Ary Khara Sach

Reputation costs: the impetus for voluntary derivative
nancial instrument reporting

Keryn Chalmers
a,
*, Jayne M. Godfrey
b
a
School of Accounting & Finance, Victoria University, Footscray Park Campus (F005),
PO Box 14428, Melbourne City MC, Victoria 8001, Australia
b
Department of Accounting & Finance, Monash University, PO Box 197, Cauleld East,
Victoria 3145, Australia
Abstract
The purpose of this study is to investigate managers responses to derivative nancial instrument disclosure
requirements proposed by the Australian accounting standard setting bodies and the Australian Society of Cor-
porate Treasurers (ASCT). Confronted with societal pressures to make derivative activities more transparent,
managers responded in a manner that can be explained by legitimacy and institutional theories and the main-
tenance of the managers and their rms nancial reporting reputations. Discretionary reporting is predicted to
be positively related to the magnitude of reputation costs confronting managers and rms. While the desire for
legitimacy is unobservable, nancial reporting reputation is proxied by the following attributesASCT, auditor,
and Group of 100 (G100) aliations. With the exception of auditor aliation, results from the analysis are
consistent with the hypotheses. Alternative explanations of the results may be possible. However, the consistency
and signicance of the results implies that legitimacy and institutional theories provide a plausible explanation as
to what impulse prompted managers responses. (The plausible explanations provided are morally based [Louch
(1966). Explanation and human action. Berkeley: University of California Press].) We are grateful to an anon-
ymous referee for this insight into our explanation). Further research to investigate managers reporting incentives
is recommended.
#2003 Elsevier Ltd. All rights reserved.
Introduction
The size, growth and importance of derivative
markets indicate widespread use of derivative
nancial instruments by rms. Despite their
extensive use, accountants have lacked a con-
sistent and coherent framework to guide the pre-
sentation, disclosure, recognition, measurement
and classication of such instruments in the
nancial statements (Benston & Mian, 1997). To
address the perceived shortfalls associated with
accounting for derivative nancial instruments,
disclosure and presentation rules have been
0361-3682/03/$ - see front matter # 2003 Elsevier Ltd. All rights reserved.
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Accounting, Organizations and Society 29 (2004) 95125
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +61-3-9688-4636; fax: +61-
3-9688-4901.
E-mail addresses: keryn.chalmers@vu.edu.au (K. Chalmers),
jayne.godfrey@buseco.monash.edu.au (J.M. Godfrey).
prescribed and are operational in countries and
regions such as Australia, the United Kingdom,
and the United States.
1
The Financial Accounting
Standards Board (FASB) and the International
Accounting Standards Committee (IASC) had
issued recognition and measurement standards
(SFAS133 and IAS39 respectively), but to date
no such pronouncement has been made by the
Australian Accounting Standards Board
(AASB).
2
The demand for regulated communication
with respect to these instruments has been sti-
mulated and intensied by the media attention
aorded to the signicant losses incurred by
rms in relation to their derivative activities.
The premise underlying disclosure requirements
is that nancial report users evaluating entities
that use derivative nancial instruments need to
be able to determine and measure the char-
acteristics of the risks (e.g. lack of treasury
knowledge and expertise, insucient operational
controls and price risk) and rewards (e.g. higher
prots and/or reduction in the impact of nan-
cial market volatility on the rms cash ows)
that exist as a result of the arrangements in
place. This premise is articulated in the various
accounting standards issued on nancial instru-
ments and is consistent with the decision use-
fulness criteria underpinning accounting
conceptual frameworks.
3
The aim of this paper is to investigate the
response of managers to societal and institutional
pressures demanding derivative nancial instru-
ment disclosures in annual reports. Schrand and
Elliot (1998) comment that managers have no
incentive for voluntary disclosures about risk
because there is no evidence that risk disclosures
aect the cost of capital. However, given the
institutional pressures for voluntary nancial
instrument reporting confronting managers, the
possible loss of nancial reporting reputation
provides an incentive for such information dis-
closures.
The paper examines voluntary disclosure prac-
tices of Australian rms in their annual reports
for the periods 19921996.
4
Conformity to com-
munity values, professional body requirements,
and peer practices are predicted to be associated
with reporting practices. Conformity is important
in the markets assessment of a rms and an
individuals credibility and, hence, reputation.
Consequently, it is predicted that rms and indi-
viduals exposed to higher reputation damage
(reputation costs) as a consequence of non-con-
formity will be more likely to respond positively
to professional, legal and community information
demands. Utilising a legitimacy theory frame-
work, managers and rms with externally recog-
nisable signs of conformity and credibility include
those aliated with the Australian Society of
1
Accounting standards, dealing with derivative nancial
instrument disclosures, issued by the Financial Accounting
Standards Board (FASB), the Australian Accounting Stan-
dards Board (AASB), the Accounting Standards Board (ASB),
and the International Accounting Standards Committee (IASC)
are SFAS119: Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments, AASB1033: Presenta-
tion and Disclosure of Financial Instruments, FRS13: Derivatives
and other Financial Instruments: Disclosures, and IAS32: Finan-
cial Instruments: Presentation and Disclosure respectively.
2
A Draft Standard on Accounting for Financial Instru-
ments and Similar Items was also issued by the Joint Working
Group (JWG). This group comprised representatives or mem-
bers of accounting standard setters or professional organisa-
tions in Australia, Canada, France, Germany, Japan, New
Zealand, ve Nordic countries, the United Kingdom, the Uni-
ted States, and the IASC. The JWG Draft Standard set out a
comprehensive approach to the recognition and measurement
of nancial instruments.
3
Paragraph 3.1.1 of AASB1033 states the objective of this
Standard is to enhance nancial report users understanding of
the signicance of on-balance-sheet (recognised) and o-bal-
ance-sheet (unrecognised) nancial instruments to an entitys
nancial position, performance and cash ows.
4
Ernst and Young (1997) and Berkman, Bradbury, Han-
cock, and Innes (1997) examine the reporting practices of Aus-
tralian rms in relation to derivative instruments, however
these studies examine a single reporting period only and there-
fore do not capture changes in reporting practices. The former
report surveys the 1996 annual reports of the top 200 Aus-
tralian companies. It concludes that reporting practices need to
improve to satisfy the requirements of AASB1033. The latter
study compares the derivative usage and reporting practices of
New Zealand and Australian rms. It examines the 1995
annual reports of 195 Australian rms and records the report-
ing (non-reporting) of accounting method, contract values, net
fair values, and comparative gures.
96 K. Chalmers, J.M. Godfrey / Accounting, Organizations and Society 29 (2004) 95125
Corporate Treasurers (ASCT)
5
and the Group of
100 (G100).
6
Audit rms procedures and practices are also
driven by the need to conform to professional
body expectations and best practices. In main-
taining or increasing their reputational capital,
audit rms are expected to inuence the disclosure
levels of the rms they audit. Hence, it is predicted
that rms audited by Big 6 designated rms (pre-
viously Big 8 and now Big 4 designation) or audit
rms with partners on accounting standard setting
bodies will exhibit a greater propensity to make
voluntary derivative nancial instrument
disclosures.
Legitimacy, as dened by Suchman (1995), is a
generalized perception or assumption that the
actions of an entity are desirable, proper, or
appropriate within some socially constructed sys-
tem of norms, values, beliefs and denitions (p.
574). Awareness of legitimacy threatening issues
can be created by the media (Brown & Deegan,
1998; ODonovan, 2000), regulatory or institu-
tional pressures (Deegan & Rankin, 1996), evol-
ving social awareness (Patten, 1991) and/or
corporate/industry crises (Deegan, Rankin, &
Voight, 2000). Management must be cognisant of
legitimacy threatening issues and manage legiti-
macy. Institutional theory contends that one
means by which legitimacy is achieved is con-
forming to current conventional practice and
external pressures (Scott, 1987).
Legitimacy theory has been used to assess rms
social and environmental reporting activities (Dee-
gan & Gordon, 1996; Guthrie & Parker, 1989; Pat-
ten, 1991) and institutional theory has been used to
explore the adoption of generally accepted account-
ing principles for external nancial reporting by
public sector entities (Carpenter & Feroz, 1992,
2001). Perceived dangers in using annual reports
to make such assessments are the inability to
identify to what impulse the action is a response,
the limit to the amount of information that can be
provided in this setting and the fact that informa-
tion is released beyond the annual report domain
(Woodward, Edwards, & Birkin, 1996). Recognis-
ing that an empirical study such as this can never
provide conclusive evidence to conrm hypothe-
sised management reporting incentives, and that
the proxies for reputation eects are subject to
alternative interpretation, a strength of this study
is that it provides a plausible explanation as to
what impulse prompted the responses. This is
particularly the case since the recommended dis-
closures were issued with quasi-regulatory
authority, and derivative nancial instrument
information was unlikely to be released in a forum
other than the nancial report. Furthermore, the
results are systematically consistent with the the-
ory and robust to alternative sample specications
and tests.
The theoretical framework of costly contracting
could also be used to derive complementary or
competing hypotheses.
7
The inclusion of a tradi-
tional contracting variable, namely leverage,
enables an assessment of the congruency between
the two theories. Leverage proxies for debt related
contracting costs, with the extant literature sug-
gesting a positive association between leverage
and voluntary disclosures (Ahmed & Courtis,
1999). Whilst this paper capitalises on the oppor-
tunity to operationalise and apply legitimacy and
institutional theories to a nancial reporting issue,
the inclusion of a contracting related control vari-
able, leverage, also facilitates an examination of the
complementary nature of applying alternative para-
digms to nancial accounting information produc-
tion decisions. Such approaches can complement
alternative approaches in the nancial accounting
literature (Carpenter & Feroz, 1992, 2001). Addi-
tional research and triangulation of research meth-
5
The ASCT, now referred to as the Finance and Treasury
Association (FTA), is a professional body whose members are
nancial and treasury professionals. It exists to advance the
profession of treasury management and the recognition of its
practitioners. Activities include research into treasury and risk
management practices, submissions to government and reg-
ulatory authorities, and professional development through
publications, seminars and special training programs.
6
The G100 is an association of senior accounting and
nance executives representing the major public companies and
government owed enterprises in Australia.
7
Carpenter and Feroz (2001) comment, economic con-
sequence theory, political science theory on power and politics
and institutional theory should be viewed as complementary
rather than competing theories (p. 638).
K. Chalmers, J.M. Godfrey / Accounting, Organizations and Society 29 (2004) 95125 97
ods in the future may enable more denitive com-
parisons of alternative theories predictive ability.
The paper is structured as follows: the next sec-
tion, on Evolution of regulation governing deri-
vative nancial instrument disclosures, details the
evolution of regulation governing derivative
nancial instrument disclosures by Australian
rms; the theoretical background and hypothesis
development is provided in the section on Theo-
retical background and hypothesis development;
The Methodology section describes the methodol-
ogy and data used in empirical testing; the results
of the tests are discussed in the Results section;
and the Conclusion section concludes the study.
Evolution of regulation governing derivative
nancial instrument disclosures
The development of accounting standards deal-
ing with derivative nancial instruments has been
protracted and has generated considerable debate
about how rms nancial reporting should
inform investors, creditors, analysts and other
nancial statement users of their use. Further-
more, approaches adopted have varied between
jurisdictions in terms of timing and coverage.
Fig. 1 depicts the timing of signicant FASB,
AASB and IASC pronouncements relative to
nancial reporting dates.
8
The approach adopted
in the United States has been to target and pursue
a particular area for investigation. The alternative
approach initially adopted by the IASC, Canada
and Australia attempted to tackle the whole
nancial instrument reporting spectrum in one
document. This approach was subsequently
revised with a more fragmented approach ensuing,
in line with the United States approach.
In terms of Australian regulation, the AASB
attempted to make ED59: Financial Instruments
(ED59) comprehensive in addressing recognition,
denition, measurement and disclosure rules.
ED59 was subjected to intense criticism from
managers, representative bodies, regulatory
authorities and academics. The criticism was
weighted heavily towards recognition and measure-
ment issues associated with nancial instruments.
Extensive lobbying resulted in the standard setters
withdrawing ED59 and issuing ED65: Presentation
and Disclosure of Financial Instruments (ED65). The
latter generally sought to establish only presentation
and disclosure rules for nancial instruments.
9
AASB1033: Presentation and Disclosure of Financial
Instruments (AASB1033), issued in December 1996,
is the culmination of the AASBs eorts to prescribe
the nancial instrument disclosures to be made in
nancial reports.
During the time lapse between the withdrawal of
ED59 and the issue of ED65, the ASCT issued an
Industry Statement specifying voluntary guidelines
for the disclosure of derivative nancial instruments
(Australian Society of Corporate Treasures, 1995).
In providing this guidance, the ASCT specied that
the Industry Statement sought to ll the void
that exists in this respect as a result of the existing
Accounting Standards framework not providing
clear direction in many aspects . . . (p. 3). The
Industry Statement contained recommended mini-
mum disclosures (Part A) and best practice interim
disclosure guidelines (Part B) for derivative nancial
instruments in annual reports. It was heralded as a
timely and positive industry reaction given the
signicant losses, linked to derivative trading,
reported by rms, and the absence of accounting
regulation for such instruments.
10
The Statement
8
The ASB rst explored accounting for nancial instru-
ments in a discussion paper, Derivatives and Other Financial
Instruments, published in 1996. FRS13 Derivatives and other
Financial Instruments: Disclosures was subsequently issued to
be eective for accounting periods ending on or after 23 March
1999.
9
The following summarises the main disclosure require-
ments of ED65 in relation to classes of derivative nancial
assets and liabilities: accounting policies; extent and nature of
underlying nancial instruments including principal, interest
rate, timing of payments, maturity date and collateral pledged;
objectives for holding or issuing the instruments; exposure to
interest rate risk; and aggregate net market value at reporting
date with supporting information as to the derivation of the
values.
10
The chairman of the Australian Securities and Investments
Commission (ASIC) refers to relying on moral suasion to win
compliance with the Industry Statement due to the lack of
progress by Australian standard setting bodies in formulating
accounting standards for derivatives (Australian Financial
Review, 30 March 1995, p. 1).
specied that the guidelines were to be placed in
the context of a communication exercise and
not at this stage as a prescriptive and reac-
tionary compliance initiative.
In a media release on 30 March 1995, the Aus-
tralian Securities Commission (now the Australian
Securities and Investments Commission and here-
after referred to as ASIC) endorsed the Industry
Statement. In a further release on 20 June 1995,
the ASIC stated they expected rms to comply
with the Industry Statement requirements for the
nancial year ending 30 June 1995, specifying it
Fig. 1. Timeframe depicting signicant accounting pronouncements with implications for derivative nancial instruments.
would be dicult for rms to meet the require-
ment to give a true and fair view in the accounts
without adopting the minimum requirements of
the Industry Statement. Whilst giving the Industry
Statement unconditional support, the ASIC
refrained from outlining particular sanctions for
non-compliance.
This section illustrates the attention accounting
for derivative nancial instruments has received,
and continues to receive, from professional bodies.
In addition it highlights the regulatory persuasion
exerted on managers to make disclosures in rms
nancial statements. The interposition of the
Industry Statement between the two accounting
exposure drafts presents a unique opportunity to
observe voluntary disclosure levels in relation to
this specic accounting issue.
Theoretical background and hypothesis development
This paper seeks to identify the legitimacy and
institutional drivers initiating change in the volun-
tary derivative nancial instrument disclosure
practices of Australian listed rms for reporting
periods 19921996. The studys time frame covers
nancial reporting periods during which ED59, the
ASCT Industry Statement and ED65 were
released. Firms derivative nancial instrument
disclosures were voluntary during this period,
however the environment changed from one in
which the disclosures were completely uncon-
strained to one where pressure was exerted on
managers to be forthcoming with these disclosures.
Adopting a social view of accounting, organisa-
tional legitimacy and the social contract of orga-
nisations with society can warrant the disclosure
of voluntary accounting information (Mathews,
1993). Studies of accounting disclosures in this
theoretical setting have concentrated on environ-
ment, human resource, product and community
disclosures.
11
Legitimacy theory predicts that
organisations react to demands of diverse groups
with responses aimed to legitimise their actions.
Similarly, institutional theory contends that orga-
nisations operate within a social framework of
norms, values and assumptions about what con-
stitutes appropriate or acceptable behaviour
(Oliver, 1991).
Given that organisations develop congruence
between their own activities and the norm of
acceptable behaviour in the larger societal system
in which they operate (Dowling & Pfeer, 1975),
disparity between the two value systems will
threaten organisational legitimacy. Positioning
voluntary disclosures of derivative nancial
instruments within this framework, media reports
associated with derivative nancial disasters have
made stakeholders conscious of, and concerned
about, rms use of derivative nancial instru-
ments. This creates a demand for transparency of
derivative nancial instrument activities in nan-
cial reports.
Financial reporting interest groups are mechan-
isms by which societys demands and corporate
actions can be reconciled. As such, the interest
groups can be viewed as agents of society. The
nancial reporting interest groups, some of which
are funded by taxpayers, need institutional legiti-
macy and support (Burchell, Clubb, Hopwood, &
Hughes, 1980). They legitimise their existence by
rendering accountability to society by developing
and enforcing nancial reporting rules and reg-
ulations that satisfy community information
demands. This self-promotional behaviour sus-
tains or enhances interest groups reputations and
promotes their continued existence. In response to
demands for derivative nancial instrument dis-
closures, accounting standard setting boards
inclusion of this matter on their agenda is neces-
sary to legitimise their role and jurisdiction in
accounting regulation. Similarly, the ASCTs
action to encourage rms to communicate deriva-
tive instrument usage is socially responsive, main-
tains the ASCTs organisational legitimacy and
enhances its reputation as a professional body.
Financial statement preparers are viewed as
agents of nancial reporting interest groups. Com-
pliance with the demand for derivative nancial
instrument transparency depends on the nature of
the societal and institutional pressures being exer-
ted. Laughlin (1990) utilises a dichotomous classi-
cation of contractual and communal pressures.
11
Refer to Mathews (1993) for a review of social responsi-
bility accounting studies conducted in various countries.
The former is a formal context resulting in writ-
ten forms of recording and dening expectations
and the latter embraces the less formal context
and less structured expressing of these expecta-
tions (p. 97). The societal pressure for derivative
nancial instrument transparency, given its infor-
mal, unwritten and unstructured nature, is a com-
munal accountability. The pressure exerted by
nancial reporting interest groups is more formal,
structured and written, but in this instance falls
short of being legally dened. Hence a trichoto-
mous classication is introduced with the
accountability of nancial statement preparers to
nancial reporting interest groups deemed to be
quasi contractual given that the various pro-
nouncements were ultimately likely to be
enshrined in law.
12
Firms and managers have incentives to be per-
ceived as reputable (Fombrun, 1996), and
reputation reects the rms relative success in
fullling the expectations of multiple stakeholders
(Freeman, 1984). The justications for acting to
enhance corporate reputation are the ability to
charge higher prices, attract better applicants,
enhance access to capital markets and attract
investment (Fombrun & Shanley, 1990). Corpo-
rate reputation consists of perceptions derived
from many determinants, with nancial reporting
practices comprising one of the determinants.
Users of nancial reports rely on reporting repu-
tation, determined by prior reporting behaviour,
when assessing nancial communication (True-
man, 1986; Williams, 1996; King, 1996; Gigler &
Hemmer, 1998).
In the context of US studies, corporate reputa-
tion has been operationalised using Fortunes
Most Admired Corporations Survey (Wartick,
1992). Until recently there were no such reputa-
tional indices for Australian rms. However, a
national survey conducted in 2000 elicited stake-
holders views on Australian large rms. The
reputation index examines, through stakeholders
perceptions, a rms ability to manage activities
that directly contribute to reputation.
13
Further
justication for the existence of nancial reporting
reputation and the rewards for practicing greater
transparency are based on the existence of specia-
lised and inuential groups that examine com-
pliance with regulatory standards,
14
and the
voluntary submission of annual reports in the
annual report awards managed by ARA Australia
Incorporated.
15
Fig. 2 depicts that nancial reporting reputation
can be generated, maintained or enhanced
through aliations and reporting practices.
Reporting practices conducive to reputation
enhancement focus on the extent to which the
nancial report conforms to regulatory pro-
nouncements, best practice guidelines and peer
reports. Aliations by reporting entities expected
to be conducive to nancial reporting reputation
include membership of the G100, appointment of
a high reputation auditor, and having directors
and nancial accounting sta held in high profes-
sional regard. Firms and managers have reputa-
tional incentives to voluntarily disclose
information (Skinner, 1994). Those expected to
have superior nancial reporting will be con-
fronted with greater reputation costs for non-dis-
closure than those with less reputational status.
Measurable consequences of disclosing infor-
mation are capital market reactions associated
with the informations value relevance and a
change to a rms cost of capital (Botosan, 1997;
12
AASB1033 can be seen as the culmination of reaction to
social change with an evident time lag between its enactment
and what may be acceptable behaviour for nancial statement
preparers.
13
Harris Interactive, using methodology referred to as the
Reputation Quotient, conducted the survey. This methodology
assesses reputation in six areas including management of
employees, environmental performance, social impact, ethical
performance, nancial performance, and market position. The
Australian Shareholders Association (ASA) and The Institute
of Chartered Accountants of Australia (ICAA) are surveyed to
comment on rms nancial performance. The ASAs criteria
to assess a companys nancial performance included the qual-
ity of all forms of information provided to shareholders.
14
The ASIC conducts a surveillance programme on com-
pany nancial reports to monitor compliance with disclosure
obligations. The Investment and Financial Services Association
also studies the reporting practices of Australias top 100 rms.
15
Chang, Taylor, and Whittred (1999) dierentiate annual
report disclosure quality on the basis of whether or not rms
are ARA recipients.
Sengupta, 1998). Supported by evidence indicating
the value relevance of derivative nancial instru-
ment disclosures (Barth, Beaver, & Landsman,
1996; Eccher, Ramesh, & Thiagarajan, 1996; Ven-
katachalam, 1996), this paper assumes that deri-
vative nancial instrument disclosures are value
relevant.
Managers responses to external disclosure
demands will be based on their perceptions of the
impact of the responses on both tangible resources
supplied to the rm by its constituents (e.g. nan-
cial resources provided by shareholders and len-
ders) and on intangible resources (e.g. reputation
and legitimacy) supplied to the rm by the con-
ferring public (Carmona & Macias, 2001). While
all managers have incentives to disclose informa-
tion in the interests of nancial stakeholders,
managers balance multiple incentives when
formulating their disclosure policies. In an unregu-
lated environment, it can be assumed that rms
equilibrium disclosures are value-maximising.
Introducing quasi-regulation or legislation increases
the relevance to rm value of intangible resources,
as the rms reputation and legitimacy are aected
by its response to the new requirements. Follow-
ing this line of reasoning, rms with G100 mem-
bership, high quality auditors, and directors and
accounting sta held in high professional regard
are more likely to conform to new reporting
requirements than are other rms.
Strategic behaviour, ranging from acquiescence
and compromise to deance and manipulation,
can occur in response to conformity pressures
(Oliver, 1991). The response is dependent upon:
why the pressure is exerted; who exerts it; what the
pressures are; how or by what means they are exer-
ted; and where they occur. Ex ante eorts to encou-
rage derivative nancial instrument disclosures are
Fig. 2. Enhancing reputation through aliations and reporting practices.
expected to be eective, but the lack of regulatory
sanctions provide managers with ex post adoption
exibility. Chalmers (2001) nds that more rms
than not are forthcoming with derivative nancial
instrument disclosures, but the disclosures lack
completeness relative to the recommended dis-
closures. This could be attributable to the quality
of information available to managers (particularly
if the risk management systems lack sophistica-
tion) or the proprietary nature of specic dis-
closure items (Peters, 2000; Verrecchia, 1983,
1990).
The incentive to disclose can be driven by prag-
matic legitimacy and/or moral legitimacy (Such-
man, 1995). Pragmatic legitimisation exists if
managers engage in such disclosures to satisfy
constituents demands for that information.
Disclosures exhibit moral legitimacy if institu-
tional pressures and the need to adopt a con-
formist stance drive them. In relation to
derivative nancial instrument disclosures, the
pressure is exerted by professional and legal
bodies in response to community demands
intensied by rms losses associated with deri-
vative activities. Managers disclosing informa-
tion prior to 1995 behave in a manner
consistent with pragmatic legitimacy whereas
disclosures made after the ASCT Industry
Statement are consistent with moral legitimacy.
Non-compliance threatens organisational legiti-
macy, and the nature of the threats can be
legal, economic or other social sanctions
(Dowling & Pfeer, 1975). Failure to disclose
voluntary derivative nancial information carries
no legal sanctions, however social ramications
are likely to be associated with a loss of cred-
ibility and reputation suered by non-disclosers.
Although no specic sanctions for non-con-
formity existed, the ASIC stated it would be di-
cult to attest to the truth and fairness of nancial
statements in the absence of derivative instrument
disclosures. This is an example of the regulator
resorting to stronger incentives to induce more
eort on behalf of the regulatee (Demougin &
Fluet, 1995). It suggests that conforming to the
institutional rules and expectations should be high
as conformity releases managers from ASIC and
professional body scrutiny and aords them
institutional legitimacy.
16
This prediction assumes
the information disclosures are perceived as non-
harmful by management and political self-interests
are not contrary to institutional objectives.
Dye and Sridhar (1995) theorise that the inter-
action among corporate disclosures (herding
behaviour) is the result of managers attempts to
inuence nancial market assessments of rms
values. The decision whether to disclose is based
on managers conjectures about the disclosure
policies of other rms managers and the history
of past disclosures. If derivative nancial instru-
ment disclosures are forthcoming in a voluntary
setting, this will provoke non-disclosing rms to
alter their status to a disclosing rm in the ensuing
reporting period. Admati and Peiderer (1998)
similarly argue that disclosure regulation has a
role if rm values are correlated and investors
valuing rms use disclosures made by other rms.
Additionally, agents may act similarly if such
actions are perceived to create mutual positive
externalities. Disclosures concerning derivative
nancial instruments may fend o further reg-
ulatory intervention if the disclosures satisfy the
stakeholders information demands and demon-
strate sound risk management practices.
Should managers believe the disclosures have
the potential to be harmful, the decision not to
disclose would subject them to the attention of the
ASIC, potentially damage their standing in the
managerial labour market and deny the opportu-
nity for a reduction in agency costs. The con-
sequence of believing the information is harmful
yet proceeding to disclose may be less serious.
Managers would be released from ASIC and pro-
fessional body scrutiny, the information gap
would reduce and agency costs may or may not
increase.
Therefore, disclosure levels are expected to
increase at both the rm level and in aggregate
16
This is also described as coercive institutional isomorph-
ism (DiMaggio & Powell, 1983). The concept of isomorphism
explains the process of homogenisation. Institutional iso-
morphism recognises that organisations compete for political
power and institutional legitimacy for social as well as eco-
nomic tness. Institutional isomorphism change can occur
through coercive measures stemming from political inuences
and coercive authority.
from 1992 to 1996 with a pronounced increase in
1995 coinciding with the release of the ASCT
Industry Statement.
17
Stating this prediction in the
alternative form yields H1:
18
H1. The level of voluntary derivative nancial
instrument disclosures increases over the 1992
1996 reporting period, with the increase being sta-
tistically signicant in 1995.
Recognising that professional organisations are
a vehicle for the promulgation of normative rules,
DiMaggio and Powell (1983) predict that respon-
ses to institutional pressures are positively related
to the extent of professionalisation in a eld.
Accordingly, it is predicted that ASCT aliated
rms exhibit greater disclosure levels, as the pro-
posed disclosure model was promoted to all ASCT
members.
Moral legitimacy can exist at the personal level
in addition to the organisational level. At the per-
sonal level, legitimisation involves individuals act-
ing ethically and responsibly by doing the right
thing to enhance their professionalism and per-
ceived value in the market place. Bernheim (1994)
recognises that individual conformity occurs
because even small departures from the social
norm will impact adversely on an individuals sta-
tus and threaten their reputation. Professional
body membership confers reputation status to the
individual. Furthermore, an accountability
relationship exists between the ASCT and its
members, with the latter having incentives to fulll
professional obligations and responsibilities
demanded by their professional body. Included in
the ASCTs code of ethics
19
are the requirements
that members shall observe legislation and reg-
ulation that governs their respective activities, as
well as the spirit of the law and contemporary
market practice and members shall exercise a
duty of care such that their activities are capable
of close public scrutiny.
ASCT members are expected to exercise perso-
nal inuence to try and ensure the derivative
nancial instrument disclosures in their employers
nancial statements conform to the best practice
benchmark initiated by their professional body.
This compliant response signies diligence on
behalf of the member and is positively related to
the professional status that they are aorded
(Dufwenberg & Lundholm, 1997). Professional
commitment and the threat of being subject to
ASIC and professional body scrutiny provides
personal incentive for ASCT aliation to be posi-
tively related to the propensity for voluntary deri-
vative nancial instrument disclosures for
reporting periods from June 1995. It is therefore
hypothesised:
instrument disclosures after 1994 is greater for
ASCT aliated rms than for non-ASCT ali-
ated rms.
An examination of the association between
auditor aliation and voluntary disclosure levels
is also undertaken. Viewing accounting as a social
construct, congruence between accounting devel-
opments and the needs and preferences of society
is necessary if the reputation earned by accoun-
tants as preparers and auditors of corporate
accounts is to be preserved (Mathews, 1993).
17
Consideration needs to be given to the possibility that no
change in underlying economic factors contributed to a change
in derivative nancial instrument usage during this time win-
dow. Examining the volume of contracts traded on the Sydney
Futures Exchange provides elementary evidence that derivative
usage in 1995 was not signicantly greater compared to 1994.
Whilst the number of SFE agricultural commodities and SFE
share future contracts traded increased, traded volumes of SFE
share index futures, SFE interest rate futures, SFE interest rate
options and SFE share index options decreased. The number of
ASX derivative contracts traded also fell in 1995. Derivative
nancial instruments can also be traded in the over the counter
market. As this market is largely unregulated it is dicult to
ascertain changes in the volume and dollar amounts of deriva-
tive trades in this market during 19921996.
18
The null hypothesis is that the level of derivative nancial
instrument disclosures does not change throughout the period
of interest. No change implies that disclosure decisions are
unaected by intangible resources supplied to the rm by con-
stituents.
19
The purposes of professional codes include the provision
of a moral foundation for the profession, a basis for self-poli-
cing of the profession and to serve as a public relations tool
(Lindblom & Ruland, 1997). These purposes help to foster
positive images of the profession amongst the public thus
legitimising the professionalism of the institute and its mem-
bers.
There are signicant audit implications, in terms
of both audit procedure and presentation and
disclosure issues, associated with entities engaging
in derivative trades.
20
The eectiveness of auditing
and the auditors ability to inuence nancial
statement disclosures is expected to vary with the
quality of the auditor. Auditor reputation is used
to dierentiate audit quality and the two recog-
nised components of audit rm reputation are
general brand name reputation and industry spe-
cialisation reputation (Craswell, Francis, & Tay-
lor, 1995; DeAngelo, 1981). Audit rms need to
consider any possible damage to their identity
and/or perceived quality of their work if they
audit rms not disclosing the recommended infor-
mation. Relative to lower reputation audit rms,
high reputation audit rms are more likely to suf-
fer reputation damage associated with auditing
non-disclosing rms. To maintain or enhance their
reputation status and avoid reputation costs, high
reputation audit rms are more likely than low
reputation audit rms to persuade (or demand)
their clients to adhere to the recommended dis-
closure regime. The likelihood of rms audited by
high reputation audit rms having greater dis-
closure levels is also attributable to the audit rms
greater expertise and to enhanced mechanisms for
knowledge dissemination within the rm and
amongst their clients. In testing the relationship
between voluntary derivative nancial disclosures
and auditor reputation, a classication of Big 6 or
non-Big 6 audit rm is employed. This captures the
general brand name component of reputation only.
The ASICs position that accounts cannot be
signed o as true and fair unless the minimum
standards contained in Part A of the ASCT state-
ment are met provides a further incentive for audit
rms to comply with the disclosure requirements
for reporting periods from June 1995. The possi-
bility of media attention associated with ASIC
questioning would have reputation consequences
for the oending audit rm. Furthermore, the
threat and repercussions of litigation, pursuant to
any losses associated with derivative trading
activity, provide additional incentive for audit
rms to adopt audit procedures embracing deri-
vative nancial instruments and to encourage
rms they audit to disclose information concern-
ing such activities.
Fig. 2 purports that reputation enhancement by
audit rms can occur if the rms are represented
on accounting standard setting bodies. Although
accounting rm partners
21
on accounting stan-
dards boards are not supposed to act as rm
representatives, it is reasonable to expect that they
are protective of their individual and rms repu-
tations. Therefore, they are expected to encourage
their audit divisions to recommend rms disclose
the information emanating from the standard set-
ting process. Furthermore, given that ED65 was
issued in June 1995, accounting standard board
representatives were in a privileged position to
ensure their audit divisions, and hence clients,
were briefed and had sucient time to incorporate
the recommended disclosures into nancial state-
ments for the year ended 30 June 1995. Even in the
absence of such an information exchange, high
reputation audit rms have incentives to be at the
forefront of auditing practices.
It is predicted that voluntary reporting dis-
closure levels are positively related to the potential
reduction in individual or audit rm reputation
that could be suered if the audit rm did not
require a high level of derivative nancial instru-
ment disclosures. It is therefore hypothesised:
rms with Big 6 auditors than for rms with non-
Big 6 auditors.
H3a. The level of voluntary derivative nancial
20
Audit guidance, released subsequent to the reporting peri-
ods examined in this study, is provided in AGS 1030 Deriva-
tives in a Corporate Environment: A Guide for Auditors.
Furthermore, in September 2000, the Auditing and Assurance
Standards Board of the Australian Accounting Research
Foundation released the Proposed International Auditing
Practice Statement ED76 Auditing Derivative Financial Instru-
ments for comment. The exposure draft recognises that deriva-
tive nancial instruments may impact on audit risk for a variety
of reasons.
21
All audit rm employees on Australian accounting stan-
dards boards have been at partner level.
rms whose audit rm has a partner who is a
member of an accounting standard setting body,
than for other rms.
Another proxy to capture reputation costs is a
rms membership of the G100. G100 aliated
rms are large rms and their reporting practices
are more closely monitored than those of smaller
rms. The visibility (both politically and com-
munally) of G100 rms creates a necessity for such
rms to respond and conform to institutional and
community demands for derivative nancial
instrument disclosures more than rms less pub-
licly scrutinised. The absence of such disclosures
would be more noticeable for G100 rms relative
to non-G100 rms and the reputation damage
suered as a consequence of non-disclosure would
be higher for G100 rms.
In lobbying the Australian accounting standard
setting body on ED65, the G100 supported the
exposure draft. The G100s goals include attain-
ment of an Australian regulatory environment
which best serves to advance the interests of Aus-
tralian business in the context of international
competition. In achieving this goal the group
endorses standards of reporting which are compa-
tible with those of leading competitor nations and
a regulatory environment that enforces Australias
reputation for compliance. Accordingly, members
of the G100 are expected to uphold their reputa-
tion and full their professional obligations by
exhibiting reporting practices adhering to best
international practice. Their visibility in the mar-
ket place also demands that they set the standard
for reporting practices in their national domicile.
Fig. 1 indicates that SFAS119 was eective in the
US for the 1995 reporting period. If SFAS119 was
perceived to be international best practice, G100
aliated rms would have an incentive to adopt
the reporting practices of their US counterparts.
22
Given social norms demand a greater eort
from rms perceived as high reputation rms, it is
therefore hypothesised:
H4. The level of rms voluntary derivative nan-
cial instrument disclosures after 1994 is greater for
G100 aliated rms than for non-G100 aliated
rms.
Control variables
Derivative nancial instrument disclosures have
the potential to aect all rms (Bessembinder,
1991; Mayers & Smith, 1982; Nance, Smith, &
Smithson, 1993; Shapiro & Titman, 1985; Smith,
Smithson, & Wilford, 1990; Smith & Stulz, 1985).
However, not all rms face the same reporting
incentives. Prior research literature argues that
rms voluntary reporting decisions are likely to
be correlated with rm size (i.e. Watts & Zimmer-
man, 1978) and industry classication (i.e. God-
frey, 1992), analyst following (i.e. Birnberg, 1995;
Skinner, 1996), capital raising (i.e. Choi, 1973;
Clarkson, Kao, & Richardson, 1994), ownership
structure (i.e. Lev, 1992), risk and commercial
sensitivity (i.e. Darrough, 1993; Verreechia, 1983),
and leverage (i.e. Chow & Wong-Boren, 1987).
While these rm attributes are not the focus of this
study, it is nonetheless important to control for
their potential impact on rms disclosure policies.
The proxies for these variables are:
SIZE Natural log of total assets
IND Firm is engaged in mining/oil activities
(1=yes; 0=no)
NEWS Reported news items (1=yes; 0=no)
23
ISSUE New share issue in the proceeding year
(1=yes; 0=no)
TOP20 Percentage of shares held by the Top 20
shareholders
LEV Total liabilities divided by total assets
The literature suggests that a rms industry
aliation and size inuences the need for, and
22
It is recognised, but not addressed in this paper, that
Australian rms listed in the US would be required to comply
with the SFAS119 requirements. This would increase the like-
lihood of disclosures being made in the nancial reports pre-
pared according to Australian accounting rules and
regulations.
23
Analytical following of Australian rms can be obtained
from the I/B/E/S summary tape. The number of analysts fol-
lowing a rm in a particular reporting period is the number of
analysts providing an estimate of the rms annual earnings.
The lack of accessibility to the I/B/E/S data is why a press
coverage construct is used to capture information asymmetry.
extent of, derivative usage. For this reason rm
size and industry aliation are included as control
variables. The industry control variable is likely to
capture complexity in commodity markets and
variability in a rms earnings and cash ows.
Managers of rms operating in markets subject to
volatile commodity prices have greater incentives
to protect themselves from unfavourable price
movements by engaging in hedging activities. Two
industries particularly subject to variability and
complexities in commodity markets are oil and
mining industries.
24
The output of these industries
is priced according to world demand. Further-
more, the mining industrys output is generally
priced in an overseas-denominated currency
(Godfrey, 1990). The rms size is included as a
control variable given that empirical studies have
found greater derivative usage by larger rms and
a positive association between rm size and dis-
closure levels.
25
Commercial sensitivity of their nancing poli-
cies is likely to be a major factor impacting some
rms willingness to disclose their nancial instru-
ment derivatives.
26
Most classications of rms
according to commercial sensitivity are highly
subjective. However, it is well recognised that
Australian oil and gas and mining companies face
greater currency and commodity pricing risks than
most other Australian rms. Accordingly, they
have incentives to not reveal to their opposition
just how they manage their risk exposures. In
contrast, because their (unhedged) risk proles are
generally known, oil and gas and mining rms
have incentives to disclose their nancial deriva-
tive hedging strategies to reduce information
asymmetry, reduce perceptions of their riskiness,
and to reduce their cost of capital. Because the
disclosure incentives are conicting and because
the mining/non-mining classication does not
relate to a hypothesis variable, no sign is predicted
for any association with nancial derivative dis-
closure levels.
Analysts and the media can be regarded as
information intermediaries.
27
This creates an
incentive to provide information voluntarily in
expectation that enhanced disclosures attract
greater analytical following and media coverage.
The benets of this include lower information
asymmetry, greater investor following, more
accurate earnings forecasts and reduced uncer-
tainty about the rms operations. The preceding
rationale suggests a rms media coverage (and
analytical following), is positively related to
incentives to provide derivative nancial instru-
ment disclosures. It is also possible that greater
analytical following and media coverage enables
pressure to be exerted on rms for more dis-
closures with respect to derivative nancial
instruments. Also in relation to information
asymmetry, if management perceives their rms
shares are undervalued prior to a planned capital
raising, an incentive is created for management to
reveal information to have a positive impact on
the value of the proposed issue. Indeed, a rm
failing to make disclosures regarding nancial
derivatives is likely to be penalised when accessing
additional equity funds. No sign is predicted for
the association between media coverage and rms
voluntary disclosures although legitimacy argu-
ments might predict a positive association. A
positive association is expected for rms acquiring
new capital.
Greater shareholder dispersion implies a greater
information gap, as more shareholders need to
incur search costs in assessing information to
evaluate rm and management performance.
Alternatively, greater dispersion can be a
24
It is acknowledged that rms operating in the banking and
nance industry are particularly exposed to maturity and
interest rate risk exposure. Consequently this industry should
be regarded as a sensitive industry. For the purpose of this
study nancial institutions are excluded from the analysis. The
rationale for their exclusion is based on disclosure requirements
for nancial institutions being the subject of a separate Aus-
tralian accounting pronouncement (ED63) and specic institu-
tional pressures on nancial institutions to be forthcoming with
derivative instrument disclosures.
25
Refer to Ball and Foster (1982) for a summary of early
empirical observations.
26
We are grateful to an anonymous referee for raising this
issue.
27
This assumption is not unreasonable given the ndings of
a shareholder survey on the usefulness of annual reports con-
ducted by Anderson and Epstein (1995). The survey results
suggest that individual shareholders rely more heavily on the
advice of their stockbroker and the nancial press than on the
annual report for making investment decisions.
consequence of a narrower information gap as
more investors are prepared to invest in a rm
with a strong analyst following or low risk prole.
As such, no sign is predicted for any association
between ownership structure and rms voluntary
derivative nancial instrument disclosures.
Many studies of accounting policy choice also
test or control for the impact of that choice on the
likelihood of violating leverage related covenants.
Debt in a rms capital structure provides share-
holders with an incentive to transfer wealth away
from debtholders to themselves. Hedging activity
alleviates the wealth transfer problem associated
with underinvestment (Bessembinder, 1991).
While disclosure does not aect leverage related
covenants directly, it can provide information that
is vital to assessing the likelihood of such cove-
nants being breached. Furthermore, the disclosure
of value relevant information reduces the price
protection mechanisms instigated by debtholders.
Hence, leverage is included as a control variable in
this study.
In summary, four hypotheses are tested in this
paper. The rst examines the change in the volun-
tary reporting of derivative nancial instruments
across the 19921996 reporting periods. The
remaining hypotheses relate the rms disclosure
levels to proxies for the reputation costs confront-
ing the rm and/or manager. Proxies for reputa-
tion costs include ASCT, auditor, and G100
aliation. Firm size, industry classication, whe-
ther the rm has been reported in the news media,
the percentage of shares held by the top 20 share-
holders, whether the rm issues capital in the fol-
lowing year, and rm leverage, are included as
control variables. Hypotheses 14 are tested using
the methodology described in the following section.
Methodology
Tests of hypotheses relating to rms voluntary
disclosures of derivative nancial instruments
require data for reporting periods when such dis-
closures were unregulated, thus precluding test
periods beyond December 1997. Rather than
focus the study on one reporting period, a multiple
reporting period spanning periods ending 30 June
1992 to 30 June 1996 is chosen. This test period
permits a richer examination of voluntary report-
ing of derivative nancial instruments than an
analysis based on one period only as an exami-
nation of changes in the level of voluntary dis-
closure is possible. This time window,
transcending ve nancial reporting periods,
incorporates a pure voluntary period (1992) as
well as periods coinciding with release dates of
signicant accounting pronouncements. The
selection of a 19921996 test period is further jus-
tied on the basis that during this period sig-
nicant losses were reported by organisations in
connection with derivative nancial instrument
dealings. This intensied the pressure exerted on
management to be socially responsible and to dis-
close information pertaining to their rms activ-
ities in derivative market trades.
The following criteria are applied to determine
the sample of rms on which the hypotheses are
tested:
1. Firms must be rated in the Top 500
28
(as
measured by market capitalisation) as at 31
March 1996,
29
with a continuous listing on
the Australian Stock Exchange spanning
19881996.
2. Firms must belong to an industry classi-
cation other than Banking and Finance.
30
3. Firms must have a nancial reporting year
within one month of 30 June. Should a rm
have a balance sheet date other than within
one month of 30 June, the extent to which
the rms voluntary disclosures are inu-
enced by regulatory and professional body
pronouncements issued at dierent times
throughout the years is likely to dier.
28
The selection of the Top 500 rms potentially introduces a
size bias into the study.
29
The Top 500, as measured by market capitalisation as at
31 March 1996, was obtained from Business Review Weekly
(1996).
30
This criterion is justied in footnote 24.
Application of the above criteria results in a
sample of 216 rms. It is necessary to delete a
further 17 rms for reasons being: six rms had a
change in reporting period; four rms had
nancial statements denominated in amounts
other than Australian currency; and nancial
statements were unavailable for all periods for a
further seven rms. These sample deletions leave
the nal sample at 199 rms. The unavailability of
nancial statements for specic years necessitates
the following exclusions: 16 rms in 1992
(n=183); 6 rms in 1993 and 1994 (n=193); 10
rms in 1995 (n=189); and 20 rms in 1996
(n=179).
31
The extent to which rms voluntarily provide
derivative nancial instrument information is cap-
tured by a disclosure index. Marston and Shrives
(1991) state the need to create an index that is
valid in the particular research environment being
investigated. (p. 198). The type and extent of
derivative nancial instrument disclosures that
could be made by nancial statement preparers
drive the disclosure index. The attributes of the
voluntary reporting disclosure index (VRDI) used
in this study are largely composed from the dis-
closures recommended in the Industry Statement
and/or ED65. The disclosures examined relate to
policy, risk and net market value information
(Appendix A details the disclosure index). These
pronouncements provide an authoritative and
objective source for construction of the index.
Scott (1994) argues that the lack of any obvious
order to the plan details, either with respect to
their relative importance or in terms of any pat-
tern, warrants the items being coded as present or
not, rather than the degree of presence.
32
The
VRDI, calculated as per Eq. (1), does not weight
disclosures according to the nature of the
disclosures.
33
VRDI
j

nj
X
i1
x
ij
=n
j
1
where: VDRI
j
=voluntary reporting disclosure
index for a set of accounts for rm j; nj=number
of items in the index for rm j; xj=1 if the ith
relevant item is disclosed and 0 if the ith relevant
item is not disclosed by rm j.
The annual nancial reports of each rm in the
sample for the period 19921996 are searched. A
score of 1 (0) is assigned to each item of informa-
tion disclosed (not disclosed). A total score is cal-
culated by summing the scores assigned to each of
the information items. The rms VRDI for each
year expressed as a percentage (VRDI
xy
) is mea-
sured by dividing the total score by the maximum
possible score. Statistical tests are performed using
both the rms VRDI for a particular year and a
dichotomous classication of whether the rm is a
disclosing rm (VRDI>0%) or non-disclosing
rm (VRDI=0%). A potential bias is introduced
in the study by categorising rms not using deri-
vative instruments and making no disclosure to
this eect as non-disclosing rms. However,
31
Firms annual reports were obtained from the Connect4
database. If the report was unavailable through this medium,
rms were contacted to request a hard copy of the report. Not
all rms responded to this request.
32
Spero (1979) discusses the merits of weighted versus
unweighted indices.
33
A survey was posted to eighty-one equity analysts from
twenty randomly selected companies in the sample. The ana-
lysts were asked to assign importance weightings to the dis-
closure items constituting the index. Sixteen useable responses
were received representing a response rate of 20%. Similar
mean values were recorded for each item comprising the index.
Therefore, the items are coded as present or not rather than the
degree of presence. Respondents were asked to rate the level of
importance of disclosure items. The verbal anchor points were:
5=very important, 4=important, 3=moderately important,
2=slightly important, and 1=unimportant. The resultant
mean scores are: 4.60 (objectives for holding derivative nan-
cial instruments), 4.313 (accounting policies pertaining to deri-
vative nancial instruments), 3.438 (collateral policies), 3.5
(monitoring derivative nancial instrument trades), 3.5 (nan-
cial controls in place with respect to derivative nancial trades),
4.60 (segregation of information by risk categories), 3.813
(statement of principal, nominal or face value of instruments),
3.875 (maturity prole), 4.250 (eective or weighted average
rate), 3.438 (credit exposure estimation), 3.313 (credit parties),
3.625 (net market value disclosures), and 3.563 (determination
of net market values).
rms in this category exerted a disclosure choice.
They could specify their status as a non-user of
derivatives (an option pursued by seven rms
which were subsequently excluded from statistical
testing) or choose to remain silent and hence be
categorised as a non-disclosing rm.
34
Results
The results of recording and analysing derivative
nancial instrument disclosures in sample rms
19921996 annual reports appear in Tables 16.
Both univariate and multivariate tests are per-
formed to provide a thorough analysis of both
individual and combined associations of reputation
cost proxies with voluntary disclosures of deriva-
tive nancial instruments.
35
There has been a con-
siderable increase in the number of rms
voluntarily disclosing information pertaining to
derivative nancial instruments (see Table 1, Panel
Ai). In 1992 only 19 rms (10% of sample rms)
are classied as disclosing rms. The number of
disclosing rms increases as follows: 29 rms (15%
of sample rms) in 1993; 41 rms (21% of sample
rms) in 1994; 96 rms in 1995 (51% of sample
rms); and 105 rms (59%of sample rms) in 1996.
The mean VRDIs for 19921996 are 2.45, 3.40,
5.26, 19.88 and 23.42% respectively (see Table 1,
Panel Aii).
To test whether the change in the VRDI
(VRDI
t
VRDI
t1
) between consecutive reporting
periods is statistically dierent from zero, t-tests
are used. The ndings (see Table 1, Panel Aii)
suggest that the change is statistically dierent for
the 19931994, 19941995, and 19951996 report-
ing periods. These results support hypothesis 1.
The change is particularly evident in 1995, imply-
ing the ASCT Industry Statement and/or the
release of ED65 were inuential in achieving
enhanced reporting of derivative nancial instru-
ments. Given the ASCT Statement was released
three months prior to June 1995 (ED65 was issued
late June 1995) and it was endorsed by the ASIC,
it is more likely to be the impetus driving deriva-
tive nancial instrument disclosures.
Univariate tests
Descriptive statistics for all variables used in
testing are summarised in Table 2. In addition,
chi-square tests and Wald tests examine the asso-
ciations between rms VRDI and the variables of
interest, namely ASCT, auditor, and G100, in
addition to the control variables (Table 3).
Table 2 indicates that the percentage of disclos-
ing ASCT aliated rms is greater than the per-
centage of ASCT aliated rms for all periods
spanning 19921996. In the 1995 reporting period,
the most important time period given the ASCT
Industry Statement release, the number of ASCT
aliated rms electing to disclose increased from
18 rms (39% of ASCT aliated rms) in 1994 to
38 rms (83% of ASCT aliated rms) in 1995.
For the same period the number (proportion) of
non-ASCT aliated rms electing to disclose
increased from 23 (16%) in 1994 to 58 (41%) in
1995. The presence of professional scrutiny and
the ASCTs request that their members exhibit
professional responsibility appears to be asso-
ciated with increasing discretionary derivative
nancial instrument disclosures. This is consistent
with legitimacy and institutional theory arguments
and supports hypothesis 2. There is a statistically
signicant relationship between the VRDI and
ASCT aliation for all reporting periods.
Hypothesis 3 predicts rms audited by Big 6
auditors will exhibit greater voluntary derivative
34
The assumption that the majority of rms would be using
derivative instruments can be tenuously supported by responses
to the Australian Corporate Treasury Survey (1994). In reply-
ing to a question as to the importance of derivatives to their
organisation, 61, 35 and 4% of respondents indicated a level of
importance as imperative, very important or important respec-
tively. Further justication is provided given the majority of
rms in the sample had foreign currency exposures and the
failure of an industry classication in the sample to record a
zero VRDI. Given that AASB1033 became operative for
nancial reporting periods after 31 December 1997, it is possi-
ble to distinguish derivative users and non-users for the 1998
reporting period. Retrospectively applying this categorisation
to early years assumes that rms 1998 derivative usage status is
representative of prior periods. Nevertheless, tests for robust-
ness have been performed using a restricted sample of rms
retrospectively classied as derivative users based on 1998 dis-
closures.
35
Multivariate tests are more powerful in the presence of
correlations between the independent variables.
disclosures relative to non-Big 6 audited rms.
The results support this prediction. The percen-
tage of disclosing rms audited by Big 6 rms
exceeds the percentage of disclosing rms not
audited by Big 6 rms throughout the 19921996
period (see Table 2). In 1992 all disclosing rms
are Big 6 audited. By 1995 (1996), 58% (66%) of
Big 6 audited rms disclosed derivative nancial
instrument information compared with 29%
(38%) of non-Big 6 audited rms disclosing in the
corresponding periods. The results indicate a sta-
tistically signicant association between VRDI
and Big 6 auditor aliation for the 1996 reporting
period only (see Table 3).
Hypothesis 3a predicts that rms whose audi-
tors have representation on accounting standard
setting bodies will have enhanced derivative
nancial instrument disclosures relative to rms
audited by audit rms with no representation. The
results support this hypothesis for 1995, the year
when transparency is expected to increase most.
The mean VRDI for AUDREP (non-AUDREP)
rms in 1995 and 1996 is 23.98% (14.29%) and
29.13% (15.86%) respectively. The possibility of
reputation being tainted should clients not abide
by the guidelines/rules individuals within the audit
rms have been instrumental in formulating
appears to provide a strong incentive for disclosing
Table 1
Derivative nancial instrument disclosures by rms for reporting periods 1992 1996
1992 1993 1994 1995 1996
No. % No. % No. % No. % No. %
PANEL A
(i) Firm numbers
Disclosing rms 19 10 29 15 41 21 96 51 105 59
Non-disclosing rms 164 90 164 85 152 79 93 49 74 41
Total rms 183 100 193 100 193 100 189 100 179 100
(ii) Dierences in the VRDI between years
Mean VRDI (%) 2.45 3.40 5.26 19.88 23.42
Standard deviation (%) 8.89 9.59 12.19 24.07 25.33
VRDI
t
- VRDI
t-1
=0
Test statistic 0.464 2.894 10.052 5.359
Probability 0.322 0.002
**
0.000** 0.000**
PANEL B
(i) Firm numbers
Disclosing rms 16 9 18 10 29 17 78 47 91 55
Non-disclosing rms 157 91 155 90 144 83 89 53 74 45
Total rms 173 100 173 100 173 100 167 100 165 100
(ii) Dierences in the VRDI between years
Mean VRDI (%) 1.93 2.14 3.89 18.52 22.38
Standard deviation (%) 7.70 7.91 10.80 23.95 25.74
VRDI
t
VRDI
t1
=0
Test statistic 0.796 2.948 9.142 5.074
Probability 0.213 0.002** 0.000** 0.000**
Panel A reports the results for a variable sample of companies given that some annual reports are unavailable. Panel B reports the
results for a constant sample based on the restriction that the annual report must be available for all years 19921996. The sample size
still slightly varies as rms identifying themselves as non or immaterial users in a particular period are excluded from the analysis.
Firms are classied as disclosing rms if their VDRI>0. Non-disclosing rms are rms with a VRDI=0. t-Test statistics are reported
for the dierence in the VRDI between consecutive reporting periods. One tailed probability is reported immediately below the sta-
tistic. The reported results are robust for the sample being restricted to rms that are retrospectively classied as users pursuant to the
mandatory disclosures in their 1998 annual report.
**
Signicant at the 1% level.
Table 2
Descriptive statistics: independent variables
Variable 1992 1993 1994 1995 1996
All
rms
(n=183)
Disclosing
rms
(n=19)
All
rms
(n=193)
Disclosing
rms
(n=29)
All
rms
(n=193)
Disclosing
rms
(n=41)
All
rms
(n=189)
Disclosing
rms
(n=96)
All
rms
(n=179)
Disclosing
rms
(n=105)
ASCT (H2)
ASCT=1 40 10 44 14 46 18 46 38 47 40
ASCT=0 143 9 149 15 147 23 143 58 132 65
BIG6 (H3)
BIG6=1 132 19 138 26 142 35 141 82 134 88
BIG6=0 51 0 55 3 51 6 48 14 45 17
AUDREP (H3a)
AUDREP=1 102 14 107 21 87 25 109 67 102 70
AUDREP=0 81 5 86 8 106 16 80 29 77 35
G100 (H4)
G100=1 38 10 34 13 34 16 36 32 37 35
G100=0 145 9 159 16 159 25 153 64 142 70
IND (Control)
IND=1 53 11 58 18 59 27 59 40 53 36
IND=0 130 8 135 11 134 14 130 56 126 69
SIZE (Control)
Continuous variable
Mean 11.73 13.88 11.80 13.19 12.05 13.03 12.14 12.93 12.27 12.91
Std deviation 2.03 1.63 1.95 1.77 1.76 1.90 1.73 1.61 1.65 1.64
TOP20 (Control)
Continuous variable
Mean 66.50 68.60 67.79 72.25 69.09 71.86 69.33 68.36 68.24 68.82
Std deviation 18.53 15.87 17.26 13.92 16.51 15.62 17.72 17.85 17.56 17.32
NEWS (Control)
NEWS=1 10 3 74 23 93 34 96 31 124 86
NEWS=0 173 16 119 6 100 7 93 65 55 19
ISSUE (Control)
ISSUE=1 44 4 56 8 155 12 89 8 30 15
ISSUE=0 139 15 137 21 36 28 89 81 129 80
LEV (Control)
Continuous variable
Mean 42.39 45.50 44.35 47.44 39.58 39.00 41.59 44.22 39.01 44.98
Std deviation 51.62 9.95 75.89 14.98 36.34 15.42 36.90 35.94 21.50 17.91
Sample size changes due to data availability. Within any particular year the reported number of rms for the ISSUE variable may not match the sample
size given that this variable is based on data from the proceeding reporting period. Variable descriptions: ASCT=Firm has an employee who is a
member of the ASCT (1=yes; 0=no); BIG6=Firms audit rm is a Big 6 audit rm (1=yes; 0=no); AUDREP=Firms audit rm is represented on
accounting standard setting boards (1=yes; 0=no); G100=Firm belongs to the G100 (1=yes; 0=no); IND=Firm is engaged in mining/oil activities
(1=yes; 0=no); SIZE=The natural log of total assets; TOP20=The % of shares held by the Top 20 shareholders; LEV=Total liabilities divided by
total assets; NEWS=Reported news items (1=yes; 0=no); ISSUE=Firm made a new share issue in the proceeding year (1=yes; 0=no); LEV=Firms
total liabilities divided by total assets. For dichotomous variables the number of rms satisfying the yes criterion is reported.
Table 3
Univariate tests for dierences between rms voluntary reporting disclosure indices (VRDI)
Hypothesis Variable Univariate tests of the VRDI(%) for reporting periods
1992 1993 1994 1995 1996
H2 ASCT 3.70 (9.23) 5.84 (10.66) 9.47 (15.87) 38.82 (25.58) 42.40 (27.03)
Non-ASCT 2.11 (8.79) 2.68 (9.18) 3.94 (10.51) 13.79 (20.14) 16.67 (20.97)
Chi-square 26.66** (0.000) 20.16** (0.002) 24.95** (0.001) 50.35** (0.000) 55.04** (0.000)
H3 BIG6 3.40 (10.32) 4.46 (10.97) 6.09 (13.20) 23.35 (25.08) 26.76 (26.32)
Non-BIG6 0.00 (0.00) 0.76 (3.48) 2.94 (8.47) 9.67 (17.34) 13.49 (19.16)
Chi-square 8.19 (.158) 7.06 (0.158) 7.64 (0.235) 16.82 (0.079) 21.98* (0.028)
H3a AUDREP 2.64 (8.90) 4.19 (10.54) 5.99 (12.04) 23.98 (24.75) 29.13 (26.68)
Non-AUDREP 2.22 (8.93) 2.42 (8.23) 4.35 (12.39) 14.29 (22.04) 15.86 (21.32)
Chi-square 14.99* (0.018) 6.89 (0.166) 11.77 (0.081) 22.48* (0.016) 18.43 (0.071)
H4 G100 4.77 (8.06) 5.82 (9.36) 9.87 (15.43) 43.65 (23.83) 47.49 (24.18)
Non-G100 1.98 (9.00) 2.89 (9.59) 4.27 (11.20) 14.29 (20.50) 17.15 (21.66)
Chi-square 48.55** (0.000) 35.77** (0.000) 36.75** (0.000) 61.74** (0.000) 48.11** (0.000)
Control variables
SIZE Disclosing rm size 13.88 (1.63) 13.191 (1.768) 13.033 (1.89) 12.925 (1.606) 12.911 (1.64)
Non-disclosing rm size 11.49 (1.93) 11.56 (1.88) 11.77 (1.62) 11.32 (1.460) 11.33 (1.14)
Coecient 0.701 0.464 0.430 0.721 0.853
Wald Statistic 18.649** (0.000) 15.194**(0.000) 15.082**(0.000) 31.293**(0.000) 29.744**(0.000)
IND Mining/oil 6.60 (14.84) 8.89 (15.11) 14.16 (18.21) 29.66 (26.85) 33.96 (28.26)
Non-mining/oil 0.762 (3.57) 1.04 (4.02) 1.33 (4.39) 15.44 (21.36) 18.99 (22.68)
Chi-square 18.52** (0.005) 32.83** (0.000) 52.70** (0.000) 25.46** (0.006) 29.06** (0.003)
TOP20 Disclosing rm Top20 68.60 (15.87) 72.25 (13.92) 71.86 (15.62) 68.36 (17.85) 68.82 (17.32)
Non-Disclosing rm Top20 66.08 (19.05) 66.89 (17.76) 68.22 (16.74) 70.45 (17.61) 67.36 (18.01)
Coecient 0.008 0.020 0.014 0.007 0.005
Wald statistic 0.295 (.148) 2.232 (0.067) 1.470 (0.112) 0.613 (0.202) 0.293 (0.294)
NEWS Disclosing rm news 5.00 (9.64) 7.24 (13.46) 9.45 (15.59) 31.18 (26.18) 29.44 (26.44)
Non-disclosing rm news 2.31 (8.85) 1.02 (4.77) 1.36 (5.53) 8.22 (14.32) 9.87 (15.88)
Chi-square 27.01** (0.000) 28.18** (0.000) 28.68** (0.000) 54.01** (0.000) 27.34** (0.005)
ISSUE New issue 3.25 (11.00) 3.98 (10.46) 8.14 (15.38) 9.18 (14.84) 20.71 (24.05)
No-new issue 2.20 (8.06) 3.17 (9.25) 4.52 (11.28) 20.79 (24.50) 25.36 (26.37)
Chi-square 11.01 (0.069) 7.16 (0.153) 14.78* (0.031) 9.00 (0.351) 13.51 (0.204)
LEV Disclosing rm LEV 45.50 (9.95) 47.44 (14.98) 39.00 (15.42) 44.22 (18.62) 44.98 (17.91)
Non-disclosing rm LEV 42.02 (54.53) 43.79 (82.23) 39.75 (40.30) 38.87 (49.09) 30.31 (23.37)
Coecient 1.072 0.055 0.060 0.447 3.557
Wald statistic 1.121 (.145) 0.056 (0.406) 0.014 (0.453) 0.901 (0.172) 18.253** (0.000)
ASCT=Firm has an employee who is a member of the ASCT (1=yes; 0=no); BIG6=Firms audit rm is a Big 6 audit rm (1=yes; 0=no);
AUDREP=Firms audit rm is represented on accounting standard setting boards (1=yes; 0=no); G100=Firm is aliated with the Group of 100
(1=yes; 0=no); IND (control)=Firm is engaged in mining/oil activities (1=yes; 0=no); SIZE (control)=Natural log of rms total assets; TOP20
(control)=% shares held by Top20 shareholders; NEWS (control)=Firm with reported news items (1=yes; 0=no); ISSUE (control)=Firm made a
share issue in the proceeding year (1=yes; 0=no); LEV (control)=Firms total liabilities divided by total assets. The mean is reported for each cell with
the standard deviation in parentheses immediately beside it. The chi-square test statistics are reported for the dierence between the VRDI for all
dichotomous variables. For the continuous variables the reported statistics are the result of running a logit regression with disclosure/non disclosure the
dependent variable. One-tailed probability is reported in parentheses immediately beside these test statistics.
** Signicant at the 1% level of signicance.
* Signicant at the 5% level of signicance.
derivative instrument activity. The result for 1995
could also suggest that having timely access to
knowledge about the ASCT Industry Statement
and release of ED65 provided audit rms with
accounting standard board representation more
time to inform their client base and implement the
recommended guidelines. In 1995 Coopers &
Lybrand, KPMG and Price Waterhouse exhibit
the biggest VRDI increases and for both 1995 and
1996 record the highest mean VRDIs. Interest-
ingly, for reporting periods 19921994, KPMG
and Price Waterhouse are not ranked in the top 3
highest VRDI and Coopers & Lybrand only
moves into the top 3 in 1994. Given that these
three rms had partners on the AASB it is expec-
ted they would embrace, and encourage clients to
conform to accounting pronouncements to further
entrench their credibility in the market place once
regulations were known to be forthcoming. This
appears to have occurred.
Hypothesis 4 predicts that the derivative
instrument disclosure practices of G100 rms
will be greater than for non-G100 rms. In
1994, 47% of G100 rms are disclosing. By
1995, 32 of the 36 G100 rms are disclosing
and all but two are disclosing in 1996 (see
Table 2). The mean VRDI for G100 rms is
signicantly higher than for non-G100 rms
during all reporting periods (see Table 3). These
results support H4 and are consistent with
G100 rms being at the forefront of disclosure
practices.
Of the control variables, rm size and industry
classication are signicantly associated with nan-
cial derivative disclosures each year (see Table 3).
Larger rms are more likely to have high voluntary
disclosures, as are mining/oil rms. There is also a
signicant positive association between whether
rms are reported in the press and their levels of
nancial derivative disclosures each year. Close-
ness of ownership, as proxied by the ownership
percentage of the top 20 shareholders, is not sig-
nicantly associated with rm disclosures in any
reporting period. Only in 1996 is rm leverage
signicantly associated with rm disclosures, and
only in 1994 is there a signicant association
between whether rms issued new capital the fol-
lowing year and their voluntary reporting levels.
The analysis described thus far suggests the fac-
tors that determine a rms propensity to disclose
derivative nancial instrument information. It is
also necessary to examine the impact of the hypo-
thesised factors on the change in derivative nan-
cial reporting over the 19921996 reporting
periods. Table 4 reports the results of univariate
tests examining the relationship between ASCT,
auditor, and G100 aliation and the change in the
VRDI between consecutive years. The most
signicant change in the disclosure levels occurred
in 1995 and a statistically signicant relationship is
found between the change in VRDI during the
1994 and 1995 reporting years for all of the hypo-
thesised variables except Big 6. While not con-
clusive, this analysis lends support to reputation
costs, represented by ASCT, AUDREP, and G100
aliation being a catalyst for greater derivative
nancial instrument disclosures in a quasi-con-
tractual environment. The control variables, other
than the percentage of shares owned by the top 20
shareholders and leverage, are all signicantly
associated with changes in voluntary reporting
levels in at least one period out of 1994 through
1996.
Multivariate results
To allow for simultaneous testing of the
explanations hypothesised, multivariate analysis
is performed using data from each of the 1994,
1995 and 1996 years. Given that 1995 is the
year in which derivative nancial instrument
disclosures increase signicantly, the multivariate
analysis performed for each year prior to, coin-
ciding with, and after this reporting period,
allows analysis of the predicted associations for
these years. The multivariate models use two
constructs for the dependent variable, namely
the disclosure index (VRDI) and the change in
the VRDI between consecutive reporting periods
(CHANGE).
36
Estimates of the following mod-
els are obtained:
36
A third construct, classifying rms as disclosing/non-dis-
closing is also used. The results are essentially the same and
have not been reported, as the regressions using a continuous
variable are more powerful than the logit results.
Table 4
Univariate tests for the change in rms voluntary reporting disclosure indices (VRDI)
Hypothesis Variable Change in VRDI between reporting periods
1992/1993 1993/1994 1994/1995 1995/1996
H2 ASCT 0.925 (5.23) 3.016 (11.65) 30.12 (21.56) 5.015 (12.27)
Non-ASCT 0.105 (2.83) 1.215 (6.22) 9.694(16.66) 3.654 (8.98)
Chi-square 19.54** (0.003) 13.44 (0.072) 50.56** (0.000) 16.09 (0.154)
H3 BIG6 0.062 (3.98) 1.469 (8.03) 17.47 (21.07) 4.24 (9.91)
Non-BIG6 0.264 (1.92) 2.101 (7.33) 6.687 (13.68) 3.322 (10.14)
Chi-square 6.66 (0.233) 10.74 (0.147) 13.86 (0.230) 13.18 (0.256)
H3a AUDREP 0.510 (3.14) 1.361 (5.78) 18.45 (21.31) 5.092 (10.94)
Non-AUDREP 0.349 (3.86) 1.97 (9.78) 9.616 (16.83) 2.571 (8.27)
Chi-square 10.35 (0.085) 9.54 (0.195) 22.04* (0.039) 19.46 (0.074)
H4 G100 1.091 (7.71) 3.992 (13.18) 34.33 (20.76) 4.054 (10.18)
Non-G100 0.093 (1.40) 1.130 (6.061) 10.05 (16.74) 4.008 (9.92)
Chi-square 29.99** (0.000) 10.55 (0.154) 56.31** (0.000) 7.68 (0.453)
Control variables
SIZE Size coecient 0.096 0.747 5.80 0.324
t-statistic (prob) 0.754 (0.226) 2.286* (0.012) 7.765** (0.000) 0.705 (0.241)
IND Mining/oil 0.442 (4.41) 4.803 (13.60) 16.01 (20.48) 6.044 (12.60)
Non-mining/oil 0.007 (3.08) 2.666 (1.617) 14.17 (19.82) 3.168 (8.51)
Chi-square 8.93 (0.129) 30.99** (0.000) 33.91** (0.001) 16.87 (0.190)
TOP20 Top20 coecient 0.005 0.007 0.068 0.065
t-statistic (prob) 0.330 (0.371) 0.176 (0.430) 0.790 (0.216) 1.492 (0.069)
NEWS News 0.414 (5.61) 3.34 (10.40) 22.92 (22.27) 4.63 (11.13)
No news 0.06 (6.59) 0.071 (3.73) 6.03 (12.34) 2.65 (6.40)
Chi-square 15.47* (0.015) 13.62 (0.069) 46.98** (0.000) 10.11 (0.378)
ISSUE New issue 0.151 (3.61) 4.96 (14.87) 3.74 (7.01) 5.17 (13.35)
No new issue 0.108 (3.47) 0.928 (4.74) 16.16 (20.96) 3.94 (9.16)
Chi-square 8.61 (0.141) 23.06** (0.003) 15.39 (0.176) 12.69 (0.276)
LEV Lev coecient 0.032 0.333 6.02 3.92
t-statistic (prob) 0.095 (0.462) 0.209 (0.417) 1.517 (0.065) 1.099 (0.136)
Change in VRDI=VRDI
t
VRDI
t1
. ASCT=Firm has an employee who is a member of the ASCT (1=yes; 0=no); BIG6=Firms
audit rm is a Big 6 audit rm (1=yes; 0=no); AUDREP=Firms audit rm is represented on accounting standard setting boards
(1=yes; 0=no); G100=Firm is aliated with the Group of 100 (1=yes; 0=no); IND (control)=Firm is engaged in mining/oil
activities (1=yes; 0=no); SIZE (control)=Natural log of total assets; TOP20 (control)=% shares held by Top20 shareholders;
NEWS (control)=Firm with reported news item (1=yes; 0=no); ISSUE (control)=Firm made a share issue in the proceeding year
(1=yes; 0=no); LEV (control)=Firms total liabilities divided by total assets. The mean is reported for each cell with the standard
deviation in parentheses immediately beside it. The chi-square test statistics are reported for the dierence between the VRDI and the
dichotomous variables. The reported statistics for the continuous variables are the result of running a regression with the change in the
VRDI as the dependent variable. One-tailed probability is reported in parentheses immediately beside these test statistics.
** Signicant at the 1% level of signicance.
* Signicant at the 5% level of signicance.
VRDI
/
1
ASCT
2
BIG6

3
AUDREP
4
G100

5
SIZE
6
IND

7
TOP20
8
NEWS

9
ISSUE
10
LEV "
i
Model 1
CHANGE
/
1
ASCT
2
BIG6

3
AUDREP

4
G100
5
SIZE

6
IND
7
TOP20

8
NEWS
9
ISSUE

10
LEV "
i
Model 2
where: /=constant; VRDI=voluntary disclosure
index; CHANGE=VRDI
t
VRDI
t1
; ASCT=-
rm has an employee who is a member of the
ASCT (1=yes; 0=no); BIG6=rms nancial
statements are audited by a Big 6 audit rm
(1=yes; 0=no); AUDREP=rms nancial
statements are audited by an audit rm with
representation on accounting standard setting
boards (1=yes; 0=no); G100=rm is a member
of the G100 (1=yes; 0=no); IND=rm is
engaged in mining/oil activities (1=yes; 0=no);
SIZE=natural log of total assets; TOP20=% of
shares held by the Top 20 shareholders;
NEWS=reported news items (1=yes; 0=no);
ISSUE=rm made a new share issue in the pro-
ceeding year (1=yes; 0=no); LEV=rms total
liabilities divided by total assets; "
i
=error term.
Correlations (see Table 5) suggest that multi-
collinearity is present. This would be expected, as
many larger rms (as captured by SIZE) are likely
to be Big 6 audited and have G100 and ASCT
aliations. The consequence of multicollinearity
can be insignicant t-values with a high R
2
,
37
however in this data set the multicollinearity has
not decreased t-values to the point of insignif-
icance. Furthermore, multicollinearity diagnostics
indicate inconsequential collinearity, thereby sup-
porting the validity of the regressions.
38
Models 1 and 2 are both tted using an ordinary
least squares regression (OLS). The results for
alternative specications of the regressions are
reported in Table 6.
39
The analysis presented in
Table 6 shows that the 1995 version of all models
has the greatest explanatory power. This is expec-
ted given that the ASCT industry statement and
accounting exposure draft were released in this
reporting period.
Results of Model 1 support the predictions of a
positive association between ASCT aliation
(hypothesis 2) and G100 aliation (hypothesis 4)
and derivative nancial instrument disclosures.
No support is found for an association between
auditor aliation and either the level or change in
rms derivative nancial instrument disclosures
(hypothesis 3 and 3a) in any of the regressions.
In the 1994 reporting period, when there were
no formal professional or mandatory require-
ments for disclosures, no explanatory variables are
statistically signicant other than the controls for
rm size and industry classication (see Table 6,
Panel A).
37
One of the rst indications of the existence of multi-
collinearity is the combination of a high R
2
value with low t
values for the regression coecients (Studenmund & Cassidy,
1987).
38
Examining the condition index assesses multicollinearity.
No condition index exceeds 30, the most commonly used
threshold value. Furthermore, none of the variance ination
factors (VIF) exceed 10. Thus, no support for the existence of
multicollinearity is found. Lowering the threshold value to 15,
only one condition index exceeds 15.
39
The alternative specications are: control variables IND,
SIZE, TOP20, NEWS, ISSUE, and LEV only (specication I),
ASCT, BIG6, G100, IND, SIZE, TOP20, NEWS, ISSUE, and
LEV (specication II) and ASCT, AUDREP, G100, IND,
SIZE, TOP20, NEWS, ISSUE, and LEV (specication III).
The Breush-Pagan test rejects the null hypothesis of homo-
skedasticity so reported OLS estimations are based on Whites
(1980) heteroskedasticity adjusted standard errors.
However, for the 1995 reporting period ASCT
and G100 are statistically signicant, as predicted
(see Table 6, Panel B). Of particular interest is the
fact that ASCT and G100 aliations are sig-
nicantly positively associated with the level of
rms nancial derivative disclosures in both 1995
and 1996, but only signicantly (positively) asso-
ciated with changes in these disclosures in 1995,
consistent with legitimacy theory predictions. The
regression including the control variables only
(SIZE, IND, TOP20, NEWS and ISSUE) explains
45% of the variation in rms disclosure indices in
Table 5
Correlations among independent variable measures
ASCT BIG6 AUDREP G100 SIZE IND TOP20 LEV NEWS
1994
BIG6 0.142*
AUDREP 0.140 0.662**
G100 0.571** 0.215** 0.228**
SIZE 0.599** 0.319** 0.268** 0.638**
IND 0.107 0.010 0.032 0.100 0.241**
TOP20 0.112 0.089 0.005 0.131 0.086 0.240**
LEV 0.184* 0.029 0.021 0.115 0.106 0.073 0.147
NEWS 0.337** 0.225** 0.207** 0.316** 0.459** 0.215** 0.153* 0.069
ISSUE 0.016 0.042 0.043 0.021 0.115 0.300** 0.032 0.016 0.071
1995
BIG6 0.133
AUDREP 0.112 0.681**
G100 0.573** 0.190** 0.225**
SIZE 0.573** 0.382** 0.258** 0.636**
IND 0.169* 0.079 0.070 0.123 0.227**
TOP20 0.132 0.078 0.011 0.147 0.118 0.187*
LEV 0.174* 0.018 0.013 0.105 0.118 0.067 0.194**
NEWS 0.312** 0.252** 0.206** 0.370** 0.476** 0.115 0.052 0.085
ISSUE 0.166* 0.182* 0.045 0.141 0.263** 0.219** 0.033 0.136 0.017
1996
BIG6 0.170*
AUDREP 0.159* 0.667**
G100 0.542** 0.232** 0.248**
SIZE 0.586** 0.316** 0.243** 0.662**
IND 0.137 0.047 0.020 0.120 0.244**
TOP20 0.132 0.052 0.013 0.116 0.087 0.161*
LEV 0.321** 0.125 0.091 0.278** 0.338** 0.220** 0.215**
NEWS 0.232** 0.200** 0.082 0.250** 0.354** 0.193** 0.107 0.215**
ISSUE 0.095 0.013 0.053 0.146 0.183* 0.104 0.043 0.013 0.119
ASCT=Firm has an employee who is a member of the ASCT (1=yes; 0=no); BIG6=Firms audit rm is a Big 6 audit rm (1=yes;
0=no); AUDREP=Firms audit rm is represented on accounting standard setting boards (1=yes; 0=no); G100=Firm is aliated
with the Group of 100 (1=yes; 0=no); IND (control)=Firm is engaged in mining/oil activities (1=yes; 0=no); SIZE (con-
trol)=Natural log of total assets; TOP20 (control)=% shares held by Top20 shareholders; LEV (control)=Firms total liabilities
divided by total assets; NEWS (control)=Firm with reported news item (1=yes; 0=no); ISSUE (control)=Firm made a share issue
in the proceeding year (1=yes; 0=no). Correlations reported are the Pearson correlations. Consistent results are obtained when
Kendalls tau_b are computed except in the following instance: 1994signicant relationship between ASCT/TOP20 and G100/
TOP20; insignicant relationship between TOP20/NEWS; 1995signicant relationship between ASCT/TOP20 and G100/TOP20;
1996signicant relationship between ASCT/TOP20; insignicant relationship between IND/TOP20.
* Signicant at the 5% level, two-tailed test.
** Signicant at the 1% level, two-tailed test.
Table 6
Summary of multiple regression models for 1994, 1995 and 1996 for the association between derivative instrument disclosures and rm attributes
Model 1 (Dependent Variable=VRDI) Model 2 (Dependent Variable=CHANGE)
I II III I II III
t
a
t t t t t
Panel A: 1994 data
Constant 32.3 3.155** 32.2 2.686** 31.9 2.673** 12.9 1.283 14.5 1.281 13.4 1.191
H2 ASCT (+) 1.703 0.643 1.667 0.619 0.443 0.397 0.451 0.381
H3 BIG6 (+) 0.587 0.380 2.581 1.878*
H3a AUDREP (+) 0.817 0.418 1.808 1.068
H4 G100 (+) 1.253 0.462 1.141 0.414 0.272 0.203 0.439 0.317
Control SIZE 2.577 3.036** 2.580 2.539** 2.567 2.480** 1.151 1.249 1.399 1.318 1.259 1.169
Control IND 15.62 5.407** 15.734 5.392** 15.68 5.401** 5.712 2.329* 5.854 2.367** 5.651 2.355*
Control TOP20 0.022 0.508 0.025 0.573 0.025 0.562 0.025 0.754 0.018 0.519 0.024 0.699
Control NEWS 1.095 0.610 1.014 0.545 1.080 0.586 0.070 0.522 0.907 0.666 0.955 0.772
Control ISSUE 0.944 0.343 1.077 0.392 1.042 0.378 2.864 1.114 2.666 1.048 2.867 1.120
Control LEV 0.927 0.675 1.193 0.854 1.204 0.879 0.316 0.379 0.474 0.535 0.392 0.460
F Statistic 14.447 F Statistic 9.555 F Statistic 9.578 F Statistic 5.183 F Statistic 3.775 F Statistic 3.645
Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000**
Adj. R
2
0.331 Adj. R
2
0.320 Adj. R
2
0.321 Adj. R
2
0.134 Adj. R
2
0.134 Adj. R
2
0.128
Panel B: 1995 data
Constant 79.1 4.801** 45.4 2.687** 45.9 2.783** 47.9 2.782** 18.1 1.018 18.7 1.076
H2 ASCT (+) 10.6 2.179* 10.7 2.236* 8.159 1.953* 8.293 2.001*
H3 BIG6 (+) 3.610 1.312 3.842 1.542
H3a AUDREP (+) 3.970 1.371 3.862 1.311
H4 G100 (+) 9.948 1.888* 9.288 1.729* 9.571 1.984* 8.918 1.803*
Control SIZE 7.403 6.097** 4.052 3.001** 4.125 3.136** 4.824 3.606** 1.848 1.262 1.954 1.350
Control IND 21.2 6.266** 21.4 6.415** 21.4 6.442** 7.032 1.817** 7.108 1.862* 7.160 1.896*
Control TOP20 0.035 0.444 0.011 0.145 0.008 0.119 0.054 0.697 0.036 0.489 0.035 0.468
Control NEWS 8.322 2.633** 6.481 2.044* 6.450 2.021* 9.133 2.935** 7.444 2.367** 7.466 2.351**
Control ISSUE 7.049 2.249* 6.964 2.274** 7.599 2.426** 7.590 2.622** 7.463 2.889** 8.117 3.041**
Control LEV 2.941 0.641 1.025 0.260 0.968 0.243 3.915 1.042 2.418 0.743 2.323 0.706
F Statistic 23.269 F Statistic 18.689 F Statistic 18.876 F Statistic 12.143 F Statistic 10.073 F Statistic 10.173
Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.000**
Adj. R
2
0.446 Adj. R
2
0.490 Adj. R
2
0.492 Adj. R
2
0.290 Adj. R
2
0.332 Adj. R
2
0.335
(continued on next page)
1
1
8
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Table 6 (continued)
Model 1 (Dependent Variable=VRDI) Model 2 (Dependent Variable=CHANGE)
I II III I II III
t
a
t t t t t
Panel C: 1996 Data
Constant 97.9 5.799** 65.0 3.416** 65.3 3.546** 7.104 0.866 10.4 1.159 9.51 1.045
H2 ASCT (+) 8.745 1.752* 8.764 1.789* 0.856 0.296 0.909 0.308
H3 BIG6 (+) 3.427 0.983 0.625 0.309
H3a AUDREP (+) 4.944 1.575 2.058 1.298
H4 G100 (+) 10.579 2.306* 9.874 2.117* 2.380 0.993 2.786 1.163
Control SIZE 8.664 6.893** 5.420 3.609** 5.393 3.713** 0.484 0.774 0.807 1.193 0.621 0.901
Control IND 23.5 6.261** 23.189 6.388** 22.6 6.397** 3.149 1.441 3.174 1.450 3.063 1.414
Control TOP20 0.021 0.245 0.019 0.233 0.024 0.301 0.037 0.949 0.037 0.854 0.032 0.774
Control NEWS 2.624 0.737 1.671 0.489 2.167 0.635 0.170 0.116 0.096 0.063 0.042 0.027
Control ISSUE 1.804 0.468 1.279 0.335 1.631 0.432 1.301 0.482 1.227 0.468 0.973 0.381
Control LEV 21.980 2.611** 16.011 1.876* 15.958 1.858* 4.615 1.074 4.717 0.921 5.052 0.998
F Statistic 22.242 F Statistic 17.021 F Statistic 17.382 F Statistic 1.041 F Statistic .789 F Statistic .942
Signicance 0.000** Signicance 0.000** Signicance 0.000** Signicance 0.402 Signicance 0.631 Signicance 0.492
Adj. R
2
0.451 Adj. R
2
0.482 Adj. R
2
0.488 Adj. R
2
0.001 Adj. R
2
0.013 Adj. R
2
0.003
The regression equations reported are:
Model 1: (OLS)
VRDI Constant
1
ASCT
2
BIG6
3
AUDREP
4
G100
5
IND
6
SIZE
7
TOP20
8
NEWS
9
ISSUE
10
LEV "
i
Model 2: (OLS)
CHANGE Constant
1
ASCT
2
BIG6
3
AUDREP
4
G100
5
IND
6
SIZE
7
TOP20
8
NEWS
9
ISSUE
10
LEV "
i
where: VRDI=Voluntary reporting disclosure index; CHANGE=Change in a rms VRDI between consecutive years; ASCT=Firm has an employee who is a member
of the ASCT (1=yes; 0=no); BIG6=Firms audit rm is a Big 6 audit rm (1=yes; 0=no); AUDREP=Firms audit rm is represented on accounting standard setting
boards (1=yes; 0=no); G100=Firm is aliated with the Group of 100 (1=yes; 0=no); IND (control)=Firm is engaged in mining/oil activities (1=yes; 0=no); SIZE
(control)=Natural log of total assets; TOP20 (control)=% shares held by Top20 shareholders; NEWS (control)=Firm with reported news item (1=yes; 0=no); ISSUE
(control)=Firm made a share issue in the proceeding year (1=yes; 0=no); LEV (control)=Firms total liabilities divided by total assets; "
i
=error term.
a
The Breush-Pagan test rejects the null hypothesis of homoskedasticity for Models 1 and 2. The reported t statistics are calculated with heteroskedasticityconsistent
variance estimators as in White (1980).
* Signicant at the 5% level, one-tail test.
** Signicant at the 1% level, one-tail test.
K
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5
1
1
9
1995 with SIZE, IND, NEWS and ISSUE all sta-
tistically signicant.
40
The explanatory power of
the regression increases to 49% when the hypo-
thesised variables are included.
41
The fact that
ASCT and G100 aliation are positive and sta-
tistically signicant in 1995, and the 1995 VRDI
change is signicantly positively associated with
ASCT and G100 membership indicates that ASCT
and G100 aliated rms, subsequent to the
release of the ASCT Industry Statement, exhibit
greater quantity (and quality)
42
in their derivative
nancial instrument disclosures than rms with no
ASCT or G100 aliation. The ASCT and G100
variables are signicant in the CHANGE model
(Model 2) for 1995 only, however, and are sig-
nicant only in 1995 for an unreported logistic
model where rms are classied as disclosers or
non-disclosers. The 1996 results indicate the
ASCT and G100 aliated rms continue to dis-
close more than non-ASCT rms, but the increase
in disclosures from 1995 do not dier between
ASCT and non-ASCT aliated rms or G100 and
non-G100 aliated rms.
Overall, the results of Model 2, testing for the
change in voluntary reporting between consecutive
years, support all hypotheses except those relating
to auditor aliation. As reported in Table 6, Panel
B, for the 1995 reporting year the best model
(specication III) has an adjusted R
2
of 0.34 with
the variables ASCT (hypothesis 2), G100
(hypothesis 4) and IND, NEWS and ISSUE all
statistically signicant at the 5% level or better.
The evidence suggests that these variables oer
plausible explanations for the signicant change in
derivative nancial instrument reporting in 1995.
In 1994, only IND is consistently statistically sig-
nicant at the 5% level or better. By 1996 how-
ever, the best CHANGE models adjusted R
2
is
only 0.001 (specication I) with no variable statis-
tically signicant for any specication of Model 2
(Table 6, Panel C).
Sensitivity analysis
Additional tests were performed using three
alternative samples: Sample 1 includes only rms
that retrospectively identify themselves as deriva-
tive users pursuant to their 1998 mandatory
nancial derivative disclosures; Sample 2 includes
only rms with annual report data available for
every year spanning 19921996; and Sample 3
comprises rms satisfying both Sample 1 and
Sample 2 criteria, namely rms retrospectively
identied as derivative users with annual report
data available for every year spanning 19921996.
The univariate results reported in Table 3 are
generally robust to the dierent sample selections.
Similarly, Table 4 univariate tests relating to
changes in rms voluntary nancial derivative
disclosures and Table 6 multivariate tests are also
generally robust to dierent sample selections. It is
particularly noteworthy that the most robust
results are those for 1995 disclosure levels and the
change in those levels from 1994 to 1995.
43
Conclusion
Analysing derivative nancial instrument dis-
closures by rms in an environment that is unre-
gulated but subject to increased scrutiny provides
insight into the necessity of mandating disclosures.
Increased probability of mandated disclosure
requirements, combined with pressure on nancial
statement preparers to be professionally respon-
sible in relation to derivative nancial instrument
40
With the exception of ISSUE, these control variables are
signicant in the expected direction.
41
Using a multiple hierarchical regression to compare speci-
cation I (control variables) and specication II (control and
reputation proxy variables), the change in the R
2
is statistically
signicant at the 1% level for both Models 1 and 2.
42
Researchers often assume the positive association between
quantity and quality. As noted by Botosan (1997) this seems a
reasonable assumption given that managers have reporting
reputations and legal liability constraints.
43
Using Sample 1 potentially overcomes the bias of classify-
ing non-users as non-disclosing rms, however it potentially
introduces another bias by assuming the user status in 1998 is
consistent with that of previous periods. The results of the re-
run multivariate models are entirely consistent with the results
reported in Table 6. For Models 1 and 2, only size and industry
are statistically signicant in 1994. In 1995, ASCT, G100, size
and industry are statistically signicant for both models. For
the 1996 period, ASCT, G100, size and industry are statistically
signicant for Model 1, and only industry is statistically sig-
nicant for Model 2.
disclosures, appears to have precipitated a change
in the number and quality of disclosures across the
19921996 nancial reporting time window. This
paper examines how standards of nancial
reporting evolve, possibly in response to changing
societal norms and institutional pressures. Up
until 1995 only 41 rms precommitted themselves
to an ex ante disclosure policy. After the release of
ED65 and the ASCT Industry Statement (an ex
ante eort to coerce increased disclosures), 96
(105) rms voluntarily disclosed the information
in 1995 (1996). Assuming the disclosures are value
relevant, this suggests that mandating derivative
nancial instrument disclosures is not redundant,
as the propensity to voluntarily disclose was not
forthcoming prior to disclosure requirements
being put forward by a professional organisation
or the accounting standard setters.
The theoretical underpinning of this paper is
that attempts to preserve or enhance reputation
may provide an explanation for voluntary deriva-
tive nancial instrument reporting. Managers
legitimacy and reputation concerns combined with
institutional pressures confronting them to be
responsive to information demands appear to be
eective conduits for attaining enhanced dis-
closures. Reputation costs confronting managers
are proxied by a rms aliations with profes-
sional bodies such as the ASCT and G100, in
addition to the rms auditors reputation. It is
predicted the presence of such aliations pro-
motes derivative nancial instrument disclosures.
Statistically signicant results are obtained for all
variables except auditor aliation, suggesting that
the decision to voluntarily disclose derivative
nancial instrument information is associated with
the preservation or enhancement of reputation status
aorded by professional aliations. While it is pos-
sible that our measures proxy for something other
than reputation and the importance of legitimacy,
the results are consistent with the prediction that
reputation considerations are associated with dis-
closure policies. A positive association is found for
the control variables size, industry, and to a lesser
extent media attention and voluntary derivative
nancial instrument disclosures. A rms leverage,
a control variable grounded in costly contracting
theory, is not a signicant predictor of derivative
nancial instrument disclosures.
Further research could use triangulation to
assess these arguments in other contexts where
disclosure regimes alter, going through a transi-
tional stage before being mandated. For example,
interviews with managers can provide insights into
the views of those making the disclosure decisions.
Acknowledgements
The authors gratefully acknowledge the com-
ments and suggestions of two anonymous referees,
Michael Bradbury, and participants at the KPMG
workshop session at the University of Queensland,
the 2000 AAA Annual Conference, and the 1999
AAANZ Conference for their comments on earlier
drafts of this paper. The authors also appreciate
the nancial support provided by the University of
Tasmania.
Appendix A. Components of the voluntary reporting disclosure index (VRDI) for derivative instrument
disclosures
Information Reference in
ED65
Reference in
Industry Statement
Score
Policy information disclosures
Does the rm specify its hedging policy? 1 (0)
Does the rm specify the objectives for holding
or issuing derivative nancial statements?
Par 52 Part A 1 (0)
Does the rm specify the accounting policies and
methods adopted for derivative instruments
(other than foreign currency hedges)?
Par 43a Part A 1 (0)
Does the rm specify their policy in giving
(or obtaining) collateral, security and credit
arrangements?
Par 66b Part A 1 (0)
Does the rm generally specify how they
monitor and control the risk associated with
derivatives?
Part A 1 (0)
Does the rm specify specic nancial controls
in place to monitor the risks?
Part A 1 (0)
Risk information
Does the rm segregate information by risk
categories (i.e. interest rate risk, credit risk)?
Part B 1 (0)
Does the rm provide the following information
for its derivative instruments?
Principal, stated value, face value, notional
value or other similar amount
Par 43bi Part B 1 (0)
Date of maturity Par 43biii Part B 1 (0)
Weighted average/ eective interest rate Par 43bii/ Par 55b Part B 1 (0)
Does the rm specify to whom they have credit
risk exposure?
Par 66ci Part B 1 (0)
Does the rm comment on their estimated credit
risk at reporting date?
Par 66a Part B 1 (0)
Net market value information
Does the rm provide net market value
information of derivative instruments?
Par 78a Part B 1 (0)
Does the rm specify the methods adopted in
determining net market value?
Par 78b & c Part B
(only for trading
activities)
1 (0)
Maximum possible total score 14
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Reputation costs: the impetus for voluntary derivative

nancial instrument reporting

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