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Mapping corporate disclosure

theories

Corporate
disclosure
theories

Larissa von Alberti-Alhtaybat

School of Management and Logistic Sciences, German-Jordanian University,
Amman, Jordan

73

Khaled Hutaibat
Faculty of Business Administration, Mutah University, Mutah, Jordan, and

Khaldoon Al-Htaybat
College of Business Administration and Economics,
Al-Hussein Bin Talal University, Maan, Jordan
Abstract
Purpose The purpose of this paper is to map corporate disclosure theories as a step towards filling
a gap in the theoretical background for corporate disclosure research. The purpose of the map is to
encompass a range of particular theories relating to corporate disclosure and to demonstrate the
complex relationships between different notions of the financial disclosure phenomenon. This will help
new researchers to understand how particular corporate disclosure theories are related, as well as help
with teaching accounting theories at undergraduate and postgraduate level.
Design/methodology/approach A deductive and inductive approach to theory building was
applied. The deductive approach suggests identifying the gap in the literature, the inductive approach
then prescribes theory building in three stages: phenomenon observation, categorisation and
relationship building. This approach serves to develop a theoretical map integrating the corporate
disclosure theories.
Findings The paper discusses theories that recognise actual features of financial markets market
failure, information asymmetry and adverse selection to provide an explanation for the existence of
corporate reporting regulations and managerial incentives, which control and determine the maximum
level of corporate information under these conditions. It then integrates these theories in a map seeking
to explain corporate disclosure levels, mandatory and voluntary, financial and narrative.
A combination of theoretical supplements codification theory, Dyes theory of mandatory and
voluntary disclosure, and disclosure transformation theory are proposed in this framework as
theories to explain processes of change in mandatory and voluntary corporate disclosure in practice.
Originality/value Another benefit mapping these theories is to provide useful insights into
existing disclosure theories, which may help to explain why some empirical results have been
inconsistent with the predictions of these theories. No similar attempts have been published in the
accounting literature.
Keywords Corporate reporting, Accounting theory, Information asymmetry, Disclosure transformation,
Narrative disclosure, Financial disclosure, Disclosure
Paper type Research paper

1. Introduction and contribution of the study

Corporate disclosure covers a wide range, including narrative and financial, mandatory
and voluntary, printed and internet disclosure (Ali et al., 2007; Xiao et al., 2002).
In attempting to formulate a comprehensive theoretical basis of corporate financial
reporting, accounting scholars have developed different disclosure theories, each of
which explains different sub-points of financial disclosure. Furthermore, prior scholars

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explained the variations in the corporate disclosure practices among countries, by

explaining the environmental factors behind financial disclosure differences (Cooke and
Wallace, 1990; Radebaugh and Gray, 2002). Recently, technological factors influenced
the form and content of corporate reporting, transforming printed to internet corporate
reporting practices (Xiao et al., 1996, 2002; Lymer, 1999).
The purpose of our paper is considered as a step towards building a comprehensive
map integrating both mandatory and voluntary disclosure theories, which specifically
address economic market aspects. This study seeks to contribute a frame of reference for
learners and researchers, when studying and researching accounting theory and
corporate disclosure. It gives an overview of all relevant economic theories relevant to
financial disclosure, their main aspects, how they interrelate, and how they can help
explain current levels of financial disclosure. It also determines relationships among those
theories, and how these relationships can remedy theories weaknesses. Furthermore, it
serves as an explanatory tool regarding companies disclosure levels, and general
disclosure practices. It identifies the strong theoretical arguments each theory provides,
and combines those into a framework, that contributes a starting point for a normative
disclosure framework. Functionalist-normative disclosure, and accountants and
auditors attitude towards such disclosures, is rooted in the ethics of accounting
(Sisaye, 2011). In order to achieve the optimal level of disclosure, accountants and auditors
have to adhere to principles, such as conservatism, independence, and basic rules of
accounting and financial reporting (Sisaye, 2011). Knowing the theoretical explanations
of existing disclosure levels serves as a starting point to integrating existing standards,
existing best practice and ethical rules of accounting in a normative framework, with the
purpose to guiding accountants and auditors to on-going best practice.
First, the paper discusses disclosure theories based on actual market features.
Following Healy and Palepus (2001) work, information asymmetry, the agency
problem and the adverse selection problem provide a fundamental aspect of the
framework for corporate disclosure. A critical review of the proposed theories will be
undertaken, and then the strongest points of each theory will be integrated into the
map, as a possible explanatory tool for future researchers and possibly to account for
differences in financial disclosure. Finally, this paper connects the discussed theories
by developing a map of corporate disclosure theories. By encompassing existing
corporate disclosure theories in one scope this paper will show the developments of
internet disclosure as a new way of corporate information provision by companies and
as a new corporate information communication medium. The following will discuss the
research methodology applied for mapping the theories, then disclosure theories will be
illustrated, and finally the map of theories will be outlined and discussed.
2. Research approach
The research approach to integrating the existing disclosure theories is deductive and
inductive at the same time. Deductive gap recognition and problem identification is done
through identifying apparent gaps in the literature (Nielsen, 2010). The literature review
denotes the deductive aspect of a study, as it serves to identify apparent gaps. Once the
gap has been identified, the inductive approach takes over (Carlile and Christensen,
2005) by observing a particular phenomenon, in this case the existing literature on
corporate disclosure, seeking to categorise, based on existing classifications and newly

developed ones, and finally establishing relationships, which will be addressed in the
last part of the paper when discussing the map of theories.
Carlile and Christensen (2005) discuss the stages of descriptive theory building,
which they classify into observing, categorising and establishing relationships (Hevner
and Chatterjee, 2010). This reflects an inductive approach to theory building. In the first
stage, the identified phenomenon is observed, which in this study means that the
existing literature is considered as the phenomenon under study as it is the basis for the
integrated corporate disclosure theories. Categorising refers to identifying the theories
that are grouped under a particular heading, based on the attributes of each theory
(Carlile and Christensen, 2005). Finally, defined relationships are shown in Figure 2. In
this step, researchers have to define the association between the defined categories,
resulting in the studys output: the corporate disclosure map of theories model.
In the practical context, the first stepping stone is reading of prior literature published
in the particular area, which is in the case disclosure theories. In the first instance, the
literature was investigated in order to establish any previously-developed disclosure
frameworks. In this case economic theories were focussed on to establish a
comprehensive association of these, which can be expanded on in the future. In the
published literature no attempt of such a comprehensive mapping was found, thus
deductively the gap was recognised. This denotes the deductive aspect of theory
building. In the next stage, the researcher seeks to associate the existing theories
inductively through categorising existing classifications. Practically, the first category
to be identified was market features, as all economically-driven theories incorporate
market features. This led to two further categories: perfect and imperfect market
conditions, i.e. in simple terms what if all is good and what if not? This approach to the
literature led to around 20 categories, which were rationalised into broader categories by
defining further relationships among theories. Identifying shared characteristics
through coding for similar explanations, terms and characteristic features of theories,
the relationships among them transpired. This would also explain the inclusion of
internet disclosure theories, as these were relevant in the context of voluntary disclosure.
The next sections illustrate the first stage of inductive theory building, after
the deductive stage was completed observing, i.e. describing and discussing
corporate disclosure theories. The categorisation of theories taking place during and
after the observation, and during the defining of relationships.
3. Corporate disclosure theories
Corporate disclosure represents the most holistic picture of information provision by
corporations to the external world. This includes financial information, narratives,
mandatory provision required by the law and accounting standards, and voluntarily
shared insights due to the external pressures or internal decision-making (Ali et al.,
2007). Thus, corporate disclosure spans a great range of information and addresses
various reasons and dynamics for providing such information. Scholars have
addressed these dynamics and their results in a great number of prior studies (Cooke,
1989, 1991, 1992; Wallace and Naser, 1995; Inchausti, 1997; Suwaidan, 1997;
Owusu-Ansah, 1998; Watson et al., 2002; Haniffa and Cooke, 2002; Allam and Lymer,
2002; Bonson and Escobar, 2002; Ettredge et al., 2002; Debreceny et al., 2002; Oyelere et al.,
2003; Marston and Polei, 2004).

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The next sections give an overview of and discuss these disclosure theories, which
are then integrated in the map of disclosure theories.
3.1 Corporate disclosure under the corporate market ideal condition, free markets theory
The free markets theory (FMT) is based on two fundamental concepts, first capital market
functions under ideal conditions and second financial information as a public good (Cooper
and Keim, 1983). The notion of the efficient market is based on the market capability of
allocating the resources in effective and efficient ways (Taylor and Turley, 1986). In
general terms, Fama (1970), Bromwich (1992) and Adelegan (2003) defined an efficient
market as a market in which prices fully reflect available information.
Riahi-Belkaoui (2004) argued that the basic assumption of FMT is that accounting
financial information is an economic public good, the same as other services and goods
in the market. The essence of this concept is that the provision of information to a single
user is equally and costlessly available to another user (Cooper and Keim, 1983; Scott,
2003). Under the ideal financial market conditions, financial reporting is the source of
accounting information, and by considering the users of accounting information as the
demand force and companies as the supply force, the forces of demand and supply play a
major role in determining the quantity of financial information produced by a
corporation to meet demand at a level consistent with the equation of marginal costs and
benefits (Cooper and Keim, 1983; Bromwich, 1992; Riahi-Belkaoui, 2004).
The above-mentioned conditions are applicable to the perfect and complete world
but are inapplicable to the worlds actual conditions. In this context, Cooper and Keim
(1983), Taylor and Turley (1986) and Riahi-Belkaoui (2004) argued that the ideal
conditions of the unregulated accounting information market are not met when the
achievement of Pareto efficient resources allocation fails. A complex situation is
created for demand and supply forces to allocate the resources in effective and efficient
ways through the market price system, which is referred to as market failure.
3.2 Financial disclosure under the financial market actual condition, market failure
Unregulated markets fail to produce efficient allocation of resources. Riahi-Belkaoui
(2004) argued that there is implicit and explicit market failure. Implicit market failure
focuses on at least one of the following claims that present defects of the accounting
information market and can lead to wrong investment decision-making: first, the claim
of accountants monopolistic control over management and accounting information.
Second, the hypothesis of nave investors, which claims that there are investors in the
market who are unfamiliar with some of the complex accounting techniques and
transformations. Third, the claim of investor failure where, under certain conditions, the
decision-making processes change in response to a change in the underlying accounting
methods. Explicit market failure is assumed to happen in the market of accounting
information when either the quality or the quantity of accounting information produced
differs from the private cost and benefits of that information (Riahi-Belkaoui, 2004).
There are three main sources of explicit market failure, the public good, information
asymmetry and adverse selection problems (Cooper and Keim, 1983).
The public good problem encompasses the joint consumption problem, externalities
problem and inability to exclude free riders or non-purchasers (Cooper and Keim, 1983;
Taylor and Turley, 1986; Scott, 2003; Riahi-Belkaoui, 2004). Corporate information

is proprietary or private before it is disclosed (Xiao et al., 1996), however becomes

available for free to the user after its disclosure, thus not equally distributed.
The information asymmetry problem is based on the fact that some parties
undertaking business transactions may have more information than other parties
undertaking the same transactions (Cooper and Keim, 1983). Information asymmetry
occurs out of differences and clashing incentives of providers and investors (Healy and
Palepu, 2001) in the form of a relationship between better informed, the former, and less
informed, the latter (Fields et al., 2001). Two major parts are included: the first is adverse
selection, which refers to insiders such as a corporate manager and employees, having
more information about the corporations current situation and its future plans than
interested outsiders (Akerlof, 1970). The second is moral hazard, which is related to the
problem that arises from the separation of ownership and control of the public shareholder
companies, and how bondholders will manage to measure managerial performance
(Cooper and Keim, 1983). Adverse selection refers to unfavourable characteristics,
whereas moral hazard refers to unfavourable actions. In the context of disclosure, both can
be reduced by disclosing financial, both positive and negative, information about a
corporation. Adverse selection suggests that sellers have superior information to buyers,
thus accept offers reflecting the quality of their goods (Lewis, 2009). Low quality goods
will be sold at low prices, whereas high quality goods will be sold at high prices (Lewis,
2009). However, due to information asymmetry, buyers might agree to the seller with the
lowest price, unaware that they might be buying a low quality product that otherwise they
would be paying less for (Lewis, 2009). On the other hand, they might choose to not buy,
being suspicious of the low offer, as they fear buying low quality. Considering these
problems, imperfect market due to adverse selection and information asymmetry in
general, increasing disclosure regarding a firms financial status through regulation and
on a voluntary basis seems to answer to overcoming these.
The next section addresses a variety of factors determining the above pathways in
accounting systems and influencing the developments of corporate reporting systems
and practice in countries around the world by referring to the main factors impacting
on accounting systems and practice in a country over time, incorporated into
environmental-cause theory (ECT) (Gray, 1988; Cooke and Wallace, 1990; Roberts et al.,
1998; Nobes, 1998; Radebaugh and Gray, 2002).
3.3 Environmental-cause theory
Cooke and Wallace (1990) suggest that accounting is a function of its environment. In
this context, many studies have sought to explain the environmental and the
technological factors that may have impacted on the developments of corporate
disclosure in a country (Gray, 1988; Cooke and Wallace, 1990; Xiao et al., 1996;
Nobes, 1998; Roberts et al., 1998; Radebaugh and Gray, 2002). Corporate disclosure
and accounting information practices are subject to a variety of environmental and
technological factors such as, e.g. social, economic, culture, political, regulation,
international trade and new technology developments, such as digital communication,
internet, mobile phones and other computer software technological developments
(Xiao et al., 1996; Nobes, 1998; Roberts et al., 1998; Radebaugh and Gray, 2002; Xiao et al.,
2002). Cooke and Wallace (1990) combined several of these factors in ECT to explain the
relationship between disclosure practices and environmental factors.

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In particular, prior scholars described the relationship between the variation in

accounting systems and a variety of factors causing such variation on national and
international levels, as can be seen in Figure 1.
As transpiring from this figure, both internal and external factors interact with each
other to influence the accounting system and corporate disclosure regulation in a
country directly and indirectly. For instance, Cooke and Wallace (1990) explained that
internal variables, such as increasing peoples education in a country, drive to improve
political awareness and demand for corporate accountability. On the other hand
external variables such as international trade and investments also have an impact
through requiring a global standardised accounting system, as for instance the drive to
harmonise/standardise accounting in the EU (Roberts et al., 1998).
Furthermore, Cooke and Wallace (1990) summarised the intensity and effectiveness
of corporate disclosure regulation in a country as a function of both regulatory
requirements and the degree of enforcement of such regulation. Environmental factors
cause the differences in the corporate reporting environment from one country to
another, and subsequently corporate disclosure and the application of its theories will
differ among countries. The following sections will discuss the theories on the twofold
accountants reactions in a bid to reduce the information asymmetry and adverse
selection problems: the first being regulatory theory in which mandatory disclosure
requirements are considered as one part of the remedy and the second managers
incentive theories, in which voluntary corporate disclosure is considered as the second
part.

External influences include:

Trade
Investment
Conquest

Society and
culture

Accounting
subculture
Accounting system:
Mandatory practices
Voluntary practices

Institutions:
Political and economic
Taxation
Corporate financing
Accounting profession

Figure 1.
Factors influencing
accountings mandatory
and voluntary practices

Accounting
regulation

Domestic/ecological
influences include:
Demograpic factors
Geograpic factors

Source: Adopted from Roberts et al. (1998, p.9) which has been adapted from Gray (1988)

3.4 Regulatory theory

In the imperfect and incomplete market the demand for accounting regulation implies
that this is the efficient way of tackling market imperfections (Taylor and Turley, 1986;
Fields et al., 2001). Ogus (2002) argued that accounting regulation should only exist
when the unregulated market fails to reach the desired outcome. Scott (2003) argued
that market failure leads to the accounting regulations setting as a reaction to the
asymmetry problem, which is frequently used to justify the existence of regulations to
protect the ordinary investor as well as to improve capital market operations.
Furthermore, Cooper and Keim (1983) argued that reporting regulation exists as a
result of market failure to ensure equitable and efficient production and dissemination
of companies corporate disclosure (the problems of public goods). The existence of
disclosure regulation influences the credibility of corporate information and as a result
public confidence in the capital market increases (Scott, 2003). Ultimately, reporting
regulation exists as a result of market failure and is regarded as the way to make
companies disclose their information to interested users according to a uniform set of
accounting standards and requirements. Two main sub-theories are part of regulatory
theory, which are:
(1) public interest theory; and
(2) interest group theory.
Public interest theory asserts that accounting regulations are a consequence of public
demand for correction of market failures (Posner, 1974), which poses the fundamental
point of PIT. Hence, there is public demand to form accounting regulations to reduce the
general public information disadvantage to maximize social welfare (Riahi-Belkaoui,
2004). The theory assumes that regulation is thought of as a cost-benefit analysis mainly
between the cost of regulation and its social benefits in the form of improved markets
operation (Scott, 2003). The central authority under this theory is called the regulatory
body or regulator, which is assumed to have the best interest of society at heart.
However, it is very complicated to decide on the right amount of regulation due to the
nature of the information and the differences in users needs (Scott, 2003).
Interest group theory or capture theory (Posner, 1974) is the second part of regulatory
theory and is complementary to PIT. This theory suggests that individuals compose a
group, referred to as interest group, to protect and maximise their own interest by
constituting a lobby for various amounts and types of regulation (Riahi-Belkaoui, 2004).
There are two versions of this theory, the economic and the political version
(Stigler, 1971; Posner, 1974; Riahi-Belkaoui, 2004). The political interest groups use their
political power to gain regulatory control (Riahi-Belkaoui, 2004), i.e. authority could be
considered as an interest group because it has the ability to provide regulation and its
main interest lies in retaining power. Therefore, regulation will be provided to those
constituencies that are considered to be most helpful and useful to retain power
(Scott, 2003). The political cost theory regards regulation as a commodity subject to
forces of demand and supply. This commodity will be allocated to the group predicted
to be the most politically-effective group to maximise its own welfare (Scott, 2003).
With regard to the economic aspect of interest group theory, economic interest groups
use economic power to gain regulation, such as the manufacturing industry may
demand special regulation to protect, and promote, their own industry from foreign
competition (Stigler, 1971). These are called demanders of regulation. Stigler (1971)

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suggests that regulation is introduced not to preserve public interests but to create an
intermediary between consumer and industry, for instance, to administer tax payments
and the distribution of such payments.
To conclude the above, disclosure regulations provide valuable and relevant
information to accounting users in order to reduce information asymmetry between
informed and uninformed people (Healy and Palepu, 2001). The absence of market
perfection provides the choices and the room to managers incentives to exceed
mandated disclosure and provides additional information to disclose the optimal level
of information for investors to reduce information asymmetry, i.e. moral hazard and
adverse selection, in order to satisfy their desires.
3.5 Manager incentives theories
Core (2001) explained that mandatory disclosure might be of sufficiently high quality
to produce low information asymmetry when the corporation does not have any need
for external finance, subsequently has little need for voluntary disclosure. On the other
hand, for a corporation with high growth opportunities, mandatory disclosure becomes
sufficiently low and information asymmetry is high. In the context of mandatory and
voluntary disclosure, Dye (1986) suggested that there is a positive relationship between
the increase in mandatory disclosure requirements and a subsequent increase in the
incentives to provide voluntary disclosure at the same time.
The incentives for providing voluntary disclosure are presented in the literature as
part of explanatory theories for the relationship between managers incentives and
users satisfaction with regard to voluntary corporate disclosure. These theories suggest
that managers would like to reduce information asymmetry by disclosing more
information via corporate reporting, which includes printed and internet corporate
reporting formats for several reasons, which are discussed below. These theories include
agency theory, signalling theory, political cost theory, capital needs theory, signalling
theory and cost-benefits analysis.
Agency theory is a common theory in accounting and auditing research and was
chosen with regard to managers incentives for voluntary disclosure. This theory is
based on the separation between corporate ownership from control, and is used by
researchers to explain the relationship between the owners and the managers of public
shareholder companies. According to Jensen and Meckling (1976) the agency relation is
regarded as follows: the separation of ownership from control in public shareholder
companies could create a conflict between the stakeholders welfare and the managers
welfare. Agency theory suggests owners, referred to as principals, can reduce any
potential conflict with managers, referred to as agents acting on principals behalf, by
giving the agent an incentive to act in the principals interest, and by incurring
monitoring costs designed to limit the aberrant activities of the agent (monitoring costs).
Jensen and Meckling (1976) added also other costs as agency cost (residual loss), which is
accrued by reduction in welfare experienced by the principal. The absence of market
perfection and the development of agency theory provided the platform for positive
accounting theory (PAT) in the late 1970s. The precursors Watts and Zimmerman (1978)
sought to explain and predict accounting practices with regard to managers choices,
and PAT has since been used as a basis to explain the factors behind managers choices
to disclose voluntary information in many studies (Milne, 2002). Basically, Watts and
Zimmerman (1978) assumed that individuals work to maximize their own utility,

e.g. corporate managers act to increase their wealth. Therefore, managers have
incentives to choose certain accounting procedures or methods which render lower
rather than higher earnings to reduce the real economic value of the corporate in order to
avoid among others the political cost.
Political cost theory refers to political costs that may arise due to attention from
particular groups, such as government or lobby groups (Deegan, 2009). Such attention
may result in increased taxes, wage payments and also product boycotts so that firms
might adopt accounting policies that lead to a reduced profit, in order to avoid such
attention (Deegan, 2009). The political cost theory is usually discussed in relation to the
corporate size hypothesis, in which the manager of a big corporation is more likely to
select accounting procedures that defer reported earnings from current to future periods
(Milne, 2002). In terms of accounting disclosure, this means that the managers of large or
very profitable companies are more in the public eye than those of smaller or less
profitable companies, thus they have more incentive to disclose voluntary information to
reduce political cost. Political cost theory was used in several disclosure studies to
explain the disclosure variation in the level of corporate disclosure among sampled
companies through the size hypothesis (Al-Modahki, 1996; Curuk, 1999). In terms of
accounting disclosure, political cost theory suggests that the managers of large or very
profitable companies are more in the public eye than those of smaller or less profitable
companies, thus they have more incentive to disclose voluntary information to reduce
political cost, such as tax and other costs, that companies are required by the
government to provide in annual reports.
Capital needs theory suggests that companies with a varied range of growth
opportunities in the capital market look for external finance to support their operations
in order to increase capital, either by issuing new shares or by borrowing new loans. In
this situation mandated disclosure is considered not sufficient enough to acquire capital
as cheaply as possible (Core, 2001). Therefore, such finance requires some kind of
competition among these companies in order to obtain corporate capital as
cost-effectively as possible under the conditions of uncertainty by disclosing more
information to outside investors in order to inform them about the corporate position and
to increase the certainty of their future cash flow (Choi, 1973). Companies disclose extra
information to reduce uncertainty about the timing and expected future cash flow that
enable investors to make investment decisions, and by doing so enable companies to
raise capital in the best way, i.e. as cost-effectively as possible (Core, 2001; Meek et al.,
1995; Suwaidan, 1997). Accounting information is supplied automatically as the
companies look for external finance on the market, and corporate disclosure leads to
reducing the cost of capital (Firth, 1980; Healy and Palepu, 2001).
Signalling theory is a further explanatory theory of information asymmetry. Akerlof
(1970) was the first to explain signalling theory in a general product market setting.
Strong and Walker (1987) argued that the differences in information between the
insiders and outsiders of a corporate can cause market breakdown. The problem was
outlined as follows: buyers in the market are unable to distinguish between the quality of
different products, because the products sellers have not informed the buyers of their
products quality in a perfect way. Thus, there is not any difference in price between the
product with high quality and the product with lower quality. Sellers can either choose to
withdraw their product, and subsequently force the market to adapt prices according to
average quality or more information can be provided about the product

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(Strong and Walker, 1987). Signalling theory was used in prior empirical research to
explain why managers in the corporate have the incentive to disclose more information
in the annual report (Suwaidan, 1997; Haniffa and Cooke, 2002; Watson et al., 2002).
Finally, managers decisions to provide voluntary disclosure are based on a
cost-benefit analysis, i.e. a comparison between the costs of information that will be
provided and the benefits that might arise from disclosing such information (Cooke,
1992). Cooke (1992) argued that companies disclosure is a costly issue involving
information collection costs, supervision costs, auditing costs and legal fees.
Consequently, managers are willing to disclose when benefits exceed total costs of
such disclosure. In this context, Meek et al. (1995) argued that managers have to create
a balance between the benefit of lower capital cost, extra information and the costs
associated with such disclosure. Corporate disclosure can take place via printed and
internet corporate reporting, and the latter has several special features, which allow for
corporate disclosure at as little cost as possible. Since managerial incentives are based
on the costs-benefits calculation, the influence of voluntary disclosure is not only
reflected in the printed form of annual reports, but also in the internet form of corporate
voluntary practices (Marston and Polei, 2004; Xiao et al., 2004).
As seen above, several corporate disclosure theories exist, of which each explains
different sub-points of the corporate disclosure phenomenon, supporting the divide in
the explanation of mandatory and voluntary disclosure practices. Mandatory and
voluntary corporate disclosure may correlate in practice. The following sections will
present two theories, codification and Dyes (1986) theories, which explain such
integration of mandatory and voluntary disclosure practices.
3.6 Codification theory
The emphasis in this theory is entirely based on voluntary practice forming accounting
standards, i.e. mandatory disclosure requirements. It is argued that (prepares?) and
auditors of corporate disclosure provide an optimal level of corporate disclosure to meet
users needs, which will then be codified by regulatory bodies as a mandatory disclosure
requirements. Taylor and Turley (1986) suggest an influence of existing practice on the
standard-setting process and Dye (1986) states that in practice mandatory corporate
disclosure requirements and standards do not develop due to exogenous reasons.
The existence of these requirements depends upon companies voluntary disclosure
practices, which lead to changes in mandatory corporate disclosure practices by
codifying existing voluntary disclosure practices. Mandatory corporate disclosure
requirement setters might depend upon companies voluntary disclosure practices,
which can be seen in the first main function of the Accounting Standards Committee
(ASC) of formulating a series of Statements of Standard Accounting Practices (SSAPs)
from 1970s to early 1990s comprising submissions of current practice and simply
requirements of standard formats (Taylor and Turley, 1986). Recently, in 2002 and early
2004, the FASB (2004) commenced projects to codify the entire generally accepted
accounting practice literature into a single authoritative source.
3.7 Dyes theory (1986)
Generally, it is assumed that increasing mandatory disclosure requirements will lead to
a decline in the level of voluntary disclosure (Dye, 1986). Contrary to this assumption,
Dye (1986) proposed that increasing mandatory disclosure leads to an increase

in managerial incentives to disclose voluntary information for value maximisation

expressed in a corporate share price, which subsequently attracts investors. In other
words, there is a positive relationship between increasing mandatory disclosure
requirements and a subsequent increase in managerial incentives for voluntary
disclosure, represented by the return link from mandatory theories to the box of Dyes
theory, and for the latter to the box of managerial incentives theory. Based on this theory
it can be stated that in practice voluntary corporate disclosure develops as a result of
homogenous reasons. For instance, the existence of new mandatory disclosure
requirements enhances managers incentives to voluntarily disclose more information to
distinguish their companies in the market from others in order to increase their market
value so as to increase wealth. In the context, Abayo et al. (1993) and Alrazeen and
Karbhari (2004) provided empirical evidence supporting this positive association
between mandatory and voluntary disclosure. Recently, Einhorn (2005) established a
model for analysing how corporate voluntary disclosure strategies are affected by their
own mandatory disclosures. The model shows that voluntary disclosure can be
significantly affected by the scope of mandatory disclosure.
A further association in the form of internet disclosure theories is made in the
proposed framework to explain how the form of corporate disclosure is transforming
from printed to electronic formats as a result of environmental factors such as the
technological innovations and the emergence of network communication. This will be
the focus in the following.
3.8 Internet disclosure theories
In light of recent technological innovations and the emergence of network
communication, the traditional corporate disclosure communication system has
become less able to satisfy users needs as it is not as timely, interactive, accessible or
detailed enough (Lodhia et al., 2004). The internet is regarded as a powerful force to
evolve traditional disclosure forward, as it is expected to provide a ground-breaking
method of corporate communication (Jones and Xiao, 2003). It is considered to provide a
new remedy for one of the recent principal problems of printed corporate reporting,
which is the ability to satisfy users needs (Xiao et al., 2002; Lodhia et al., 2004). In this
context, Ettredge et al. (2002) used managerial incentive theory with regard to voluntary
disclosure in order to examine the relationship between companies traditional
disclosure reputation, in other words the overall quantity of companies reporting
practices, and the level of internet corporate disclosure. They concluded that the
incentives, which motivate traditional voluntary disclosure, can also explain the
subsequent dissemination of voluntary material on the internet.
Mandatory disclosure also has an impact on the level of internet voluntary
disclosure, as the one spurs the other and limited financial means would be necessary to
share existing information on the internet (Xiao et al., 2004). Consequently, a positive
association between the increase in mandatory and the increased incentive to follow the
new technological developments in corporate reporting can be assumed, reflecting Dyes
theory (1986). Xiao et al. (1996, 2002) and Jones and Xiao (2003) reasoned that printed
corporate reporting is influenced by technological and non-technological factors,
which cause new developments in the printed corporate reporting system, i.e. the
internet corporate reporting system. Thus, it is possible to establish a theoretical
relationship between companies attitude towards printed corporate disclosure and

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internet disclosure. Companies with a high level of mandatory and voluntary disclosure
in printed annual reports are more likely to use the internet for corporate disclosure by
establishing their own web site to disclose corporate information to their users. This
relationship between printed and internet disclosure is referred to in this study as
disclosure transformation theory.
Two further theoretical developments are taken into account regarding internet
corporate disclosure institutional theories and innovation diffusion theory (Aly and
Simon, 2008; Victoria et al., 2007). Meyer and Rowan (1977) and later DiMaggio and
Powell (1991) sought to explain behaviour patterns and phenomena relating to
companies seeking legitimisation. Companies provide information on themselves, in the
form of corporate disclosure, in order to be legitimate, driven by a variety of factors, such
as legal, cultural and societal (DiMaggio and Powell, 1991). Xiao et al. (2004) discuss that
legitimisation is one reason for companies to make disclosure of corporate information
voluntarily on the internet. Innovation diffusion theory seeks to explain how a new
invention, in this case internet corporate disclosure, is adopted and subsequently
becomes successful (Clarke, 1999). Clarke (1999) discussed a variety of stages through
which an innovation is diffused, suggesting that it takes some time before the adoption
of an innovation is complete (Sevcik, 2004). Thus, internet corporate disclosure is still
evolving with new developments in information technology consistently influencing
the progress.
Having discussed various theories seeking to establish how and why companies
undertake corporate disclosure, it is necessary to incorporate also an explanation as to
why companies continue to have variations in the levels of their corporate disclosure.
3.9 Variations in companies corporate disclosure levels
In practice, there are variations in the levels of corporate disclosure among companies, as
not all companies comply fully with disclosure requirements and as degrees of printed
and voluntary disclosure levels vary. Generally, the variation in the level of compliance
with mandatory disclosure is hypothesised, based on the four managers incentive
disclosure theories, to be influenced by several corporate characteristics, such as size,
profitability, industry type and others (Abayo et al., 1993; Inchausti, 1997;
Owusu-Ansah, 1998; Ahmed and Courtis, 1999; Alrazeen and Karbhari, 2004; Street
and Gray, 2002), of which each explains different reasons behind the managers choice of
complying with the mandatory requirements. Corporate familiarity is a further variable
suggested by Abd-Elsalam and Weetman (2003), who found that non-compliance with
IASs in emerging markets took place due to less familiarity with these requirements.
Prior studies examined the relationship between the company characteristics and the
variation of corporate disclosure based on one question (Elsayed and Hoque, 2010): why
do some companies disclose more information than other companies? Scholars justified
this question by using managerial incentives theories to explain the differences among
companies in their structure-related variables, managerial performance and
market-related variables, in which the companies will follow different paths on
different levels to provide corporate information. The number and choice of company
characteristics, i.e. company structure, company performance and company ownership
structure variables, varies among prior studies, reflecting the absence of a clear overall
theory as to which company characteristics are likely to determine levels of corporate
disclosure. The number of independent company characteristics in the prior studies

range from one variable (ownership form, that is, whether or not family owners are
dominant (Chau and Gray, 2002) to 14 variables (company size, assets in place, industry
type, listing age, complexity of business, level of diversification, multiple listing status,
foreign activities, gearing, top ten shareholders, foreign ownership, institutional
investors, profitability, and type of auditors (Haniffa and Cooke, 2002). Moreover, prior
scholars have applied different proxies of measurements for these variables (Ahmed and
Courtis, 1999).
None of the above-discussed theories are free of critique and provide a perfect
solution to an existing problem. Prior to integrating the theories into the map of
theories, relevant criticism needs to be addressed.
4. Critical review of disclosure theories
The above discussion has outlined the primary economic theories in relation to
financial disclosure. This section seeks to identify the critical aspects of the various
theoretical assumptions and theories, and how these are sought to be overcome in the
map. Critiques of the different theoretical assumptions are abundant, in particular with
regard to the economic viewpoint. First, the primary assumption that the perfect market
exists is considered to be impossible (Riahi-Belkaoui, 2004). Therefore, it is
rejected as hypothetical starting point, and the disclosure map addresses the first
realistic disclosure theoretical viewpoint, market failure, as suggested by Healy and
Palepu (2001). The map of theories considers the market failure assumption as a starting
point, which incorporates information asymmetry, adverse selection and unequal access
to information (Healy and Palepu, 2001).
In response to these problem factors, two major theoretical fields have been
developed: regulatory theories and manager incentives theories. Regulatory theories
seek to explain the need for accounting regulation, which exists to correct and prevent
accounting failures and protect society and particular interest groups. However, these
theories cannot yet claim that having regulation is superior to a free market approach
(Healy and Palepu, 2001). Such theories are not able to suggest the ultimate level of
financial disclosure, as regulation is viewed as a remedy rather than predictor
(Kaplan and Ruland, 1991; Whittington, 2004). They can also not account for why
companies comply with regulation at varying levels (Healy and Palepu, 2001). This is
usually explained by the various factors that influence companies levels of corporate
disclosure. Furthermore, they do not consider all types of disclosure items, such as
intangible assets, which are then provided for through voluntary disclosure (Arvidsson,
2011). Similarly, Healy and Palepu (2001) state that it is not always clear what regulation
seeks to solve, for instance issues such as major market failures. In the framework, this is
addressed by referring to the public interest and the interest of specific groupings.
Furthermore, Healy and Palepu (2001) conclude their review by opening the debate
regarding the usefulness of global standards, given that economic environments differ
so vastly. The framework recognises such differences by including ECT, which outlines
the factors to be considered for global standardisation.
Finally, regulatory theories can also not explain why companies voluntarily provide
information. The latter point is addressed by manager incentive theories (Dye, 1986),
which consider managers strive for personal gain one of the main reasons why
companies disclose information voluntarily. However, this has been criticised for its
simplistic approach towards the principal-agent conflict, reducing the principal to purely

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being incentive-driven and forgetting to include more complex objectives in individuals

behaviours (Tinker and Okcabol, 1991; Ogden, 1993). Ideally, companies disclose
information that provides more benefits than its disclosure creates costs. Nevertheless,
Core (2001) states that in fact voluntary disclosure is often too costly, especially if firms
want to reach the optimal level of disclosure, the pay-off is not sufficient. However, none
of these guarantees that all relevant and important information that is not required by
regulation is actually disclosed, meaning that their voluntary nature allows companies
to disclose selectively. Neither do any of the discussed theories explain why companies
operating in a country with a high level of accounting requirements still disclose
additional information voluntarily, and why new internet technologies have
increasingly gained momentum as a disclosure tool. Two theoretical approaches
address some of these issues, each on the opposite end of the spectrum. Codification
theory suggests that voluntary disclosure leads to a mandatory requirement through
codifying existing practice (Dye, 1986; FASB, 2004), whereas Dyes theory (1986) is
based on the assumption that more mandatory disclosure leads to more voluntary
disclosure, as companies seek to affect their share price positively. Dye (1986) suggests a
positive relationship between high mandatory and voluntary disclosure levels, which is
incorporated in the framework to link both types of disclosure.
A final critique point to mention is that the framework accounts for economic
theories only, which is addressed in the recommendations for future research. Other
theories, such as organisational and legitimacy theories could be considered to address
further factors explaining corporate disclosure. However, this is beyond the scope of
this study, thus should be considered in future research studies.
The next section illustrates the proposed corporate disclosure framework and seeks
to explain the relationships based on the above review of corporate disclosure theories.
5. A map of theories of corporate disclosure
The map of theories that results from this inductive approach of theory building is
shown in Figure 2.
The previous sections outlined the discussion (observation) stage and the
categorisation stage, based on the prior literature of the inductive theory-building
process, after the deductive aspect identified the gap in the literature. This section
discusses the defining of relationships among the categories of corporate disclosure, in
order to provide an integrated approach to describing and explaining corporate
disclosure. The map provides useful insights into the existing disclosure theories, which
may explain the prior empirical results being inconsistent with the arguments of these
theories, as exist in the literature. Its rationale in the authors opinion is that there is a
great advantage to encompass the theories related to financial disclosure within one
scope to simplify the complex relationships between different notions of the financial
disclosure phenomenon, supporting the new researchers familiarisation process.
As can be seen in Figure 2, the map first serves to integrate theories explaining
financial disclosure under the assumption of the ideal conditions of the financial market
in which demand and supply forces of financial information are considered as an
efficient tool to determine the optimal level of financial information in order to allocate
economic resources (Taylor and Turley, 1986; Riahi-Belkaoui, 2004). To disclose the
optimal level of financial information identifies the ultimate user need. There is a direct
link between market efficiency and the optimal level of financial disclosure,

Corporate
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Figure 2.
A theoretical roadmap
of corporate disclosure

which proves that in a complete and perfect market situation quantity of accounting
information is subject to users needs and subject to managers incentives to meet these
needs. Market forces alone fail to meet all the users needs because the market is
inadequate to control and organise the information demanding and supplying process.
In Figure 2, there is a direct link between market efficiency under ideal conditions and
market failure under actual conditions. Since the users needs cannot be satisfied
through the market alone, disclosure theories incorporate actual features of the market,
in order to achieve a maximum level of quality of financial information in order to be
useful for decision-making.
Thus, the map integrates theories that recognise actual features of the
financial market market failure, i.e. the imperfect balance of demand and supply
(Healy and Palepu, 2001), and information asymmetry and adverse selection, i.e. the
inefficient and unequal distribution of information (Cooper and Keim, 1983). Within this
map information asymmetry and adverse selection are regarded as a root cause,
and are regarded to cause a twofold accountants reaction, as can be seen in Figure 2,

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in a bid to reduce this problem: the first being regulatory theory and the second
managers incentive theories. The first categorises mandatory disclosure theories,
sustaining quality of disclosed information through force, the second voluntary ones
including the willingness to engage in voluntary internet corporate disclosure, which
reflects the recognition on corporations part that investors decision-making needs to be
supported through high-in-quality reported information. Quality of reported financial
information is determined through its usefulness for decision-making, which is sought
to be achieved through high levels of disclosing relevant information, so that investors
can get a full picture. Whether that is indeed achieved, can only be determined in a
survey of investors perceived usefulness of disclosed information.
Environmental factors, as illustrated by ECT, determine the context of the financial
reporting environment, and consequently are seen to instigate changes in financial
disclosure practice within one country over time and serve to explain differences among
countries. Environmental factors set the general context of corporate disclosure systems,
both within an individual country and among countries. The external environmental
factors lead to mandatory disclosure. Regulatory theories determine the level of
mandatory disclosure required. Internal factors lead to managers incentives to provide
voluntary disclosure, based on the various theories that represent these incentives.
In a bid to integrate theories of mandatory and voluntary disclosure practices,
codification theory and Dyes (1986) theory are included. This relationship between
voluntary disclosure practice and mandatory disclosure requirements is integrated by
a link launched from the managerial incentives to codification theory and a link
launched from the latter to the regulatory theory. The former refers to the argument
that new mandatory disclosure requirements may indeed represent codified best
practice, i.e. embody former voluntary disclosure. The latter implies Dyes (1986)
argument of a positive relationship between increasing mandatory requirements and a
subsequent increase in voluntary disclosure. In the same vein, a positive relationship
between printed financial disclosure practices and internet usage for disclosing
financial information will be shown in the form of disclosure transformation theory.
Figure 2 shows that there is a link between regulation and voluntary disclosure
theories and the optimal level of printed corporate disclosure, which represents the case
of compliance with mandatory requirements, and disclosing voluntary information in
the printed annual reports. This broken line explains also companies attitude towards
corporate disclosure. This link suggests that there is a positive association between
higher printed corporate disclosure, both mandatory and voluntary, and engaging in
voluntary disclosure on the internet. Increasing companies printed corporate disclosure
practice motivates companies attitude towards disclosing more corporate information
on the internet in order to take advantage of new technological developments, to reduce
the agency problem arising from the separation between control and management. The
broken line from the environmental factors, e.g. technological factors, to the printed
corporate disclosure, illustrates the technological developments impacting on printed
disclosure and the latter transforming into internet corporate disclosure. These factors
have not only an impact on the regulation of corporate disclosure but also on voluntary
disclosure practices regarding the same procedures. This explains the application of two
pathways represented in the proposed map of theories in a country, where ECT affects
both regulatory and managers incentive theories representing mandatory and
voluntary disclosure, respectively, including internet disclosure.

Furthermore, there is a link from the optimal level of printed corporate disclosure to
the corporate disclosure variation, which explains the variation in the level of compliance
with mandatory disclosure requirements and the level of voluntary disclosure among
companies. Similarly, there is a link between the internet corporate disclosure and the
corporate disclosure variations, which provides an explanation for the differences in the
level of the internet corporate disclosure among companies. Finally, this theoretical map
comprises the fundamental factors used to explain the variation in the level of financial
disclosure practices, which consist of several well-discussed corporate characteristics
and as a newly developed variable, corporate familiarity.
6. Conclusion and future research suggestions
This paper set out to propose a map of theories of corporate disclosure, both mandatory
and voluntary financial and narrative disclosure, by encompassing existing corporate
disclosure theories in one scope. This map was designed to provide guidance on a
theoretical background, which could add significant value to the development of
corporate disclosure research and accounting education. Furthermore, it provides a
starting point for developing a normative disclosure framework, identifying the ideal
level of disclosure. Ultimately, this requires consideration of human factors, such as
what keeps humans accountable, and what makes a person strive to do the right thing,
e.g. ethical principles. However, the current framework outlines a coherent set of
explanations of the actual state of corporate disclosure, which is a relevant and needed
starting point for continuing from what-is to determine what-should-be.
It is suggested that there is a theoretical scope with respect to corporate disclosure. This
scope is assumed to start from the optimal level of corporate disclosure under the ideal
condition of market efficiency and then to move to the situation under the actual conditions.
It was explained that demand for corporate reporting regulations and managerial
incentives arise from market failure, information asymmetry and adverse selection.
Information asymmetry and adverse selection are regarded as a root cause and regulatory
as well as managerial incentive theories as a resulting reaction. It was shown how external
and internal factors have an impact to change the corporate reporting environment
within an individual country over time and to cause differences in corporate reporting
practices among countries. This map integrated further theoretical aspects of corporate
disclosure, such as codification theory, Dyes (1986) theory and disclosure transformation
theory, in a bid to illustrate one complete picture of developments in corporate disclosure
practices. These theories were introduced as explanatory theories for the changes and
developments in the form and content of mandatory and voluntary disclosure practices.
Furthermore, the map of theories emphasised that there are differences in the level of
compliance with mandatory disclosure requirements and in the level of voluntary
disclosure among companies. This variation in the levels of corporate disclosure may
happen due to characteristics inherent to an individual corporate influencing compliance
with mandatory requirements and disclosing voluntary information.
A limitation and future scope of this theoretical map is that currently it provides a
descriptive context and ultimately it should move towards a normative framework
following the theory building approach of Carlile and Christensen (2005), possibly
predicting and explaining the ideal level of corporate disclosure. Furthermore, new
theoretical developments should be added to maintain the comprehensive character,
through re-categorising and re-defining the relationships of the theoretical framework.

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A further limitation is that this map only emphasises theories that focus on economic
aspects in particular. A focus for future research can be the addition of behavioural,
organisational and legitimacy disclosure theories.
The proposed map of theories provides useful insights into particular existing
disclosure theories and seeks to simplify the complex relationships between various
different notions of the corporate disclosure phenomenon, so as to offer future
researchers a methodical approach to understand in depth each angle, and possible
existing lacks, of comprehensive agreed theory. Finally, both for accounting education
and research the map of theories can be a useful and helpful tool in various ways. The
proposed map demonstrates the logical relation of these theories in a coherent way,
which will help new researchers to understand how corporate disclosure theories are
related and enforcing upon each other.
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Corporate
disclosure
theories
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Further reading
Al-Htaybat, K. and Napier, C. (2004), Mandatory disclosure in the annual reports of Jordanian
manufacturing companies before and after 1998, paper presented at the Eighth Annual
Financial Reporting and Business Communication Research Conference, Cardiff Business
School, Cardiff, 1-2 July.
Verrecchia, R.E. (2001), Essays on disclosure, Journal of Accounting and Economics, Vol. 32,
pp. 97-180.
Watts, R.L. and Zimmerman, J.L. (1986), Positive Accounting Theory, Prentice-Hall,
Englewood Cliffs, NJ.
Watts, R.L. and Zimmerman, J.L. (1990), Positive accounting theory a ten year perspective,
The Accounting Review, Vol. 65 No. 1, pp. 131-56.
About the authors
Larissa von Alberti-Alhtaybat is an Assistant Professor of Accounting and
currently holds the position of Chairperson of the International Accounting Department.
Larissa von Alberti-Alhtaybat is the corresponding author and can be contacted at: larissa.
vonalberti@gju.edu.jo
Khaled Hutaibat is an Assistant Professor of Accounting and currently holds the position of
Assistant Dean.
Khaldoon Al-Htaybat is an Associate Professor of Accounting.

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