.1
07
.4
37
55 55 55
-.086
.533
.1
-
06
.4
40
-
.1
69
.2
18
55 55 55
.(a)
.
.(a
)
.
.(a
)
.
55 55 55
-.026
.848
.0
-
33
.8
13
-
.0
52
.7
06
55 55 55
-.026
.848
-.074
.590
-.038
.784
-.127
.355
.0
-
33
.8
13
.0
-
92
.5
05
.0
-
47
.7
35
.1
82
.1
85
-
.0
52
.7
06
55 55 55
-
.1
46
.2
88
55 55 55
-
.0
74
.5
90
55 55 55
-
.1
98
.1
48
6
55
.10
-
7
.43
7
55
1
55
.12
-
4
.36
8
55
.(a)
.
55
.03
-
8
.78
2
55
.03
-
8
.78
2
55
.10
-
7
.43
7
55
.05
-
4
.69
3
55
.08
-
5
.53
6
55 55 55 55 55 55 55 55 55 55
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed). a Cannot be computed because at least one of the variables is constant.
Erasmus Universiteit Rotterdam
Master`s Thesis
68
5
55
-.169
55
.(a)
55
-.052
55 55
-.052 .14
-
6
85
55 55
-.074 .1
-
98
.218
55
-.124
.
55
.706
55
.706
.28
8
55 55
.(a) -.038 -.038 .10
-
7
.368
55
1
.
55
.782
55
.782
.43
7
55 55
.(a) -.060 -.060 .16
-
9
55
.
55
.662
55
.662
.21
8
55 55
.(a) .(a) .(a) .(a) .(a)
.590
.1
48
55 55
-.054 .0
-
85
.693
.5
36
55 55
-.086
.1
91
.533
.1
63
55 55
.(a)
.(a
)
. . . . . .
55
-.060
55
.(a)
55
1
55 55
-.019 .05
-
2
.662
55
-.060
.
55
.(a)
55
.893
.70
6
55 55
-.019 1 .05
-
2
55
-.026
.848
55
.1
32
.3
36
55 55
-.026
.1
97
.662
55
-.169
.
55
.(a)
.893
55
-.052
.70
6
55 55
-.052 1
.848
.1
50
55 55
-.074 .0
-
31
.218
55
-.086
.
55
.706
55
.706
55 55
.590
.8
25
55 55
.(a) -.026 -.026 .07
-
4
1 .0
-
42
.7
58
55 55
.533
55
.191
.
55
.848
55
.848
.59
0
55 55
.(a) .132 .197 .03
-
1
.163
55
.
55
.336
55
.150
.82
5
55 55
-.042
.758
55
1
55

Erasmus Universiteit Rotterdam
Master`s Thesis
69

Erasmus Universiteit Rotterdam
Master`s Thesis
70
Appendix 5
Correlations
Control Variables
Size & Profitability & Debt Score Correlation
Significance (2-tailed) df
Rank Correlation
Significance (2-tailed) df
Score
1.000
.
0
-.667
.000
50
Rank
-.667
.000
50
1.000
.
0
Appendix 6
Control Variables
Size & Profitability & Debt
& Accomo & Agri &
Construct & Cult & Fin &
Health & Manufacturing &
Personel & Property &
Retail & Transport
Correlations
Score Correlation
Significance (2-tailed) df
Rank Correlation
Significance (2-tailed) df
Coefficients(a)
Unstandardized
Coefficients
Model
1 (Constant)
B
.717
Rank
Size
Profitability
-.001
-7.47E-007
.003
Debt
.054 a Dependent Variable: Score
Std. Error
.039
.000
.000
.064
.082
Standardized
Coefficients
Beta
-.695
.000
.004
.067 t
18.484
-6.323
-.003
.042
.656
Score
1.000
.
0
-.594
.000
39
Rank
-.594
.000
39
1.000
.
0
Appendix 7
Sig.
.000
.000
.997
.967
.515
Collinearity Statistics
Tolerance
.838
.800
.936
.984
VIF
1.193
1.250
1.069
1.016

Erasmus Universiteit Rotterdam
Master`s Thesis
71
Appendix 8
Residuals Statistics(a)
Predicted Value
Residual
Std. Predicted Value
Std. Residual
Minimum Maximum
.4216 .7323
-.21312
-1.445
.25424
1.783
Mean
.5607
.00000
.000
-2.102 2.507 .000 a Dependent Variable: Score
Std. Deviation
.09625
.09758
1.000
.962
N
55
55
55
55
Appendix 9

Erasmus Universiteit Rotterdam
Master`s Thesis
72
Appendix 10

Erasmus Universiteit Rotterdam
Master`s Thesis
73

Erasmus Universiteit Rotterdam
Master`s Thesis
74

Erasmus Universiteit Rotterdam
Master`s Thesis
75
Appendix 1
-
-
-
-
-
-
(C)
-
(B)
-
-
-
Forward looking information model
(A)
-
Opportunities and risks, including those resulting from key trends:
Recent changes in environment; nature and timing of company`s response;
Opportunities or risks specified for segments of the company.
Risk in terms of ability of companies to enter the industry or threats of substitutes or services, changes in bargaining power of customer or suppliers;
Information about the economy, the markets, competition or technology that could have an influence on the company;
-
Management's plans, including critical success factors:
Major goals, strategy of the company;
Acknowledgement of the critical success factors to achieve the major goals and the strategy of the company;
Methods of conducting the business: how will the goals of the company be achieved, provided that the critical success factors are present.
Max Points
10
10
Forecasted Operating and Financial Data:
Beneficial or detrimental circumstances in which the company is involved and that may increase or decrease cash flows, profitability or revenue in the future;
10
Changes in the financial position of the company in terms of refinancing, emissions etcetera;
Quantitative forward looking information with respect to revenue and profit;
(D)
Forward looking information per segment.
Comparison of actual business performance to previously disclosed opportunities, risks, and management's plans
Come back to previous opportunities and risks, including those from key trends or management's plans, including critical success factors.
5