VOLUNTARILY DISCLOSE INFORMATION

Why do firms voluntarily disclose information?



Abstract

The purpose of this essay is to answer the question, Why do firms voluntarily disclose information? With the thorough study of multiple journals and research articles, we will sort out the reasons and motives behind such action from the firms and try to reach a meaningful conclusion.

Why do firms voluntarily disclose information?

Introduction

The term voluntarily a disclosure refers to the information revealed by the company which is beyond the scope of financial statements and not explicitly required by International Financial Reporting Standards or GAAP (US) or SEC rule. As obvious from the term, it is not obligatory or mandatory for companies to reveal such information. The purpose of the underlying discussion is to determine the reasons, motives and intentions behind such disclosure by the companies when no regulatory or accounting standard requires disclosure of this information to shareholders and investors. Discussion

Voluntarily disclosure of information may be related to company business data or management analysis of business data; this information may also include available opportunities and risks present affecting the company or information about stakeholders including management, principal shareholders, or board of directors. The scope of voluntarily disclosure also includes company business strategies or info related to intangible assets like research and development, human resources, customer relations. FASB (2001) published a report entitled "Improving Business Reporting: promote corporate, voluntary disclosure perspective" research report, which selected the automobile, chemical, computer, food, petroleum, pharmaceutical, regional banks, and textile 8 industries of the number of listed companies as samples, summed up the company voluntarily disclosed the content of these mainly related to business data, managers of business analysis of the data, forward-looking information, the information managers and shareholders, company background, intangible assets and human resources Meek, Robert and Gray (1995, pp. 555-572) study, the voluntary disclosure of information of listed companies into strategic information, financial information and non-financial information. Strategic information, including corporate identity, corporate strategy, research and development, the company's future development information; non-financial information including information about the Board of Directors, and staff -related information, social responsibility and value-added information; financial information, including foreign currency information, price information and other financial information.

Forecast of Earnings

An extensive research, undertaken to establish a relationship between forecast of earnings and voluntarily disclosures, implies that firms prefer to disclose any information, which might be, affecting the future earnings prospects of the firms. Analysts, as well as, investors prefer firms with higher level of transparency. Any attempt to conceal the information which might be affecting the long term growth prospects may tarnish the management's image from investors and analyst eyes. (Lang & Lundholm, 2000; Skinner, 1994; King, Pownall, & Waymire,1990; Frankel, McNicols & Wilson, 1995)Free Cash Flows

For evaluating a firm's performance, Modern finance theories have long urged more focus on free cash ?ow than earnings. Free Cash flow is the net amount available to be distributed to the bondholders and shareholders after the firm has made all necessary capital expenditure. In United States, although, not required by US GAAP, some firms still prefer to report Free ...