Mandatory Disclosure Practices by Listed Companies in Bangladesh

Abstract

The importance of disclosure is justified by agency theory, political economy theory, stakeholder theory, institutional theory and signaling theory. The agency theory states that mandatory disclosure in corporate annual reports is one of the fundamental elements for reducing information asymmetry between insiders and outsiders. These theories provided reasons for corporate disclosure, which is important for gaining investors’ confidence, developing efficient markets, creating good corporate governance, protecting minority interest, ensuring an investment friendly environment, harmonizing international accounting standards to cope the national market and economy with the challenges of globalization and for protection of investors. Disclosure is made for giving good signal of firm as justified by signaling theory. More importantly, disclosure ensures transparency, accountability, fairness and responsibility of corporations to stakeholders. Realizing the facts, the different regulatory bodies of a country always put pressure on the listed companies to disclose adequate information in their annual reports as stated by institutional and stakeholder theory. Corporate mandatory disclosure is the minimum regulatory requirement that implies the presentation of financial and non financial information in corporate annual reports that is required by regulatory authorities including the Standard Setting Bodies and the Stock Exchange Authorities. The minimum level of corporate mandatory disclosure is defined by accounting standards, the legal framework of a country (Company Law, Banking Companies Act, SEC Rules and Income Tax Act), industrial norms or standards and security market requirements. This disclosure should be adequate in corporate annual reports. Adequate disclosure is a function of the quantity and quality of information disclosed timely in annual reports following established Standards and Acts. Research on mandatory disclosure in Bangladesh reports the poor level of mandatory disclosure by the listed companies due to non compliance of mandatory requirements and accounting standards Akhtaruddin (2005a). The ineffective enforcement of policy is also responsible for this in one hand. On the other hand, most of the people of Bangladesh especially the investors are very little aware of the corporate disclosures. These matters result low level of mandatory disclosure in Bangladesh. Accordingly, attempts were made by the regulatory authorities in Bangladesh to improve the quality of financial reporting in the country over the last decade. Such measures have included the amendments of the Companies Act, 1994; adoption of Financial Reporting Standards started in 2007, the issuance of Corporate Governance Guidelines of SEC in 2006 as well as major revisions to Securities and Exchange Rules in 1997. Twenty Bangladesh Accounting Standards (BASs) and eight Bangladesh Financial Reporting Standards (BFRSs) have been made effective from 2007. The present research interest has been set forth to examine the extent of disclosure as it is changing towards the improvement over the periods. The aim of this study is to examine the mandatory disclosure practices by listed companies in Bangladesh. It also investigates the firm-specific characteristics that have a significant influence on the level of compliance to mandatory disclosure. An attempt is also made to find the variation of disclosure over the years, among the samples and across the industries. Five major hypotheses were formulated to achieve the research objectives. To test the hypotheses, this study uses panel-data of the selected thirty companies for 5-year period and T-test, F-test, correlation and the test of multiple regressions were run using the SPSS software. The descriptive results indicate that none of the sample companies in Bangladesh discloses all mandatory items as the average mean score is 59.28 percent with a range of 47.09 percent to 69.93 percent. Fifty three percent of sample companies satisfy average disclosure and 12 out of 30 companies are found practicing standard level of disclosure while taking 60 percent as standard. The results report that the level of disclosure is relatively low in Bangladesh as compared to the disclosures of other developed countries. The trend of disclosure over the years and the variation among the sample companies has also been tested by applying paired sample t-test. The results indicate a negligible variation of disclosure over the years and significant differences between the extents of disclosure practices of sample companies. One-way ANOVA has been used to examine the flow of disclosure across the industrial sectors. It also shows an insignificant variation of disclosure across the industry. The result of bivariate analysis reveals that the dependent variable, total relative mandatory disclosure scores (RMDS), is positively associated with number of outside shareholders (NS), listing age (AGE), dummy of market category (DMC), net annual sales (NAS), return on total assets (ROA), return on equity (ROE), Tobin’s q ratio (TOBINQ, net profit margin (NPM), and quick ratio (QR). But it shows a significant correlation with number of outside shareholders (NS), listing age (AGE), dummy of market category (DMC), and return on total assets (ROA) at 0.01 level and correlation with net annual sales (NAS), net profit margin (NPM) and quick ratio (QR) at 0.05 level. The results of regression indicate that number of outside shareholders, listing age, market category, return on assets and leverage have significant and positive impact on mandatory disclosure. However, size of the firm, foreign ownership, and audit firm size were found statistically insignificant. The results of this study are expected to assist regulatory bodies in formulating policies towards improving the compliance level, which may further enhance the mandatory compliance among the public listed companies. The outcome of the results is also expected to assist local and foreign investors in making more informative decisions The main limitation of the study is that it has excluded 66 companies for having different reporting period that did not end at December 31. Another limitation is that the study is not specific to any particular industry. It has not considered all the mandatory items set by regulatory bodies in Bangladesh and the process of selecting relevant items was also arbitrary.