Corporate Disclosure Practices In Indian Pharma Industry – An

Empirical Study

Vivek. R. Nair

S2, MBA

CET

A company is required to make specified disclosures at the time of issue and make continuous disclosures as long as its securities are listed on exchanges.

The Companies Act disclosure and investor protection guidelines, listing agreements, regulations relating to insider trading and takeovers etc specify the standards for disclosure in India.

This study empirically examines the quantum of corporate disclosure and its association with various corporate attributes, such as age, size, profitability, leverage, listing status, shareholding pattern, audit firm, and residential status of a company.

Abstract

Based on a sample of 50 companies from the Pharma industry drawn from “PROWESS” database of the Center for Monitoring Indian Economy (CMIE) for the year 2009-10 on the basis of market capitalization as on March 31, 2010.

An unweighted disclosure index consisting of 90 items of information was constructed, which was used to compute the disclosure score of each selected company.

Pearson correlation product moment matrix was used to check the multi –colleanarity between independent variables.

Multiple regression analysis revealed that significant association exists among size, profitability, audit firm and disclosure level. However, no significant association was found among disclosure score and age, listing status, leverage, shareholding pattern, and residential status of the company.

Introduction

Corporate disclosure with its determinant analysis has become a thrust area of research for various researchers and academicians.

Now, emphasis is laid on the qualitative aspect of information which is relevant to informed investors for making economic decisions.

The main reason for this emphasis is that full and completed disclosure is the cornerstone to protect the shareholder’s rights.

Only through full and complete disclosure can shareholder’s feel confident that the firm in which they invested, is being operated with their best interests in mind.

Forward thinking companies report both financial and regulatory data to key external and internal constituents.

They monitor market and stakeholder reactions to the reported information and then adapt their disclosure in response to such feedbacks as well as other market, regulatory and social developments.

With globalization of Indian economy and subsequent entry of Foreign Institutional Investors, there has been demand for disciplined financial reporting.

Today’s complex business environment has also increased the pressure on companies to be more transparent in their financial reporting.

Significance of Disclosure

Investors have a very real interest in what companies disclose, in the trustworthiness of the disclosure, and in how and when they disclose. Better disclosure enhances the quality and level of monitoring of firm by shareholders and strengthens the corporate governance.

Is significant from the point of view of other potential users such as employees, suppliers, creditors, management, legislatures etc, and above all the public.

As India gets integrated in the world market, Indian as well as international investors demand greater disclosure and more transparency for major decisions and better shareholder value.

It is the financial reporting behavior of publicly listed companies that is of primary importance to international portfolio investors and creditors.

Annual reports are used as a medium for communicating both quantitative and qualitative corporate information to shareholders, investors and other users.

It reduces uncertainty in the market and helps users in selecting the best portfolio for their investments.

Thus, disclosure is significant from the point of view of users, companies and the nation on the whole.

So, corporate disclosure is an essential element for the efficient functioning of the capital market.

Need and Objectives of the Study

The review of literature reveals that some studies have been conducted to analyze various aspects of corporate disclosure practices in India. Hardly any study has been carried out to explore the research on industry specific disclosure practices in India.

The following are the objectives:

To study the extent of disclosure in annual reports of selected companies of Indian pharmaceuticals industry.

To test the impact of various corporate attributes and the reporting practices of the firm’s in pharma industry.

Data Collection

The universe of study constitutes the companies representing pharma industry sector, selected on the basis of market capitalization, as on March 31, 2010 from “PROWESS”, the database of CMIE.

There were 394 companies representing pharma industry to which various filters were applied for selection. Thus, out of 394 companies, 25 was selected and studied.

Software Package for Social Sciences (SPSS) version 10.05 was used for application of various tests.

Disclosure Index Construction

A disclosure index is taken as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to shareholders.

The quantum of disclosure has been studied by framing a disclosure index comprising 90 items of information. The items of information was selected on the basis of the criteria laid down by the Institute of Chartered Accountants of India (ICAI).

The unweighted index was used for the purpose of the present study. The contents of the each annual report were compared to items listed in disclosure index and coded as 1 if disclosed and 0 if not disclosed.

For each item a disclosure index was computed as the ratio of the actual score given to the firm divided by the maximum score.

Model Development

In order to study the impact of various corporate attributes, Multiple Regression Analysis has been used.

The model used to test the relationship between specific related variables and level of disclosure is:

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + β6X6 + β7X7 + Β8x8 + є

Where,

Y = Disclosure score

X1 = Age of the firm

X2 = Listing status of the firm

X3 = Shareholding pattern

X4 = Leverage of the firm

X5 = Size of the firm

X6 = Profitability of the firm

X7 = Audit firm size

X8 = Residential status of the firm

β = Slopes of independent variables while β0 is a constant or the value of Y when all values of X are zero

Є = The error term, normally distributed about a mean of 0.

Hypothesis Development

H1 : Size of the firm H2 : Profitability of the firm H3 : Leverage of the firm H4 : Audit firm size H5 : Age of the firm H6 : Residential status of the firm H7 : Listing status of the firm H8 : Shareholding pattern

Results and Discussions

Since, wide variations have been observed in the disclosure score of the selected companies from the Indian pharma industry, it becomes imperative to know the reasons of such variations. The reasons might be company-specific. So an attempt has been made to find the effect of corporate-specific variable on the disclosure score.

Impact of the Corporate Attributes on the Corporate Disclosure

Correlation Analysis

To examine the correlation between the dependent and independent variables and with the dependent variables, Pearson product moment correlation (r) was computed. A correlation matrix of all the values of r for the explanatory variables along with dependent variables was constructed and is shown in Table 1.

Independent Variables

Age Listing Status

Promoter Share

Market Cap

Leverage Assets ROS Audit Firm Size

Residential DIS

Age 1.000

Listing Status

316 1.000

Promoter Share

310 0.102 1.000

Market Cap 291 0.214 0.015 1.000

Leverage 407 0.301 0.407 0.256

Assets -0.113 0.156 -0.146 0.124 1.000 1.000

ROS 0.252 0.221 0.04 0.194 125 -0.252 1.000

Audit Firm Size

0.512 0.409 0.534 0.183 0.901 -0.633 0.301 1.000

Residential 0.630 0.14 0.161 0.354 0.269 -0.109 0.206 0.306 1.000

DIS -0.05 -0.172 -0.134 -0.007 -0.106 -0.114 -0.100 -0.100 -0.100 1.00

Regression Analysis

Regression analysis has been run in two stages. First, multiple regression analysis was run, wherein no concluding results could be found out or in other words, no variable except audit firm size could significantly explain variations in the disclosure level.

Afterwards, in the second stage, stepwise regression analysis was run, wherein few variables were dropped from the model and a combination on the disclosure level.

Multiple Regression Analysis

Three separate determinants of firms size (sales, assets and market capitalization) as well as four different measures of profitability (ROS, ROA, ROCE, AND RONW) were used. Each surrogate to represent size and profitability was used only once in a model.

This led to the creation of 12 regression equations.

Stepwise Regression Analysis

The stepwise regression analysis was applied by eliminating different independent variables having insignificant effect on disclosure.

The problem of multi-collinearity between independent variables namely, leverages and audit firm size was resolved by eliminating leverage (the insignificant variant).

A stepwise regression model separately applied showed that all size measures are significantly influencing the level of disclosure.

Testing the Hypothesis

The results from the stepwise regression analysis shows that firms with large asset size are more in the eyes of general public and are required to disclose more information.

All size measures are found to be significant in explaining the extend of disclosure, but the total assets explain more variation in the disclosure practices of the firms in the pharma industry.

So H1 is accepted in favor of the hypothesis that all the surrogates of the size of the company have a positive impact on their disclosure score.

Out of the profitability measures, ROS explains more significant variations in disclosure than firms with more ROA, RONW, and ROCE.

So, H2 is accepted in favor of the hypothesis that the profitability of a company as measured by ROS has a positive impact on the disclosure score.

The firms, being audited by big six audit firms, that are having international links, disclose more extent of information than others.

H4 is accepted in favor of positive impact of audit firm size on the disclosure score.

The residential status of a firm, leverage of a company has negative association (though insignificant) with the level of disclosure.

The companies having more debt content have the policy of disclosing only mandatory information because these companies disclose to the maximum extent only when they have more share of public in the share capital.

So, all other variables do not explain significant variations in the level of disclosure.

The other variables like, age of a company, listing status of firms and shareholding pattern have positive association with extent of disclosure though not significant.

It appears that all the companies in the pharma industry are young in age. So, age does not emerge as a significant factor influencing the level of disclosure.

The companies in which the promoters have high stake in capital structure have less extent of disclosure.

So, all hypothesis except H1, H2 and H4 are rejected.

Conclusion

This study provides an evidence of the extent of corporate disclosure in the Indian pharma industry. The analysis reveals that the extent of disclosure with the pharma industry varies within 32.2% to 71.1% for the period of study.

It implies that though all the companies disclose mandatory information as required by law, but at the same time, a large no of companies disclose more than what is required by legal provision.

These companies are known for maximization of the shareholders wealth.

It has also been observed that the extent of disclosure is influenced by size, profitability and the audit firm size of the company.

The companies with large assets size, high profitability and audited by big firms have tendencies to be more transparent and hence disclose more information.

However, age of a company, shareholding pattern, listing status, leverage and residential status do not significantly influence the level of disclosure.

Thank You…!!!