A STUDY ON FACTORS INFLUENCING VOLUNTARY DISCLOSURE …adalyajournal.com/gallery/47-aug-1687.pdfdisclosure. Thus financial reports should include all the material information relevant

A STUDY ON FACTORS INFLUENCING VOLUNTARY DISCLOSURE BY INDIAN

GOVERNMENT OWNERSHIP COMPANIES

M. Sathiyamoorthi,

Ph.D Research Scholar, PG & Research Department of Commerce,

AVS College of Arts and Science, Salem. E-Mail: [email protected]

Dr. P. Ashok Kumar,

Assistant Professor, PG & Research Department of Commerce

Sri Vasavi College, Erode. E-Mail: [email protected]

Abstract

Accounting operates in a socio economic environment as a ‘service function’. When

there is a drastic change in the political or economic system of the country, it is bound to

change the objectives of accounting and corporate disclosure. In developing countries, the

movement toward a market oriented economy has necessitated a revision of financial

reporting system. The emergence of joint stock companies together with the divorce of

management and ownership has led to the increasing significance of corporate disclosure.

Corporate Disclosure system provides re liable and relevant information to the interested

parties for their decision making. Through disclosure requirements, a proper recording and

classification of economic transactions of the business concern can be achieved.. However,

the present study proposes to analyze the factors influencing voluntary disclosures by Indian

government ownership companies. The sample is based on the financial information provided

by the CMIE Prowess 3.1 Database and audited financial results of the companies that

consist of financial information of BSE-100 listed Indian private ownership Companies. This

work focused on all non financial companies listed in Bombay Stock Exchange. The data

collected from this source were compiled and used for this study .The financial companies

are excluded from the sample due to the above mentioned reason. Total sample consists of 11

companies which are involved in the construction of BSE-100 index

Key Words: Factors Influencing, Government ownership companies, Voluntary Disclosure.

ADALYA JOURNAL

Volome 8, Issue 8, August 2019

ISSN NO: 1301-2746

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A STUDY ON FACTORS INFLUENCING VOLUNTARY DISCLOSURE BY INDIAN

GOVERNMENT OWNERSHIP COMPANIES

INTRODUCTION

Information should be prepared, audited, and disclosed in accordance with high

quality accounting standards. Stakeholders and potential investors require access to regular,

reliable and comparable information in details for them to assess the stewardship of

management, and make informed decisions. A strong disclosure regime enhances

transparency, and it is a powerful tool for influencing the behavior of stakeholders. It results

in the attraction of more capital, sustains investors‟ confidence in the capital market, and

possibly prevents fraud. Inadequate information may increase the cost of capital and result in

a poor allocation of resources. Moreover, the business environment has witnessed changes

over the years, mainly been influenced by globalization and technological innovation.

Companies worldwide are now trying to penetrate international capital markets. Therefore,

the disclosure of adequate and reliable information is necessary.

Accounting operates in a socio economic environment as a „service function‟. When

there is a drastic change in the political or economic system of the country, it is bound to

change the objectives of accounting and corporate disclosure. In developing countries, the

movement toward a market oriented economy has necessitated a revision of financial

reporting system. The emergence of joint stock companies together with the divorce of

management and ownership has led to the increasing significance of corporate disclosure.

The wider recognition of social responsibility of business for the last few decades has

important implications for corporate disclosure practices. This has emphasized the efficient

allocation of society's resources and wealth. The concept of social responsibility has now

become broader and includes employment generation, pollution control, civic amenities etc.

Now, groups other than shareholders such as employees, local communities, Social groups

and the general public have interest in the accounting information. They are having vital

influences on accounting and reporting.

Corporate Disclosure system provides re liable and relevant information to the

interested parties for their decision making. Through disclosure requirements, a proper

recording and classification of economic transactions of the business concern can be

achieved. Thus, a fair picture of the business and the true results of its operations over a

period of time are made available. The business future trends can be estimated with greater

accuracy, if the financial reports are prepared in accordance with the rules and regulations of

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disclosure. Thus financial reports should include all the material information relevant for

various interested groups for decision making.

REVIEW OF LITERATURE

Barako Hancock and Izan (2006) conducted a study on the factors influencing the

voluntary corporate disclosures by 43 companies in Kenya for the period 1992 to 2001. They

performed a longitudinal analysis on the voluntary disclosure practices in the annual reports

of sample companies listed in Nairobi stock exchange. The study investigated the extent to

which corporate governance attributes, ownership structure, and company characteristics

influence the voluntary disclosure practices. The study found out that there was an increase in

the extent to voluntary disclosures over the sample period of ten years. Results of the study

also showed the existence of a relationship between the level of voluntary disclosures and

corporate governance attributes, ownership structure, and company characteristics. It was

also found that large companies and companies with high debt were disclosing mare

voluntary information. However, board leadership structure, liquidity, profitability and type

of external audit firm were not found having a significant influence on the level of voluntary

disclosure in corporate annual reports of Kenya.

Cooke (1992) examined the association between the level of disclosure and three

corporate attributes - size, listing status and nature of industry- for 35 Japanese companies.

He constructed an index of disclosure consisting of 165 items, which consisted of both

statutory and voluntary items of information. He analyzed the disclosure levels of Japanese

companies using the annual reports of companies for the year 1988. This study was a unique

one in the sense that the size of the company was measured in terms of a composite variable

i.e., a linear combination of eight alternate indicators of size - capital stock, turnover, number

of shareholders, total assets, current assets, fixed assets, shareholders funds and bank

borrowings. He concluded that the extent of disclosure was positively and significantly

associated with dl the three explanatory variables - size, listing status and nature of industry.

Singh and Bhargava (1978) examined the disclosure of financial and non-financial

information in annual reports of 40 public sector enterprises on the basis of index of

disclosure consisting 35 items. They also analyzed the relationship between the quality of

disclosure and organizational pattern and nature of industry. The findings of the study

indicated that there were significant cross sectional differences in the disclosure of

information by sample companies. Based on the analysis, the study inferred that the

organizational pattern did not have any impact on the quality of disclosure of information,

whereas the nature of industry did influence.

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RESEARCH METHODOLOGY

The main objective of this study is to explore the factors influencing voluntary

disclosures by Indian Government Ownership companies. The model, the variables used in

the study and the statistical techniques applied to explore the factors influencing voluntary

disclosures of Indian Government Ownership companies are discussed in the section.

Statement of the Problem

In India though there is availability of research studies pertaining to capital structure

Bhaduri (2002) and Pandey (2002) which are performed after the pioneering works in the

west Modiglialini and Miller (1958) and Titman and Wessels (1988), the work related to

factors influencing voluntary disclosures of Indian companies is meager in count.

To fill the gap in the existing literature it was intended to study the factors influencing

voluntary disclosures of Indian Government Ownership companies. Hence, it was thought

appropriate to study the factors influencing voluntary disclosures by BSE-100 listed Indian

Government Ownership companies. The reason for taking BSE-100 is for the convenience of

data availability.

Scope of the study

The scope of the study is limited to the factors influencing voluntary disclosures by

BSE-100 listed Indian Government Ownership companies. The reason for not including

financial companies as that financial intermediation and insurance, these company due to

differ in their capital structure from the rest of the companies Muller (2008) and finance

companies have different accounting practice and reporting rules from the companies in other

sector Lin (2008).

In this study, we are going to examine empirically the factors influencing voluntary

disclosures by the Indian Government Ownership companies.

Objectives of the Study

To identify the factors influencing voluntary disclosures by the Indian Government

Ownership companies.

Hypotheses of the Study

In the light of the above objectives, the following testable hypotheses are formulated.

Hypotheses 1

Ho: There is no significant influence of ownership structure on disclosure practice.

Hypotheses 2

H0: There is no significant influence of profitability on disclosure practice.

Hypotheses 3

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H0: There is no significant effect of risk of a firm on disclosure practice.

Hypotheses 4

H0: There is no significant impact of net fixed assets on disclosure practice.

Hypotheses 5

H0: There is no significant influence of size on the disclosure practice.

Sample

The sample is based on the financial information provided by the CMIE Prowess 3.1

Database and audited financial results of the companies that consist of financial information

of BSE-100 listed Indian government Companies. This work focused on all non financial

companies listed in BSE-100 in Bombay Stock Exchange. The data collected from this source

were compiled and used for this study. The financial companies are excluded from the

sample due to the above mentioned reason. Total sample consists of 11 companies which are

involved in the construction of BSE-100 index.

Variables

The dependent variable under the study is Promoters holding, Public holding to

measure the ownership structure.

i) Dependent Variables

To measure the ownership holdings of companies, promoters‟ holdings of shares, and

non promoters or public holdings of equity is used (Dwiredi and Jain (2005)). To find out

market value of equity the holdings are multiplied by the closing stock price of the particular

year. By getting market value of holdings on yearly basis is considered as the reasonable

assumption for calculating the ownership structure (Friend and Lang (1988)).

ii) Independent variables

The Independent Variables used in the study are classified as Leverage, Profitability

and Control variables.

iii) Leverage variables

To calculate the leverage level of companies‟ debt to value ratio calculated as debt

divided by total value of book assets defined on a book value basis excluding trade credit and

short term accruals from debt (Friend and Lang (1988), Rajan and Zingles (1995) and Lin

(2008)). This is considered by various researchers as a measure of corporate leverage.

iv) Profitability variables

To evaluate the profitability of companies EBIT divided by total assets on a book

value basis is taken as a reasonable proxy for measuring the profitability of a firm (Demsetz

and Lehn (1985), Cho (1998)).

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To corner the fluctuation in earnings or risk of a firm, standard deviation of earnings

divided by assets on a book value basis is taken as a proxy to spot the risk of a business

Friend and Lang (1988). These are considered as effective tools to measure the profitability

and fluctuation in earnings of a particular firm.

v) Control Variables

Besides, the other variables like firm‟s size and asset structure that may have

influence on ownership structure are taken as control variables where total assets is taken as a

proxy for size of the company by using natural logarithm of total assets Rajan and Zingles

(1995), And the fixed assets ratio which is calculated by dividing net fixed assets to total

book assets is considered as a appropriate measure to mark the asset structure of a firm Friend

and Lang (1988).

Statistical Tools

To inspect the data, descriptive statistics like mean, median and standard deviation

and a statistical tool Pearson‟s Correlation matrix is used for data to observe the association

between variables like ownership interest, leverage and profitability. Further, for the purpose

of identifying influence of the independent variables on dependent variable multiple

regression analysis is used.

ANALYSIS AND INTERPRETATION

In this section, the factors influencing voluntary disclosures by BSE-100 listed Indian

Government Ownership companies is analyzed by employing statistical techniques such as

Descriptive statistics, correlation analysis and regression analysis. These are used to derive

quantitative value for our said arguments which is necessary to prove or disprove our framed

hypothetical statements. By taking the quantitative value, proper interpretation would be

given with the existence of casual relation that is formed on the basis of existing empirical

research work.

Table 1 presents the summary statistics which represents the data set related to

manufacturing companies where ownership vests in the hands of private parties.

Table 1 displays the summary statistics which represents the data set related to public

utility companies where ownership vests in the hands of Government. In this summary

statistics government holding used in the place of promoters holding because in these

companies holding are held by government of India‟s nominal head president of India. When

compared with the total sample of BSE-100 non-finance listed companies, government

companies shares a smaller portion.

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Table - 1

Descriptive statistics of Government companies

Variable Obs Mean Std. Dev. Min Max

NFA 99 0.361 0.199 0.005 0.801

SIZE 99 3.906 0.782 1.792 4.994

DT 80 0.185 0.133 0.000 0.572

ROAM 99 0.100 0.049 0.011 0.243

ROAS 99 0.030 0.026 0.002 0.151

GMV 82 5.226 0.729 1.628 6.623

NPMV 99 5.959 0.828 3.696 8.606

Description of the variables: NFA: Ratio of net property, plant and equipment to book assets;

SIZE: Log of total assets; DT: Debt/Asset ratio; ROAM: Mean of earnings / asset ratio; ROAS:

S.D of earnings / asset ratio; PMV: Market Value of equity held by promoters; NPMV:

Market Value of equity held by public.

In this Table net fixed assets (NFA) shows mean value of (0.361) and this variable

deviated (0.199) which closer to zero level. Size posts mean value (3.906) and deviated to

(0.782) maximum value shows (4.994). In the case of debt it shows some less observations

when compare with other variables because some government companies has zero level of

debt in their capital structure.

Earnings level shows mean value of (0.100) and it is deviated (0.049) level. Risk level

of firm touch (0.002) close to zero and maximum reaches to (0.151).

Government market value of equity shows less number of observations because some

companies holdings fully held by public. Public holding shows (5.959) as mean value and

deviated at (0.828) is more when compared with other variables. Table 2 exhibits the

correlation coefficient matrix of government ownership companies.

Table – 2

Correlation Coefficients Matrix of Government Ownership Companies

NFA SIZE DT ROAM ROAS PMV NPMV

NFA 1

SIZE .621** 1

DT .382** .118 1

ROAM .269** .280** -.414** 1

ROAS .047 .081 -.044 .551** 1

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GMV -.015 .398** -.278* .375** .312** 1

NPMV -.194 .511** -.532** .201 -.097 .476** 1

** Significant at 0.01 level (2-tailed).

* Significant at 0.05 level (2-tailed).





In that correlation matrix government holding to net fixed assets (-0.015) shows

negatively in significant correlation but government holding to debt (-0.278) shows negative

correlation at 0.05 percent significant level. But public holding to debt level shows (-0.532)

shows negative significant correlation at 0.01 percent level. Higher level of correlation

between public holdings to debt level than government holding to debt level may be due to

public risk averting attitude or government obstacle in issuing equity to public or problem in

disinvestment.

There is a positive correlation between earnings level and risk (0.551) of a firm at

0.05 percent significance level means that if risk increases, earnings level also will increase.

Government holding to risk level of firm (0.312) shows positive correlation at 0.01 percent

significance level. But public holding to risk level touches (-0.977) which reveals there less

amount of risk prevails if companies are going for public. Debt to earnings level shows (-

0.414) negatively significant correlation discloses that if there is any increase in debt due to

their fixed amount bearing nature which normally charge against profit may reduce the

earnings.

Table 3 explains the multiple regression estimates for the government ownership

sample. Government market value of equity and public market value of equity is taken as

dependent variables. Then we have to discuss about the influence of independent variables on

the dependent variable.

Table – 3

Multiple Regression Estimates for the Government Ownership Sample

PMVi = α+ β1 NFAi +β2 SIZEi +β3DTi +β4 ROAMi +β5ROASi + µ…. (1)

NPMVi = α+ β1 NFAi +β2 SIZEi +β3DTi +β4 ROAMi +β5ROASi + µ… (2)

GMV NPMV

Variable Co.ef t-value Co.ef t-value

NFA -1.182 -2.53*

-0.975 -2.7*

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(0.014) (0.000)

SIZE 0.689 6.46

*

(0.000) 0.946

7.29*

(0.000)

DT -1.371 -2.01

*

(0.048) -2.149

-3.9*

(0.000)

ROAM -0.380 -0.17

(0.868) 2.214

1.28

(0.206)

ROAS 3.471 1.08

(0.265) -6.753

-2.78*

(0.000)

Adj R2 0.440 0.617

*Regression is significant at 0.05 level





Adj R2

describes there is a evidence of 44 percent variation in promoters

holding and 61.7 percent variation in public holding is explained by the independent

variables.

From this table it is observed that the influence of leverage on government market

value of equity (β = -1.371; t= -2.01; p <0.05) shows negatively significant effect. From the

coefficient value we identified that one percent level of change in debt level would affect the

government market value of equity at (-1.371) percent level. The effect of public holding on

leverage (β = -2.149; t= -3.90; p <0.05) shows negatively significant relationship. We

inferred from the co efficient value that one percent level of increase in leverage is negatively

impact the public holding at (-2.14) level (Friend & Lang (1988); Guney & Ozkan (2005)).

Due to their fixed bearing charges or threat of bankruptcy or anticipating growth

opportunities may tape the equity issue. Existing shareholders aim to increase their holing by

rights, bonus shares may be the reason. Therefore we reject the null hypothesis that there is a

significant impact of leverage level on ownership structure.

The impact of profitability on promoters holding (β = -0.380; t= -0.17; p <0.05)

shows insignificant negative influence. From the co efficient value it is identified that one

percent level of change in earnings explains (-0.380) level variation in government market

value of equity. The influence of profitability on public holdings shows (β = 2.214; t= 1.28; p

>0.05) in significant positive impact. We observed from the beta value that one percent level

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of increase in profitability gives (2.214) percent increase in public equity (Hovey and

Noughton (2003); Wei and Varela (2003)). If government companies‟ posts profits in a

financial year, public are eager to get shares of those concerns or government prefer to

disinvest the company‟s shares. Hence we accept the null hypothesis that there is no

significant impact of profitability on ownership structure.

It is observed from the table that the influence of risk of firm on promoters holding (β

= 3.471; t= 1.08; p <0.05) shows insignificant positive effect. The co efficient value discloses

that one percent level of increase in risk gives (3.47) percent increasing trend in government

holding. If there is increasing trend in risk of a firm government may hike their holding to

stabilize the problem. So accept the null hypothesis that there is no significance influence of

risk on ownership structure of a firm.

The impact of risk of firm on public holding (β = -6.753; t= -2.78; p <0.05) exhibit

significant negative effect at 0.05 percent significance level. The coefficient value expressed

that one percent variation in risk of firm inversely affect the public holding at (-6.753)

percent level. It is normal that increasing amount of risk of firm can make the public to

offload their holding. Here, we accept the alternate hypothesis that there significant influence

of risk on public holding.

The influence of fixed assets on government holding shows (β = -1.182; t= -2.53; p

<0.05) significant negative effect. From the co efficient value we inferred that one percent

level of increase in fixed assets will have -1.182 percent level of decrease in government

equity. But the effect of fixed assets on public holding (β = -0.975; t= -2.70; p <0.05) posts

significantly negative influence. The beta value says if there is one percent increase in fixed

assets have negative impact of the public holding at -0.975 percent level. Therefore we accept

the alternate hypothesis that there is a significant impact of net fixed assets on ownership

structure. Industrial distributions play a role in determining the companies fixed assets (Moon

and Tandon (2007)).

We can infer from the government holding observation table that the leverage is

influencing the ownership structures in a negatively significant manner. It is observed that

the net fixed assets shows negative impact and size shows positive influence on the

ownership structure. Risk of firm shows significant negative impact on the public holding

which implies that the public holding can restrict the volatility in earnings of a firm.

CONCLUSION

From the sample which consists of only government companies it is found that the

negative influence of leverage on public holding is comparatively higher than the impact of

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leverage on government holding. It is because of the hesitation of the public to reduce the

holding in highly levered firms. It is discovered from the result that the impact of profitability

on government holding shows insignificantly negative. But it posts positive insignificant

reaction with the public holding which reveals the favorable effect of external monitoring in a

firm. It is revealed that the effect of risk on government holding shows insignificantly

positive but the risk effect with the public confirms significant negative. This reveals the

negative attitude of pubic towards the risk. It is disclosed that the effect of net fixed assets on

government holding is significantly negative, which is comparatively higher than the public

holding. It shows the attitude of the Government in appropriation of profit.

REFERENCES:

1. Bhaduri .N (2002) “Determinants of Capital Structure Choice: A Study of the Indian

Corporate Sector”, Journal of Applied Financial Economics, (12), pp. 655-665.

2. Cho (1998), “Ownership Structure, Investment and Corporate Value: An Empirical

Analysis”, Journal of Financial Economics, 47, pp.103-121.

3. Demsetz and Lehn (1985), “The Structure of Corporate Ownership: Causes and

Consequences”, Journal of Political Economy, 93, pp.1155-77.

4. Dwivedi and Jain (2005), “Corporate Governance and Performance of Firms: The

Effect of Board Size and Ownership”, Employee Responsibilities and Rights Journal,

17(3), pp.161-172.

5. Friend and Lang (1988), “An Empirical Test on the Impact of Managerial Self

Interest on Corporate Capital Structure”, Journal of Finance, 43(2), pp.271-82.









10. Guney & Ozkan (2005), “New Insights on the Importance of Agency Costs for

Corporate Debt Maturity Decisions, Applied Financial Economics, (1), pp.233-238.

11. Guney & Ozkan (2005), “New Insights on the Importance of Agency Costs for

Corporate Debt Maturity Decisions, Applied Finance Economics, (1), pp.233-238.

12. Hovey, Li and Naughton (2003), “The Relationship between Valuation and

Ownership of Listed Firms in China”, Corporate Governance, 11(2), pp.112-123

13. Lin et. al (2008), “Ownership and Firm Performance”, Journal of Afro. Asian

Finance and Accounting, 1(1), pp.67-80.





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16. Modigliani .F and Miller M.H, (1958), “The Cost of Capital, Corporation Finance

and Theory of Investment, American Economic Review, (48), pp.261-297.

17. Moon and Tandon (2007), “The relationship between equity ownership and

leverage”, Review of Quantitative Finance, (29), pp.339-351.

18. Muller (2008), “Benefits of Control, Capital Structure and Company Growth”,

Applied Economics letters, 40, pp.2721-2734.

19. Pandey I.M (2002) “Capital Structure and Market Power”, IIM-A working paper

20. Rajan and Zingales (1995), “What We Know about Capital Structure - some

evidence from international data, Journal of Finance, 50(5), pp-1421-60.





23. Titman and Wessels (1988), “The Determinants of Capital Structure Choice”, The

Journal of Finance, 23 (1), pp.1-19.

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A STUDY ON FACTORS INFLUENCING VOLUNTARY DISCLOSURE …adalyajournal.com/gallery/47-aug-1687.pdfdisclosure. Thus financial reports should include all the material information relevant