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Theories related to Corporate Disclosure - Coggle Diagram
Theories related to Corporate Disclosure
Positive Accounting Theory
Explains whether the accounting method
will or will not
be used by the company, instead of should or should not.
States individual
self-interest concept
and
wealth maximization
. In-line with the argument that, the primary objective of an organization is to utilize the resources and maximize the company's profit.
However, it is claimed that economic-based performance no longer being the only factor. Social and political factors are also claimed to have impacted the corporate disclosure.
Said to be
scientific
and
unable to interpret the social constructive
side of accounting phenomena, as it concerns on the results presented by the big data sets of accounting numbers' misstatement, while ignoring the company's post-attitude.
Agency Theory
Conflict of interest
between
manager
and the
shareholders
on decision making
3 hypotheses
as major incentives driving company's decision of adopting the particular accounting method
debt to equity hypothesis
The higher the debt-equity ratio, the tighter the debt constraint on the company. Hence, the manager would rather prefer a less conservative accounting policy that could
increase the current period income so as to relax the debt constraint
and avoid the high cost of violating debt covenants
political cost hypothesis
The manager would prefer a rather conservative accounting policy that could help to shift current period income to future in order to
reduce the current net income to report
, so as to reduce the risk of exposing to high tax charges and tax inspection due to sudden high profit
To convince that the company is not generating excessive profit
bonus plan hypothesis
Given that the pay to manager is depending on profit of the year, they would possibly prefer accounting policies that could shift future income to current period to
present highest possible income
for their interest
Tend to increase earnings
Agency cost as contracting cost that driving managers' decision.
Example of contracting cost: -
Agency cost
Renegotiation cost
Transaction cost
Information cost
Bankruptcy cost
Major focusing on the incentives motivating managers in making accounting choices that are favorable to their position (e.g., bonus, stock options, etc.), unless there are constraints from external audit and internal control.
Signalling Theory
Incentive of voluntary disclosure to the capital market
Motivates manager to
disclose favorable information
even is not mandated by regulations, to the investors in order to attract investments and enhance his
reputation
Supported with empirical studies done
Through the extension on works of Toms, Hasseldine et al. (2005) found that the
quality of information disclosed gives a stronger impact on the reputation
, than quantity.
Ohlson (1995) found that firms with
information in their favor
, are
likely willing to disclose
their reports.
Toms, (2002) found that the
disclosure
of the company's environmental policies
significantly contributes
to the environmental
reputation
As a critical factor enabling a company to compete in the risk-driven market
Originated from
information asymmetry
issue.
Explains the
voluntary disclosure
when the
information is not accessible to all parties
.
Disclosure of private information to the market could reduce the risk and uncertainties that exposed to the investors.
The lesser the information disclosed to the market, the higher the risk bearded by the investors, and hence they are willing to pay less for the company, and vice versa.
Explaining the behaviors of companies and individuals when there is information assymetry.
The sender of information has to decide which way to communicate the information, while the receiver should decide the way of interpretating the signal.
Companies communicate the information to the investors, and the investors response in the market.
Developed to overcome the limitation of Normative theory which emphasize on claiming "what accounting should be".
A typical utilization of the theory used to define the power of market force in directing corporation to disclose information that benefit the social.
It is claimed that this behavior should also be considered, because using only the factors of wealth maximization and self-interest are not enough to explain the impact on disclosure.
In PAT, knowledge is claimed to be derived from empirical results.
The induction process has been critiqued as an issue.
The things are all presumed to be the same as the knowledge derived from only past research,
Claimed as not empirical implausible.
Political Economy Theory
Public Interest Theory
concerns on
protecting public interest
from potential harms by setting regulations to regulate the firms
Ensure accurate information of a firm is provided to the public by setting regulations
Could raise public (e.g., investors) confidence and
improve market efficiency
E.g., Sarbanes-Oxley Act in 2002 as a public interest regulatory respond to corporate failures and accounting manipulation in 2000s
Recognize the normative and stewardship roles of regulators.
Ignore opportunistic role of regulator capture of regulatory processes, and private interest groups.
Defining how the
society
is affected by the
public policy
.
The Capture Theory
The
accounting standard setting process
may be lobby by the
powerful interest group
to maximize their interests, through voting rights
Eventually, in the case where the powerful interest group successfully capture the regulatory body, the regulations may bias towards industries favor instead of the public one
Stands that public interest theory will fail to enhance as the regulatory body might be captured by the industries
Challenge the assumption of public interest theory
Limitation
: Preoccupied the influence of parties who hold voting rights, onto the standard setting processes.
In fact, parties without voting rights also have the rights to comment on the standard settings. (e.g., accounting profession, big accounting firms, as well as MNCs)
Private Interest Theory here comes to overcome the limitation of these two theories.
Private interest groups who are self-interest maximizers, will involve in the standard setting and implementation process.
Not only focusing on
economical
aspect, but also
political, social and environmental
sides.
This theory concern on the
variance of interest, achievements and accountability
from varied groups of people who influence or being influenced among each other, who are all striving for certain goals in a competitive political process.
The formation and implementation of accounting regulations represents the accountability, expectation, achievement and influence of varied interest groups.
The theory assumes that the existence of expectation gap subjects to the circumstances when
(i)
various interest group potentially being influenced by the regulations;
(ii)
abandon of stewardship; or
(iii)
legitimize the roles to maximize their self-interest.
Also recognize the disclosure as a
strategic tool
for the organization to achieve its goal.
Classified into classical and bourgeois streams.
Bourgeois
Ignore class interest, structural equity, conflicts, and roles of the state
Perceived the world to be pluralistic
Concerning on interaction within the society, while ignoring the powerful groups.
Consists of the application of legitimacy and stakeholder theories
Classical
Tend to remain those who hold scarce resources in the favored position.
Recognize the existence of class interests, powers, and conflicts among the society.
A weapon that ensures the organization's continuous profitability and growth by influencing the distribution of wealth and income.
Stakeholder Theory
The
stronger the power of stakeholders
(control of resources), the
tighter the control on management's
activities (until they satisfy the demand of stakeholders).
Explains company's strategy responses towards social demand.
Focus on the way the
company manages its stakeholders
which depends on the extent of benefits that stakeholders can bring.
The company is the party who chooses stakeholder groups they want, and grants with power
The power of stakeholders is said to have
impact on the voluntary disclosure
to the extent of their resources control on the company.
In terms of resources, access to media, legislation, and consumers' consumption.
Claims that the companies' continuous development is depending on the stakeholders.
Any activities should adjust to gain stakeholders' approval.
Initially the shareholders are proposed to be the major stakeholders
Then amended to include adversarial group (e.g., interest groups and regulators)
Recognize only powerful groups in the society.
Legitimacy Theory
Focuses on the
interaction between the company and social
.
Explains the
influence of society on the voluntary disclosure
of the company.
Explains that organizations always ensure that they are operating in the boundaries and norms of the society.
Striving for the
compatibility
of company's activities with social values and norms of acceptance.
Legitimate gap
appears when the
entity value disparate from the social value
.
E.g., where the company's performance is not the same as the society expectation.
A
threat
to organizational legitimacy.
Evaluate and align to the social; or alter the social values or corporations' perception.
Through identifying the power under controlled, and the parties who have the power to provide corporations with legitimacy.
Both consider societal components (e.g., social groups, norms, and values)
Considered as managerial behavior.
Forms
social contracts
between corporations and society.
Applicable on any institutions or businesses that operate in the society.
Companies' growth and continuous existence depending on their ability to deliver social desirable.
Explicitly called as legal requirements; Implicitly called as social expectations.
The resources gained from the social groups are not permanently available.
Corporations would have to work in-line with the social legitimacy to gain society approval.
Claims that legal system may be slow in adapting to the changes in social norms and values.
Society may be tolerance to certain behaviors, but will not take it into the legal system.
Recognize society as a whole
Contingency Theory
Suggests that there's
no one universal way
applicable for structuring a company in all different situations, only
contingencies
(e.g., corporate strategy, market environment, technology uncertainties).
Best alternative should be generated
based on the characteristic of a specific situation
.
The
dependency
refers to
contingencies
, which could drive the result. It can be
constraint or opportunity
to the situation
Williams (2004) suggests that
environmental factors and technologies
are the
main contribution factors
to company's uncertainties that potentially affects disclosure decision.
Thomas (1986) suggests that contingencies can be
internal
(environmental constraint) and
external
(organizational constraint) factors based on his findings of the effect of contingencies on reporting practices.
Suggests also that most studies on contingency approach that conducted in different countries, reached to the same result that the reporting practices
varied in the aspects of social, economic, or political factors.
Suggests also in some cases, the financial reporting system could also affect the contingency variables.
Suggests that environmental consists of physical, vocational and social dimensions.
Suggests that disclosure practices associated with circumstances variable.
Conceptualize constraint into two classes: organizational attributes and environment
Contingent variables can
influence or influenced by
the financial reporting system.
Schweikart (1985) observed that different countries have different environmental factors affecting the needs of accounting information.
Also suggests that contingencies are categorized into
internal and external
Identified the environmental factors that can affect accounting practices into four categories:
educational, economic, political and social
Suggests that
information needed
might
vary according to environment
States that
different national business environment
could lead to
different accounting policies among nations
Suggests to conduct the study on a
smaller regional group
which consists of countries with
higher similarity
, as the results could be more useful due to
lesser differences in environment.
The factors observed could be more reliable in that case.
Shehata (2014) suggests that management's preferences on disclosure are suggested to be affected by
environmental and organizational constraints
.
Motivation such as stock compensation, information asymmetry
Constraints such as agency cost, litigation cost
Contingency approach is said to be
common in the comparative international accounting literature
In debating the
universal applicability of International Accounting Standards
Lawrence & Lorsch (1967) claims that contingencies can be opportunities or constraints that can influence the internal structures and process of a company.
Which can affect the accounting choices and disclosure practices as well.
Different environment can lead to different disclosure practices.
Genron & Wallace (1995) also suggests for
cross-national study
on the influence of environmental factors on disclosure practices.