Choi 1973 PDF

Accounting Research Center, Booth School of Business, University of Chicago
Financial Disclosure and Entry to the European Capital Market

Author(s): Frederick D. S. Choi
Source: Journal of Accounting Research, Vol. 11, No. 2 (Autumn, 1973), pp. 159-175
Published by: Wiley on behalf of Accounting Research Center, Booth School of Business,
University of Chicago
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Financial Disclosureand Entryto the
European Capital Market
FREDERICK D. S. CHOI*
In this paper, I providesome evidence concerningthe relationshipbe-

tweenfinancialinformation and a firm'sentryinto a capital market.The
main assumptionunderlyingthis studyis that corporationswill be moti-
vated to upgradetheirfinancialdisclosurein orderto obtain scarce money
capital as cheaplyas possible.'
To assess the relationshipbetweendisclosureand capital marketentry,
I selected the entryof an enterprise-investor into an internationalnew
issues market.My reason forthis choicewas simplythat a firmwould be
expectedto make its securityissues relativelyappealing duringentryin
orderto attractsupportfroman audiencewhichpossesses alternativeout-
lets fortheirsavings.2The demand for informationwould appear to be
even strongerin an internationalsettingwhere investorsare often un-
acquainted with the relative meritsof foreignborrowers.3The effectof
*Assistant Professor, University of Hawaii. The author acknowledges the con-
structivesupport of his reading committee while at the University of Washington and
the financial assistance of the American Accounting Association and the Lybrand
Foundation.
'The relationship between financial disclosure and a firm's capital costs is ex-
plored in another paper, Frederick D. S. Choi, "Financial Disclosure in Relation to
a Firm's Capital Costs," Accounting and Business Research (forthcoming). Briefly,it
is argued that increased corporate financial disclosure tends to reduce uncertainty
regarding a firm'spresent and futurefinancial affairs.This, in turn, reduces investor-
perceived uncertaintiesand thus induces them to accept a lower rate of return yield-
ing a lower cost of capital to the firm.
2 While institutional interest in the international capital market is growing, the
major suppliers of funds to the market are reportedlywealthy individuals around the
world. See Lawrence A. Meyer, "The World's Freest Money Markets," Fortune (April
1968), pp. 167-68.
8 While investors within a
given countrytypically have access to a variety of com-
159
160 JOURNAL OF ACCOUNTING RESEARCH, AUTUMN, 1973
entryon disclosurewas inferred frommeasuredchangesin disclosure

sampleof international
scoresof a representative borrowers. Underlying
thisapproachis thepresumption thatchangesin publicdisclosure prac-
oftheresponse
ticesarea reflection ofcorporate managers to thedemands
fortheinformation.4
For purposesofthispaper,theterm"disclosure" willreferto thepub-
licationof any economicinformation relatingto a businessenterprise,
quantitativeor otherwise, whichfacilitatesthe makingof investment
decisions.Economicinformation, in turn,is any datumthatreducesthe
uncertainty about the outcomeof futureeconomicevents.The concept
by meansof a disclosureindex (to be
of disclosureis operationalized
elaborateduponlater),quantifying the typesof data disclosedby cor-
porateborrowers deemedrelevantto investors.The term"improved
disclosure"is definedstrictlywithinthe contextof thismodel,that is,
positivechangesin thequantumof corporate data disclosed,as discerned
bytheindex,areregarded as improvementsindisclosure.
Selectionofa ProperTestEnvironment
Corporatedisclosuremaybe affected bothby forcesof supplyand de-
mandforinformation in thecapitalmarketsand by legallyadministered
minima, suchas prescribedinformationrequirements containedin various
formsof legislation.
Therefore, the environment withinwhicha test of
effectsof entryon disclosurecan be made shouldnot consistof any
highlyregulatedcapitalmarket.Onlyif themarketdoes indeedprovide
somefreedom forenterprise
ofchoiceis therea possibility actionsto be a
offreemarketresponse.
reflection
Sincemostnationalmarketsare controlled by nationallegislationaf-
fectingcorporatefinancialreporting practices,I restricted
my analysis
marketforforeign
to the international securityissuesor the European
capitalmarket.5 ofthemarketfollows.
A briefdescription
petinginformation sourcesabout a particularfirm,this is generallynot truein the
internationalsphere.In view of the limitedinformation available on foreignbor-
rowers,it appearsreasonableto assumethatinternational investorsrelyveryheavily
on information providedby theborrowing firm.
'Note Bevis: "Informationabout the companyis one of the conditionsbeing
imposedmore and moreby the sophisticatedsuppliersof capital or theiradvisors.
Institutionalinvestorsand the analystsof financialhouses are contributing to the
pressures"(HermanBevis,Corporate Financial Reporting in a Competitive Economy
[NewYork: MacmillanCo., 1965],pp. 9-19).
'The marketis also referredto as the Eurobondmarketin view of the preponder-
ance ofbondissueswhichhas characterized the marketin the past.Factorsprecipitat-
ingthe developmentofthismarketwerethe U. S. InterestEqualizationTax and the
seriesof voluntary(eventuallymandatory)restraint programsinitiatedin the mid-
1960s to remedyan adverse United States balance of payments.Both measures
generatedpressuresto mobilizepools of capitalbeyondnationalboundaries.For an
ENTRY TO EUROPEAN CAPITAL MARKET 161
The Euro-capital marketis characterizedby the fact that it is foreign

to both borrowersand lenders. Since investorsparticipate in security
transactionswhich represent,for them, foreignassets, ultimate claims
against enterprise-borrowers are generallymade in countriesoutside the
legal jurisdictionof the securityholder.6Arrangementsforsecurityissues
in the Euro-capital marketare also unique. Securityflotationsgenerally
constitutedirect or private placements by "three-tiered"international
underwritingsyndicates,consistingof a managing underwriter(s),an
underwriting group,and a sellinggroup of brokers,dealers, and bankers
fromall over the world.The managingunderwriter and the underwriting
group,consistingof up to twentymembers,typicallysubscribefirmlyfor
the issue, pricing it, however,as late as possible. The selling group,
consistingof anywherefromten to fiftymembers,in turn,places part of
the issue, which cannot be placed by the underwriting consortium,with
their clients or purchases a portion for their own account. The great
geographical coverage, arising from the internationalsyndication and
distributionof Eurobonds, makes the concept "market of issue" quite
vague.7 It also renders impractical any attempted controls over the
market.
Features which make the European capital marketa suitable testing
environmentfor the question at hand are: (1) the market's operation
and structureare subject to the regulationsof no one country;8 (2) al-
thoughevidence suggeststhat competitionamong borrowersfor access
to this marketis keen, such access has not been subject to formal re-
strictionsof any kind;9 (3) minimum informationrequirements,as
typifiedby those prescribedby the Securities and Exchange Acts in
the United States or the Companies Acts and Legislation of various
European countries,are not mandatory; (4) listing activities, when
undertaken,tend to be a rational responseto the economic advantages
of doing so and tend to be concentratedin those exchangeswhere dis-
excellentdescription of the Eurobondmarketand its originsee GunterDufey,The

EurobondMarket: Functionand Future(Seattle: Universityof Washington, Gradu-
ate SchoolofBusinessAdministration, 1969).
e A typicalEurobondtransaction, forinstance,wouldinvolvethe issue of corporate
bondsby a Swedishmultinational firm(denominatedin U. S. dollars) and managed
by a consortium of Europeanand perhapsAmericaninvestment bankers,wherebya
portionof the issue wouldbe placed withItalian investorswho maintaininvestment
accountswithSwissbanks.See David Williams,"ForeignCurrency Issues on European
SecurityMarkets,"IMF StaffPapers(March 1967),p. 43.
7 It is reportedthat the privateplacementsare sold so widelythat the Securities
and ExchangeCommissionwouldconsiderthema publicoffering had theybeenissued
in the United States. See MorrisMendelson,"The Eurobond and Capital Market
Integration,"JournalofFinance(March1972),p. 111.
8Denis S. Katsonis,"The Bustlein theBond Markets,"ColumbiaJournalof World
Business(Summer1966),pp. 62-63.
8Dufey, pp. 56-59.
162 FREDERICK D. CHOI
closurerequirementsare least burdensome;10and (5) this market,which

took hold largelyin the early 1960s, has expanded very rapidly and, in
view of its broad base, continuesto be veryresponsiveto the international
demandsplaced uponit forcapital financing.
Selectionofa DisclosureResponsePeriod
The period selected for measuringexpected disclosurechanges was a
five-yearspan coveringthreeyears priorto and a year subsequentto the
year of entry.The priorperiod was chosen in the belief that corporate-
financingplans and disclosurechanges are not likely to be made more
than threeyears in advance of tapping any particularfinancialmarket
for funds." The subsequentyear was added to capture any lags which
might characterizea company's competitivedisclosure response to the
evententry.
The Significanceof DisclosureImprovementsUpon Entry

If changes in disclosurepolicy were solely a functionof competition
forexternalfinances,we would expectdisclosurechangesover the selected
five-yearintervalto be caused primarilyby the event,entry.However,
Cerf12and Singhvi13have shown that disclosurelevels also tend to be
correlatedwithfirmsize. Moreover,disclosurepracticesare affectedover
time by informalrequirementsimposed throughvarious capital market
institutions.14
In order to circumventthese other influences,I tested the effectsof
entry on the disclosurepractices of a representativesample of Euro-
bond participantsrelative to changes in the disclosure practices of a
controlgroupof nonparticipants.Additional commentson matchingcri-
teria are given later. To facilitatethe test, the standard of comparison
was directlyincorporatedinto the measurementsemployed. Measured
changes in disclosureover the chosen five-yearinterval of the experi-
mentalgroup (participants)denoted,,XJ,wherei denotesdisclosureof the
ith participant,was contrastedwith changes in disclosureof the control
group over the same interval,denoted at. The difference betweensuch
changes for each matchedpair, lad - Ac = Di, constitutedthe opera-
JacobRothschildand RodneyLeach,"RecentDevelopmentsin the International
Capital Market,"The Banker(April1967),p. 303.
`"For a good discussionregardingthe difficultyand importanceof the timingof
financialpolicysee J.FredWestonand EugeneF. Brigham,ManagerialFinance (New
York: Holt Rinehart& Winston,1969),pp. 757-84.
'2Alan R. Cerf,CorporateReportingand InvestmentDecisions (Berkeley,Calif.:
PublicAccounting ResearchProgram,1961),p. 34.
3 SurrendraS. Singhviand HarshaB. Desai, "An EmpiricalAnalysisofthe Quality
ofCorporateFinancialDisclosure,"Accounting Review(January1971),p. 131.
1 For an interestingaccountof the generaltrendtowardimproveddisclosureinter-
nationallysee RobertBall, "The DecliningArt of Concealingthe Figures,"Fortune
(September1967).
tional variable of interestin the subsequenttests.The significanceof the

differencein disclosure changes between the experimentaland control
group was based on the nonparametricWilcoxon matched-pairssigned-
rankstest.15Were therenothingunusual about the disclosurechangessur-
roundingentry,Di's would be purely chance determinedand, over the
longrun,would have an expectedvalue of zero.In termsof signedranks,16
we would expectthat some of the largerranks would come frompositive
Di's while otherswould come fromnegativeDi's. Thus, if we wereto sum
the rankshavinga plus sign and the ranks having a minussign,the two
sums, on average, would be about equal. The significanceof the dis-
closurechangeson the part of the experimentalgroupover and above that
of the controlgroup duringthe years surroundingentry can therefore
be testedin theformofthe followingset ofoperationalhypotheses:
1. Null Hypothesis.Ho: The improvementin disclosureof the experi-
mental group does not differfromthat of the control group. In
termsof the Wilcoxontest,the sum of the positiveranks is equal to
the sumofthenegativeranks.
2. AlternativeHypothesis.H1: The improvementin disclosureof the
experimentalgroupis greaterthan that of the controlgroup,that is,
the sum of the positiveranksis greaterthan the sum of the negative
ranks.
Since the sample of firmsanalyzed is small,the null hypothesiscan be
rejectedif the "IT" statistic,whichequals the smallerof the sums of the
similarlysignedranks,is less than or equal to the criticalvalue, T*, for
the particularlevel of significancethat is chosen17and forN = the total
numberof differences having a sign. If the null hypothesiscan be re-
jected, we can at least say that the evidence is consistentwith the ex-
istenceof a responseon the part of the experimentalgroupover and above
that of the controlgroup, indicatinga relationshipbetween disclosure
improvement and entryintoa broadlybased capital market.
Method ofObservationand theMeasurementofImproved

Disclosure
In a new issues market,such as the Euro-capital market,the offering
circular or "Europrospectus"would be one medium for observingdis-
"The measurements employedin operationallydefiningdisclosureimprovements
lay in therealmof ordinalas opposedto intervalmeasures.Hence the decisionto use
the nonparametric equivalentofthepopulart-test.For an excellentdescription of the
Wilcoxontest,thereaderis referred to SidneySiegal,Nonparametric Statisticsforthe
BehavioralSciences(NewYork: McGrawHill, 1956),pp. 75-83.
16Use of the Wilcoxontest requiresthat measureddifferences in disclosureDi's
be convertedfromnumericalscoresto signed-ranks, i.e., a measuredchangein dis-
closurein whichA4a > Ate wouldbe precededby a minussignand vice versa.Each
Di is rankedwithoutregardto sign,therankof 1 beinggivento the smallestID6j, the
rank2 to thenextsmallest,and so on.
l The level ofsignificance
chosenis .05.
closureimprovements.18 However,I decidedto base my analysison an

examination of disclosurechangesobservablein a firm'spublishedan-
nual reports.My reasonswere as follows: (1) The researchdesign
adoptedin thisstudyrequiresthe observation of disclosurescoresboth
priorto and subsequentto entryin orderto detectany improvements
whichmayhaveoccurred duringtheinterim. Offering wouldnot
circulars
satisfythedesignrequirements as theyare typicallyissuedonlyonce.19
(2) In viewoftheimportance of thecontrolgroupin the current study,
observationsof disclosure
improvement in the Europrospectus wouldre-
quire,as a basis of comparison,a prospectus of the controlfirmduring
the same year as its experimental counterpart's entry.This would be
impossibleunlessthecontrolgroupalso engagedin newexternaldebtor
equityfinanceduringthat particularyear. (3) If greaterdisclosureis
detectedin annual reports,thenit shouldfollowthat greateroverall
firmdisclosurealso holds,providing, of course,thatthereis no decrease
in disclosurethroughothermedia,that is, rejectionof the null,based
onlyondisclosure in annualreports,is conservative.
A DISCLOSURE INDEX
The "quantityof disclosure"was operationallymeasuredby an index

whichcontaineda listingof accountingand relatedinformation abouta
firmand its environment deemedrelevantto international investors.20
Itemsselectedforinclusionin the indexwereobtainedin the following
manner.Disclosurecriteriawerefirstderivedfroman investordecision
framework.2'These criteriawerethenappliedto existingdisclosurein-
dexespublishedin theaccounting and financeliterature.22
To imbuethe
8I1 wouldlike to expressmy appreciationto Mr. Mark Hoffman,Managerof In-
ternationalIssues,HambrosBank Limited,London,forhishelpfulsuggestions in this
regard.
19Whilea comparison betweentheEuroprospectus and theannualreportis possible,
this would probablybias any observedchangesin disclosuresince offering circulars
accompanying these securityissues generallycontaininformation not publishedat
other times. See Philip Howard, "Eurobond Disclosure,"Euromoney (November
1971),p. 10.
' See AppendixA. The philosophyunderlying the measurement of disclosuredoes
not differsubstantiallyfromthat adopted by Cerf (n. 12 above), however,the
methodology employeddoes.
' For an elaborationof the disclosurecriteriaemployedand theirderivationsee
FrederickD. S. Choi, "Financial Reportingand Disclosurein Relation to Broadly
Based Capital Markets"(Ph.D. diss.,University ofWashington,1972),pp. 122-53.
Indexes scrutinized,in addition to the Cerf construct,include those by the
varioussubcommittees of the Committeeof CorporateInformation of the Financial
AnalystsFederationand Singhvi'ssupplementto the Cerfconstruction. See "Report
of the Subcommitteeon the Adequacy of the AnnualReportsof the ChemicalIn-
dustry,"The AnalystsJournal(March 1950),p. 68; "Reportof the Subcommittee on
the Adequacyof the AnnualReportsof the Paper Industry,"The AnalystsJournal
(March 1951),p. 142; "Reportof the CorporateInformation Committee,"Report to
theMembership for theYear 1954-1955, National Federationof Financial Analysts
Societies,pp. 27-32;Singhviand Desai, p. 138.
indexwithan international focus,the disclosurecriteriawerealso ap-

plied to reportedaccountingnumbersand other corporatedata re-
vealedin a sampleofforeign annualreports. The samplestudiedto con-
structtheindexconsisted ofbothEurobondparticipants and nonpartici-
pantsengagedin a varietyof industries and domiciledin a varietyof
countries.Foreignreportsso scrutinized were chosenon the basis of
whichreports, in myopinion,appearedmostforthright in the informa-
tiontheyprovided investors.23
To increasethesensitivityofthemeasuring
device,themeasurement processwas conductedon a higherlevelofdisag-
gregationthanhad beenconducted by Cerfand others.Moreover,cardi-
nal weightswerenotemployed, sinceindividuals,
giventheiruniqueset
of preferences,would probablyemploytheir own cardinal-weighting
scheme.A secondtest,usinga weightedindexpatternedafterCerf's,
yieldedsimilarresults,
andthiswillbedescribedlater.
Specificitemsincludedin the disclosureindexare listedin Appendix
A. Minimum, as wellas moredetailed,specifications
of accounting num-
bersand otherrelevantcorporate data containedthroughout the annual
reportsofenterprise-investors
wereestablished foreachitemin thecheck
list.24
DISCLOSURE IMPROVEMENT
The disclosureindexwas appliedto the entirereportto arriveat a

score"fora givenyear.That is, each company'sannualre-
"disclosure
portwas givena numerical
scorewhichwas merely thesumoftheequally
weighteditemscontainedin the indexwhichalso appearedin the given
company'sannualreport.25Positivechangesin disclosure
scoresbetween
'Companies whose annual reportswere scrutinized,includinga descriptionof
theirnationaloriginand industry(parenthesized), were: Le Nickel(France: Mining);
TJsinor (France: Iron and Steel); AugustThyssen-HutteA. G. (Germany:Iron and
Steel); Farbenfabriken Bayer A. G. (Germany: Chemicalsand Pharmaceuticals);
Fiat (Italy: Autos); MontecatiniEdison (Italy: Chemicals,Textiles, Finance);
Komatsu Manufacturing Company,Ltd. (Japan: Heavy machinery);Sony Corpora-
tion (Japan: Electricalengineering);Hoogovens(The Netherlands:Iron and Steel);
Wm. H. Mullerand Co. (The Netherlands:Shippingand Transport);Aktiebolaget
Svenska Kullargerfabriken (Sweden: Bearings, Machinery components); L. M.
Ericeson Telephone Co. (Sweden: Telecommunications);British Leyland Motor
Corporation(United Kingdom: Autos); The Plessy Company Limited (United
Kingdom:Telecommunications).
IFor example,the firstitemin the appendeddisclosureindex was disaggregated
into its nationaland international dimensions.The resultingsubclassifications
were
further classifiedin termsof theirfutureand historicalorientations.As the itemsde-
tailed in the indexwereactuallyderivedfromreporteddata of international enter-
prise-investors,it is notbeyondthemeansofmostcompaniesto furnish them.
' Subclassifications of major topicsappearingin each of the major sectionsof the
index,i.e.,thenarrativesection,thefinancialstatementsection,and thesupplementary
information section,wereassignedequal weights.For example,if thenarrativesection
of the reportcontaineda discussionof the company'spast sales performance, addi-
tional "disclosurepoints"wereassignedif the discussionincludeddisclosureof sales
by geographicarea, both domesticand foreign, sales by major productgroups,sales
two successivetime periods were interpretedas an improvementin dis-

closure.
Selectionofa Population
The initialpopulationof Eurobond participantsexaminedconsistedof
239 private industrialenterpriseswhichtapped the Euro-currencybond
marketfor financingpriorto July 1971.26 Governmentaland municipal
obligationswere excluded because they tend to carry the guaranteesof
their respectivegovernments.Similarly,utilities and banking institu-
tions were excludedsince they are oftensubject to unique disclosureand
reportingrequirements.Aside fromconsiderationsof data accessibility,
therewould be no reason to eliminate fromconsiderationfirmsof any
particular national origin. However, certain conditions in the United
States and the United Kingdom suggestthat participantsin these coun-
triesmay be less subjectto competitivepressuresregardingdisclosure.
First,the London and the U.S. capital marketsare generallyregarded
as having high disclosurerequirements,due in part to their relatively
long recordsof experienceand expertisein handling both domestic and
foreigndebt and equity flotations.Second, the relativelyadvanced stage
of developmentof the accountingprofessionin both countrieshas ex-
erteda large influencein shapingdisclosurestatutes.In fact,an examina-
tion of the annual reportsof a randomsample of British Eurobond par-
ticipantsand a controlgroupof nonparticipantssupportedthis suspicion.
I found,for example, that disclosureimprovementson the part of the
experimentalgroupwere not significantly fromthat of the con-
different
trolgroup. Details of the examination are providedin AppendixB.27 The
by majorcustomer, and so on. Each incremental added anotherpointto
classification
the firm'sscore.Similarly,in the financialstatementsection,each additionalbalance
sheetor incomestatementclassification, deemedto be decisionrelevant,constituted
a disclosurepoint. In the financialsummarysection,however,a slightlydifferent
approachwas adopted.In view of the myriadof detailed financialand operating
statisticswhichcould be disclosed,an aggregationschema,thoughtotallyarbitrary,
was adopted.This was imposedto guardagainstthe possibilityof oversensitizing the
disclosureindexin thisarea of disclosureand therebyaddingan upwardbias in any
measuredresults.A 3 X 3 matrixwas therefore constructed, witheach row standing
fora selectedquantityof financialor operatingstatisticsand each columnstanding
fora numberofyearsconstrued as an additionaldisclosureitem.
10Quotationservicesutilizedin defining the populationof Eurobondentrantsin-
cluded: (1) WhiteWeld and Company,Ltd., WhiteWeld Securities, U.S.A. (weekly);
(2) Strauss,Turnbulland Company,ForeignBond List, London (updated periodi-
cally); (3) European QuotationService,Rate Sheets (weekly); and (4) Morgan
GuarantyTrust,WorldFinancialMarkets(monthly).
'7 The UnitedStates is generallyknownto possesswhat many considerto be the
highestdisclosurestandardsin the world.This fact,togetherwith other practical
considerations,promptedme to limitmypilotinvestigation to a Britishsample.The
presumption underlying thisposturewas thatifBritishentrantsexhibitedlittleor no
changein theirdisclosurelevels upon gainingaccess to the Eurobondmarket,then
decision to omit both United States and United Kingdom participants

obviouslyreducedthe size of the population considered,but this reduc-
tion was adequately compensatedfor by the increased homogeneityof
theremainingparticipants.
Sample Selection
The workingpopulation,as finallydefined,consisted of seventy-two
accessible firms.I decided to sample exhaustivelyall seventy-twoEuro-
bond entrants,receivingresponses fromsixty-four-a response rate of
89 percent.Respondentsactually selected for inclusion in the sample,
however,had to satisfythe followingcriteria: (1) Each firmmust have
provided annual reportsfor each year of the study interval; (2) the
numberof firmsselectedshould not be overlyrepresentativeof any one
countryor industry; (3) there should be available a nonparticipating
counterpart(with the same data requirements)similar in most respects
to the Eurobondparticipants,withthe exceptionthat the formerdid not
entertheEurobondmarket.
The firstcriterionwas intendedto assure a relativelyconsistentset of
observationsamongthe sample of Eurobondparticipants.The secondwas
designedto assurethatthe sample selectedwas representative, and the last
was introducedto avoid any confoundingeffectswhich might obscure
any observedcompetitiveresponses.
To minimizethe chance that any observeddisclosureresponseto entry
could be due to variables extraneousto the researchquestion of interest,
I attemptedto matchEurobondparticipantswitha controlgroupof non-
participants.Ideally, each control firmshould publish annual reports
over the same time interval as the Eurobond participant,be of com-
parable size, and be selectedfromthe same industryin the same country.
In addition,it should participatein the same capital market as its ex-
perimentalcounterpart,prior to the latter's entry into the Eurobond
market.
However,it was difficult to findcontrolfirmswhich met all four cri-
teria. Reevaluation of the criterialed me to the conclusionthat the in-
dustryvariable was perhaps the least crucial. Cerf, for instance,found
little correlationbetweenindustryconcentrationand disclosurelevels.28
Moreover,examinationof the Eurobond participantswhich enteredthe
marketin the past revealed that entrywas not dominatedby any par-
ticular industrygroup.But even if there was an industryeffect,its ex-
istence would only tend to introducea downwardbias in any observed
differencesin disclosure scores between the experimentaland control
firms.To the extentthat the Fortune list of the 200 largest foreigncor-
Americanfirms, becauseof theirrelativelyhigherforthrightness
in financialreporting,
couldbe expectedto exhibita similarresponse.
' Cerf,pp. 35-36.
porations is a reasonableindicatorofindustry theappearance

leadership,
ofmostoftheEurobondparticipants in thislistmadesucha bias a very
realpossibility.29 Therefore, oftheindustry
satisfaction criterion
was not
requiredin everycase. Relyingmainlyon theotherthreecriteria, I was
able to obtaina working sampleof eighteenmatchedpairs fromeleven
differentcountries.30A listingofthesecompanies, together
withinforma-
tionregarding theirnationalorigin, and thetime
theirsize,theirindustry,
periodstudied, is inAppendix C.
TestingtheSignificanceofDisclosureImprovementsUpon
Entry
If entryintoa broadlybasedcapitalmarkethas a significant influence
on disclosurebehaviorof borrowing thenthe sum
enterprise-investors,
of the ranksof the negativedifference scores,(Di's), shouldbe small
relativeto thesumoftheranksof positivescores.Unweighted measured
difference scoresforeach matchedpair of Eurobondparticipants and
nonparticipants aregivenintable1.The tableshowsthatafterthevarious
Di's had beenranked,onlythreematchedpairsshoweddifferences in the
directionof lesserresponsiveness to the phenomenon entryon the part
oftheEurobondparticipants. Andthesedifference scoresare amongthe
smallest,theirranksbeing1,2, and4.
Recourseto theappropriate tableofcriticalvaluesofT in theWilcoxon
matched-pair signed-rankstestrevealsthat T = 7 is less (actuallyre-
markably less) thanthe criticalvalue,T*, fora single-tailed
significance
levelof .05 and N = 18.31 Therefore, we can rejectthe nullhypothesis,
Ho,in favorofthealternative hypothesis,H1, sincethesumof the posi-
tiveranksis greaterthanthatofthenegativeranksby an amountthat
wouldnotoccurbychancemorethanfivepercent ofthetime.
The foregoing resultinvolvedtheuse of an equallyweighted measur-
ing deviceand is thussubjectto possiblebias. Variousfinancialitems
contained inthedisclosureindexcouldbe considered to be moreimportant
bits of disclosurethan others.To determine whetherthe findingwas
sensitiveto a weighted measurement scheme,I replicatedthetestusing
an indexsimilarto the one employedby Cerfand Singhvi.Their dis-
closureweightswerebased uponan analysisof the demandforvarious
financialitemsexpressedby capital marketparticipants in the United
States.32Weightedmeasuresof disclosurechangesforbothcontroland
experimental groupsaresummarized intable2.
As illustrated,useofa weighted indexcausedsomechangesin therank-
29"TheLargest200OutsidetheU.S.,"Fortune(August1971),pp. 151-54.
' No countrywas represented by morethantwomatchedpairs.
I Actually,a T = 7 permitsone to rejectHo at a .005level ofsignificance.
8 Weightsof financialitemsin AppendixA appear as parenthesized numbersfol-
lowingeach item.These weightsare, of course,subject to the limitationthat they
have notbeenvalidatedinternationally.
TABLE 1
DisclosureImprovement
Unweighted Scoresof Eurobond
Participantsand Nonparticipants
Disclosure Disclosure
Improvements Improvements Di RankwithLess
Pair of theExperi- of theControl (AiE - .C) Rank ofDi FrequentSign
mentalGroup Group(AiC)
1. 15 1 14 11
2. 18 7 11 8
3.8 10 -2 -2 2
4.......... 32 6 26 18
520....... 8 12 9.5
6...... . 16 4 12 9.5
713....... 7 6 7
823....... 3 20 15
9...... 5 -12 17 12
10...... 20 2 18 13
11.1 -3 4 4.5
12....... 9 13 -4 -4.5 4.5
13. 20 -4 24 17
14. 32 11 21 16
15.4 5 -1 -1 1
16. 31 12 19 14
17. 19 15 4 4.5
18. 18 14 4 4.5
T =7.5
TABLE 2
Weighted ScoresofEurobond
Pair
Pair AiC Di Rank ofD, Rank withLess
AiE Aic ~~~~~~~~~~~~~~~~Freq
Sign
1. 21 0 21 12
2. 21 10 11 5.5
3. 15 17 -2 -1 1
4. 63 5 58 18
5. 24 8 16 9
6. 19 7 12 7.5
7. 31 19 12 7.5
8. 45 -1 46 17
9. 11 -17 28 13
10. 27 7 20 11
1. 5 -3 8 4
12. 17 28 -11 -5.5 5.5
13. 36 -9 45 16
14. 49 13 36 14
15.6 12 -6 -3
16. 49 11 38 15
17. 28 32 -4 -2 2
18. 51 34 17 10
T 11.5
ings of difference scores and, in one instance,resultedin a reversal of

signs.However,thesmallerofthesumsof like-signedranks = 1 + 2 + 3 +
5.5 = 11.5 = T. The table of criticalvalues of T in theWilcoxontestshows
that forN = 18, a T of 11.5 enables us to rejectthe null hypothesisat a
level of significance= .005 fora single-tailedtest.We can, therefore,
con-
clude that at least the firmsexamined here significantlyimprovetheir
financialdisclosureuponentryintothe European capital market.
ConcludingRemarks
Positive resultssuch as those reportedhere are encouraging.However,
care shouldbe exercisedin the interpretationoftheseresults.In view of the
difficultyof definingthe theoreticalpopulation,reliance on the property
of mathematicalrandomnesswas not possible. Thus, there is a possible
bias due to the exclusionof the disclosurepracticesof a largersample of
Euro-marketparticipants.
Replication of the presentstudy on an expanded scale is obviously
warranted. Of even greater interestwould be a comparison between
financialdisclosurein regulatedversus nonregulatedmarkets.A study of
this nature could providevaluable insightsregardingthe question of the
value of requiredfinancialdisclosurelegislationvis-A-visthe "competitive
disclosurehypothesis"arisingout ofthepresentstudy.
APPENDIX A
ItemsIncludedin DisclosureIndex
Narrative
1. Discussionof economicvariablescorrelated with sales/performance of the
(1)
enterprise
2. Discussionofmajorindustry trends(1)
3. Discussionofothermajorfactors tending to affect
future business(2)
4. Discussionofcompetitive positionofthefirm(2)
5. Forecastofcompany performance (4)
6. Breakdown ofsales/earnings performance
a. Consolidated
group-Parent-Subsidiaries (3)
b. Domestic-Foreign (2)
c. Majorproduct line/activity (2)
d. Majorcustomer (2)
7. Discussionofreasonsforchanges in currentoperating performance (2)
8. ListofDirectors/Managers (1)
9. Emoluments ofDirectors/Managers (1)
10. Discussionofbasicpolicies/objectives ofmanagement (2)
11. Discussionofmarketing network forfinishedgoods/services (1)
12. Discussionofrecentacquisition-formation/spin-off activities(2)
13. Descriptionofmajorproducts/operating activities(1)
14. Physicalproduction statistics (3)
15. Ordersbooked(1)
16. Backlogs(1)
17. Supplyofrawmaterials (1)
18. Capital expenditures

a. Past (3)
b. Planned (3)
19. Recent capital marketactivities(2)
20. Descriptionof principalplants (2)
21. Discussion of researchand developmentactivities(3)
22. Numberof employees(1)
23. Informationon labor contracts/relations (2)
etc.) (1)
activities(i.e., environmental,
24. Social responsibility
25. Numberof shareholders(1)
FinancialStatements
26. Incomestatement
a. Single (3)
b. Comparative(4)
c. Relevant subclassifications(1)
27. Distributionof incomeschedule(1)
28. Dividends (1)
29. Balance sheet
a. Single (3)
b. Comparative(4)
c. Relevant subclassifications
1. Subclassification(1)
2. Method of valuation (3)
30. Auditor'sreport(3)
31. Statementofaccountingprinciplesused in statementpreparation(3)
32. Multiplelanguagetranslations(1)
33. Multiple currencytranslations(1)
Information
Supplementary
34. Sourcesand uses of funds/cashflowstatement
a. Single (3)
b. Comparative(4)
35. Statementof reconciliationof earned surplus(3)
36. Summaryof importantfinancialstatistics
a. 10 years or more (3)
b. 6-9 years(2)
c. 3-5 years (1)
APPENDIX B
A Test of the Significanceof Disclosure Improvementson

thePart of U.K. EurobondParticipants
Britishcompaniesappearingin the sampleselected,togetherwitha briefdescrip-
tion of theirrelativesize and industrycharacteristics, are summarizedin table 3.
This table is followedby another (table 4) which contains changes in disclosure
scoresover the five-yearintervalsurroundingentryon the part of the selectedex-
perimentaland controlgroups.
As can be seen fromtable 4, the improvementsin disclosureon the part of the
experimentalgroup were not consistentlygreaterthan that of the controlgroup.
For thosepreferring a statisticalanalysis,use oftheWilcoxonmatched-pairssigned-
ranks test suggeststhat the null cannotbe rejectedat the .05 level of significance.
Replicationof the test using a weighteddisclosureindex producedsimilarresults.
The relevantstatisticsare summarizedin table 5.
TABLE 3
U.K. EurobondParticipantsand Nonparticipants
Studied
Date of Experimental GroupCompany ControlGroupCompany
Entry (Size: Industry) (Size: Industry)
4/66 BeechamGroupLimited Albrightand WilsonLimited

?: Chemicalsand Phar-
(95,000,000 (128,000,000?: Chemicals and
maceuticals) Pharmaceuticals)
6/65 BritishPetroleumCompany The Shell Transportand Trading
?: Oil and Gas)
(2,400,000,000 CompanyLimited
?: Oil and Gas)
(1,500,000,000
4/69 CourtauldsLimited EnglishCalico Limited
?: Textiles)
(414,000,000 (117,000,000?: Textiles)
3/71 The GreatUniversalStoresLimited Marks and SpencerLimited
?: Shops, Stores,Dis-
(192,000,000 (219,000,000?: Shops,Stores,Dis-
tribution) tribution)
3/71 J. Lyons and CompanyLimited Granada GroupLimited
(131,000,000?: Hotels, Catering, (62,000,000?: Hotels, Catering,
Entertainment) Entertainment)
4/70 Trust Houses Forte Limited Mecca Limited
(73,000,000?: Hotels, Catering, (42,000,000?: Hotels, Entertain-
Entertainment) ment)
TABLE 4
Unweighted Scoresof Eurobond
Disclosure Disclosure
Improvements Improvements Rank withLess
Pair of te Experi-
mentalGroup
of theControl
Group(us C)
Rako
~ FrequentSign
1........ . -2 5 -7 -5
2. ........ 5 -1 6 4 4
3......... 6 15 -9 -6
4.. 1 2 -1 -1
5. ........ 4 -1 5 3 3
6. ........ 2 6 -4 -2
T= 7
TABLE 5
Weighted Scoresof Eurobond
Pair i AC X
~~~~~~an
Di
f
Rank ofDi
Rank withLess
FrequentSign
1.......... -8 9 -17 -6
2.......... 9 -1 10 4 4
3.......... 11 25 -14 -5
4.......... 0 6 -6 -2
5.......... 4 -1 5 1 1
6.......... 0 8 --8 -3
T = 5
APPENDIX C
List of Eighteen Matched Pairs
EurobondParticipants Nonparticipants
Australia
Company:Comalco Limited Company:AmpolPetroleum Limited
Periodstudied:67-71 Periodstudied:67-71
Assetsize:$161,000,000 Assetsize:$191,000,000
Industry:Steel Industry:Oil and Gas
Company: IronPty.Limited
Hamersley Company:TheBroken Hill Proprietary
Periodstudied:67-71 Co. Ltd.
Assetsize:$500,000,000 Periodstudied:67-71
Industry:Iron Assetsize:$1,300,000,000
Industry:Steeland Oil
Belgium
Company:Petrofina S.A. Company:Cockerill-OugreeS.A.
Assetsize:32,000,000BF BF
Assetsize:30,000,000,000
Industry:Oil refining Industry:Ironand Steel
Denmark
Company:Carlsberg Og
Bryggerierne Company:The East AsiaticCompany
TuborgsBryggerier A/S Ltd.
Kr.
Assetsize: 1,000,000,000 Kr.
Assetsize: 1,300,000,000
Industry:Beer,Wines,Spirits Industry:Shipping,Exports,etc.
France
Company:Ciments Lafarge Company:Vallourec
F
Assetsize: 1,250,000,000 F
Assetsize:900,000,000
Industry:CementandBuilding Industry:Steel
materials
Company:Compagnie FranfaiseDes Company:SaintGobain

S.A.
Petroles Periodstudied:62-66
Periodstudied:62-66 F
Assetsize:3,500,000,000
F
Assetsize:4,400,000,000 Industry:Glass,Oil,andChemicals
Industry:Oil and Gas
Germany
Company: Anilin
Badische & Soda Company:Schering AG
FabrikAG Periodstudied:62-66
Periodstudied:62-66 DM
DM
Assetsize:6,500,000,000 Industry: Chemicals and Pharma-
Industry:Chemicalsand Pharma- ceuticals
ceuticals
Company:Farbwerke AG
Hoechst Company:Mannesman AG
DM
Assetsize:8,000,000,000 DM
Assetsize:4,500,000,000
Industry:Chemicals Industry:Machinery andEquipment
Italy
Company:Finsider S.p.A. Company:DalmineS.p.A.
L
Assetsize:2,500,000,000,000 L
Assetsize: 222,000,000,000
Industry:Iron,Steel,and Chemicals Industry:Coal,Iron,and Steel
& C.
Company:Ing. C. Olivetti Company:PirelliS.p.A.
L
Assetsize:310,000,000,000 L
Assetsize:380,000,000,000
Industry: Office
Generalengineering, Industry:Electricalengineering,
machines Rubberproducts,etc.
Japan
Company: HondaMotorCompany Company: ToyotaMotorCompany
Limited Limited
Assetsize:Y 202,000,000,000 Assetsize:A 371,000,000,000
Industry: Autos,etc.
Motorcycles, Industry:Autos
Company:NipponElectric Company, Company: MatsushitaElectric

Limited Periodstudied:66-70
Periodstudied:66-70 AssetsizeY 583,000,000,000
Assetsize:Y 280,000,000,000 Industry:Electronic
products
Industry:Electronic
products
TheNetherlands
Company:GistBrocades NV Company:Schlumberger
f.
Assetsize:273,000,000 f.
Industry:ChemicalsandPharmaceuti- Industry:Oil andElectronics
cals
Company:Oce-van derGrinten
N.V. Company:MaatschappijVan Berkel's
Periodstudied:66-70 PatentN.V.
f.
Assetsize: 175,000,000 Periodstudied:66-70
Industry: Photo-
Generalengineering, f.
Assetsize: 170,000,000
copying equipment Industry:Generalengineering,
Meas-
uringinstruments
Norway
Company:NorskHydro-Elektrisk Company:ElkemA/S
Kr
Assetsize: 1,400,000,000 Assetsize:668,000,000
Kr
Industry:Electricpower,Chemicals, Industry:Miningand Metals
etc.
Sweden
Company:AtlasCopcoAB Company:Electrolux AB
Kr
Assetsize: 1,300,000,000 Assetsize: 1,500,000,000
Kr
Industry:Generalengineering,
Heavy Industry:Electricalengineering
compressed airequipment
Company:AllmannaSvenskaElek- Company: Alfa Laval AB

triskaAB Periodstudied:62-66
Periodstudied:62-66 Kr
Assetsize: 1,600,000,000
Kr
Assetsize:3,600,000,000 Industry:Generalengineering
Industry:Electricalengineering
Switzerland
Company:Allusuisse Company:Sandoz
Sfr.
Assetsize:800,000,000 Sfr.
Assetsize: 1,300,000,000
Industry:Metals Industry:Chemicals andAllied
products

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Accounting Research Center, Booth School of Business, University of Chicago

Financial Disclosure and Entry to the European Capital Market

In this paper, I providesome evidence concerningthe relationshipbe-

entryon disclosurewas inferred frommeasuredchangesin disclosure

The Euro-capital marketis characterizedby the fact that it is foreign

excellentdescription of the Eurobondmarketand its originsee GunterDufey,The

closurerequirementsare least burdensome;10and (5) this market,which

The Significanceof DisclosureImprovementsUpon Entry

tional variable of interestin the subsequenttests.The significanceof the

Method ofObservationand theMeasurementofImproved

closureimprovements.18 However,I decidedto base my analysison an

The "quantityof disclosure"was operationallymeasuredby an index

indexwithan international focus,the disclosurecriteriawerealso ap-

The disclosureindexwas appliedto the entirereportto arriveat a

two successivetime periods were interpretedas an improvementin dis-

decision to omit both United States and United Kingdom participants

porations is a reasonableindicatorofindustry theappearance

ings of difference scores and, in one instance,resultedin a reversal of

18. Capital expenditures

A Test of the Significanceof Disclosure Improvementson

4/66 BeechamGroupLimited Albrightand WilsonLimited

Company:Compagnie FranfaiseDes Company:SaintGobain

Company:NipponElectric Company, Company: MatsushitaElectric

Company:AllmannaSvenskaElek- Company: Alfa Laval AB

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