Voluntary forward-looking statements driven by corporate governance and their value relevance

J. Account. Public Policy xxx (2013) xxx–xxx

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J. Account. Public Policy

journal homepage: www.elsevier .com/locate/ jaccpubpol

Voluntary forward-looking statements driven bycorporate governance and their value relevance

0278-4254/$ - see front matter � 2013 Elsevier Inc. All rights reserved.http://dx.doi.org/10.1016/j.jaccpubpol.2013.02.009

⇑ Corresponding author. Address: Department of Accounting and Auditing, Faculty of Commerce, Ain Shams UniversiEgypt.

E-mail addresses: [email protected] (M. Wang), [email protected] (K. Hussainey).

Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements drivenporate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/1j.jaccpubpol.2013.02.009

Mingzhu Wang a, Khaled Hussainey b,c,⇑a Department of Management, King’s College, London SE1 9NH, UKb School of Management, Plymouth Business School, Plymouth University, Plymouth PL4 8AA, UKc Department of Accounting and Auditing, Faculty of Commerce, Ain Shams University, Cairo, Egypt

a b s t r a c t

This paper examines the impact of corporate governance on thelevel of voluntary disclosures of forward-looking statements inthe narrative sections of annual reports. It also examines whetherthe forward-looking statements that are driven by governance areinformative about future earnings. This analysis is drawn from alarge-scale sample of UK FTSE All-Share companies for financialyears ending within the period January 1996–December 2007.We find that corporate governance influences companies’ decisionsto voluntarily disclose these statements. The main drivers aredirectors’ ownership, board size, board composition, and the dual-ity of the CEO’s role. These results suggest that better corporategovernance improves reporting practice. We further find that theforward-looking statements of well governed firms improve thestock market’s ability to anticipate future earnings. Our findingshave important implications for policy makers and regulatorsbecause they confirm that the effectiveness of corporate gover-nance in the practice of disclosure is a function of certain charac-teristics and that the voluntary forward-looking statements ofwell governed firms contain value relevant information forinvestors.

� 2013 Elsevier Inc. All rights reserved.

1. Introduction

In 1993, the Accounting Standard Board (ASB) of the United Kingdom (UK) introduced a majorinnovation in the financial reporting of public firms: the voluntary Operating and Financial Review

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2 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

(OFR). The OFR enables companies to provide a formalized, structured, and narrative explanation oftheir financial performance. The OFR had been voluntary for all firms listed on the Financial TimesStock Exchange (FTSE) before April 1, 2005.1 Although the OFR was made mandatory for public firmsin the UK after April 1, 2005, the Chancellor of the Exchequer announced on November 28, 2005 thatthe OFR would no longer be a mandatory requirement for UK companies. The UK government claimedthis change to be a recalibration of policy rather than a fundamental change (Williams and Conley,2007).2 It was actually a major shift in emphasis in relation to the importance of providing forward-look-ing information in annual reports. In 2006, the ASB published a new financial reporting statement thatrecommended rather than required the adoption of a revised voluntary OFR that was far more extensivethan the previous mandatory version. The ASB pinpointed that OFR statements should be ‘‘addressed tomembers, setting out their analysis of the business, with a forward-looking orientation in order to assistmembers to assess the strategies adopted by the entity and the potential for those strategies to succeed’’(ASB, 2005: summary, b). In addition, the OFR should ‘‘focus on matters that are relevant to the interestof members’’ (ASB, 2006: principle 6). The ASB considers information relevant ‘‘if it is capable of making adifference in the decisions made by users’’ (FASB, 2010: 17). It is stated that financial information shouldbe capable of making a difference in decisions ‘‘if it has predictive value, confirmatory value or both’’(FASB, 2010: 17). FASB (2010b: 17) states that information would have a predictive value ‘‘if it can beused as an input to processes employed by users to predict future outcomes’’.

The UK, therefore, provides a unique country context in which to analyze the linkage between thevoluntary disclosure of forward-looking statements and corporate governance. The UK and the UnitedStates (US) share a similarity in diverse corporate ownership structures and generally high quality cor-porate governance. Forward-looking statements in the UK, however, are very different in nature fromcorporate voluntary disclosures in the US as they are not immediately verifiable or auditable. Further-more, forward-looking statements in the UK allow for a fuller and more powerful approach to analysisbecause of their unique nature of these statements. The statements are qualitative in nature and usu-ally dominated by good news (Athanasakou and Hussainey, 2012). In addition, prior research shows asubstantial variation between UK firms’ forward-looking reporting practices (Hussainey et al., 2003).In this paper, we aim to answer the important questions of whether corporate governance affectsfirms’ decisions to voluntarily disclose forward-looking statements in the narratives of their annualreports and, if so, whether the forward-looking statements that are driven by governance contain va-lue-relevant information for investors.

The research on the determinants and the value relevance of voluntary forward-looking statementsis sparse, mainly because of the difficulty in disclosure measurement. In the US context, where quan-titative earnings forecasts are available, researchers investigate the association between voluntaryearnings forecasts and corporate governance for large samples of companies over long periods (i.e.Hirst et al., 2008; Karamanou and Vafeas, 2005). In this paper, we use the computerized contentanalysis approach developed by Hussainey et al. (2003) to measure the voluntary disclosure of for-ward-looking statements. In comparison with the research on voluntary forward-looking statements(Hussainey et al., 2003; Hussainey and Al-Najjar, 2011), we extend the sample size and the period ofanalysis to cover the majority of UK non-financial firms that publish voluntary OFR statements. Ourresultant sample is comparable in size to those used in the US studies based on quantitative earningsforecasts. We believe that increasing the number of firm-year observations should allow more robustidentification of the corporate governance determinants of voluntary forward-looking statements and,hence, result in more generalizable findings.

Our paper provides three contributions to the literature in terms of the determinants and the valuerelevance of forward-looking statements. First, our paper examines the impact of a comprehensive setof corporate governance variables on the level of voluntary forward-looking statements. The studieson the determinants of forward-looking statements use limited proxies for corporate governance(see Hussainey and Al-Najjar, 2011). We hand collect a comprehensive set of corporate governance

1 The FTSE Group is an independent organisation that is jointly owned by the London Stock Exchange (LSE) and the FinancialTimes and that specializes in creating and managing indices of shares.

2 The wording of the objectives of the 2005 OFR Reporting Standard and the 2006 OFR reporting Statement were almost identicalapart from the latter being more persuasive relative to the former that had a clear mandatory requirement.

Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/j.jaccpubpol.2013.02.009



M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx 3

variables for our large-scale sample of UK firms and find that the main drivers of voluntary forward-looking statements are director ownership and board characteristics (size, composition, and CEO dual-ity). Our results also show that institutional investors as external monitors have little impact on thelevel of voluntary forward-looking statements in the UK. Karamanou and Vafeas (2005) test the effectsof audit committee characteristics on the quality of US earnings forecasts and find that audit commit-tee expertise is important to the firm in deciding whether or not to issue a forecast. We extend theirstudy by analyzing the effects of audit committee characteristics (size, independence, and financialexpertise) on the level of voluntary forward-looking disclosures in the UK. The results show that onlythe audit committee size has a negative impact and that neither the independence nor the financialexpertise of the audit committee’s members has an impact on the level of voluntary disclosures.

Second, we investigate whether voluntary forward-looking disclosures that are driven by gover-nance reduce information asymmetry and enhance the stock market’s ability to anticipate future earn-ings. Economic theory predicts that voluntary disclosures reduce information asymmetry (Diamondand Verrecchia, 1991; Leuz and Verrecchia, 2000). Empirical literature shows that voluntary for-ward-looking statements enhance investors’ ability to anticipate future earnings (Hussainey et al.,2003; Schleicher et al., 2007; Hussainey and Walker, 2009). Unlike these studies, we modify Collinset al.’s (1994) returns-future earnings model to examine the impact of governance-driven forward-looking statements on the stock market’s ability to anticipate future earnings. Our results show thatthe forward-looking statements of well governed firms improve the stock market’s ability to antici-pate future earnings.

Third, we contribute to the body of knowledge on methodological developments in both the mea-surement of voluntary forward-looking statements and the estimation method in empirical tests. Core(2001) calls for more methodological development to improve existing proxies for corporate disclo-sure. Researchers have attempted to contribute to the disclosure literature by using computer soft-ware packages to automatically create disclosure scores for large samples of firms.3Hussainey et al.(2003) are among the first to use computerized content analysis to measure levels of voluntary for-ward-looking statements for large samples of UK companies. Like Hussainey et al. (2003), we use aQSR software package (NUD � IST 6 ) to calculate the number of forward-looking statements in annualreport narratives (i.e., OFR). In addition, apart from the Ordinary Least Square (OLS) estimation methodcommonly used in disclosure studies, we also use the random-effect panel regression method to examinethe voluntary forward-looking statements that are driven by corporate governance and their value rel-evance. The panel regression method removes the combined firm-year effects on the dependent variable(i.e., the voluntary disclosure score measured as the number of forward-looking statements) and henceyields more accurate examinations of the determinants and value relevant of voluntary forward-lookingstatements. Furthermore, the analyses of the impact thresholds (Larcker and Rusticus, 2010) for the cor-porate governance mechanisms show that their identified characteristics are indeed significant drivers ofvoluntary forward-looking statements, which are not subject to an endogeneity problem.

Our results are likely to be of interest to a wide range of stakeholders. For example, investors, finan-cial analysts, lenders, and auditors may find it helpful to consider the findings of this research whendealing with firms with different characteristics (e.g., high or low quality corporate governance, highor low profitability, or large or small sizes of firm). In particular, our results confirm that certain boardand audit committee attributes are associated with the level of forward-looking statements. These areof interest to policy makers in regulating the effective monitoring of financial reporting on public firmsby corporate boards and audit committees. If corporate governance has a positive impact on the vol-untary disclosure of forward-looking information, policy makers could encourage public firms toimplement sound corporate governance practices (Karamanou and Vafeas, 2005) in order to enhancethe information content of financial reporting. The lack of evidence on audit committee independenceand financial expertise, however, casts some doubt on the UK government’s efforts to ensure moreindependent directors and financial experts on audit committees.

The remainder of the paper proceeds as follows. Section 2 reviews the literature and develops theresearch hypotheses. Section 3 describes our measure of voluntary forward-looking statements.

3 See Li (2010) for an extensive review of the literature on the use of computer-based textual analysis for measuring corporatedisclosures.





Section 4 presents the sample, the data and the research design. Section 5 presents the empirical find-ings and Section 6 presents our conclusion.

2. The literature and hypotheses

In this section, we review the three strands of the literature that are relevant to our study and weformulate our research hypotheses. The first strand relates to the association between corporate gov-ernance and voluntary disclosures. The second focuses on the effect of firms’ characteristics on corpo-rate voluntary disclosures. The third relates to the value relevance of forward-looking statements.

2.1. Voluntary disclosures and corporate governance

A sizeable body of the literature argues that the wave of accounting scandals can be attributed tothe poor quality of corporate governance in overseeing the practice of financial reporting (Agrawal andChadha, 2005). In response to these scandals, regulators implement new rules to improve the qualityof corporate governance and these regulatory changes lead implicitly to an improvement in reportingpractice (Byard et al., 2006). The empirical research shows that good corporate governance reduces theinformation asymmetry between managers and owners (Kanagaretnam et al., 2007) and improves thelevels of corporate disclosure (Lang and Lundholm, 1993). In addition, the literature shows that bettergovernance is associated with the possibility that managers could issue more earnings forecasts vol-untarily (Karamanou and Vafeas, 2005). In this study we test the association between corporate gov-ernance and forward-looking statements. Specifically, we examine the impact of institutionalownership, director ownership, board size, board composition and CEO duality on forward-lookingstatements.

Financial markets consider institutional investors to be the main suppliers of funds. Such investorsoften undertake an active role in monitoring management performance (Jensen and Meckling, 1976).Firms with a high concentration of institutional ownership are highly motivated to disclose informa-tion voluntarily in order to maintain investor confidence (El-Gazzar, 1998). Thus, prior research ex-pects institutional ownership to have a positive relationship with voluntary disclosure (Mitchellet al., 1995). In support of this view, Karamanou and Vafeas (2005) find that US firms are more likelyto issue management earnings forecasts when institutional investors own a greater proportion of thefirm’s stock. The need for corporate disclosure, however, can decrease as the level of institutional own-ership rises (Schadewitz and Blevins, 1998). Institutional investors, particularly those with blockshareholdings, can gather information via one-on-one meetings with company management (Barker,1998; Holland, 1998; Marston, 2008) in order to obtain detailed forward-looking information. Compa-nies with large block owners are also less reliant on smaller investors and face lower demand for vol-untary public corporate disclosure. Similarly, some empirical studies find a negative associationbetween institutional ownership and voluntary disclosures (Schadewitz and Blevins, 1998; Celiket al., 2006).

When a large number of institutional shareholders exist, disseminating forward-looking informa-tion to all institutional investors through direct meetings can be costly for a company. The voluntarydisclosure of forward-looking statements in the narratives of annual report can be more efficient whenmore institutional investors invest in companies. This leads to our first hypothesis:

H1. A positive association exists between institutional ownership and forward-looking statements inthe narratives of UK annual reports.

Director ownership is also referred to in the literature as managerial or insider ownership. Manage-ment entrenchment theory and agency theory predict contradictory associations between directorownership and voluntary disclosures. According to management entrenchment theory, concentratedmanagerial ownership can be counterproductive to the firm’s long-term value because managersare more likely to maximize their private controlling benefits by reducing the level of voluntary dis-closures (Morck et al., 1988). Thus, one should expect a negative association between director owner-ship and voluntary disclosures. However, based on agency theory, one should expect a positive





association between director ownership and voluntary disclosure because the extent of managerialownership could serve to align the management’s interests with those of other shareholders (Jensenand Meckling, 1976). Companies with a high degree of director ownership have less informationasymmetry between management and shareholders and, therefore, can provide more forward-lookinginformation in the narrative sections of their annual reports.

The empirical evidence suggests that management entrenchment theory is more influential thanagency theory with regard to the relationship between director ownership and voluntary disclosure.Director ownership has a negative impact on voluntary forward-looking disclosures (Hussainey andAl-Najjar, 2011), intellectual capital disclosures (Li et al., 2008) and overall voluntary disclosures(Eng and Mak, 2003; Nagar et al., 2003; Gelb, 2000; Ruland et al., 1990). When board members holda substantial portion of shares, these holdings create a power base that induces management to createconditions conducive to managerial entrenchment (Shivdasani, 1993). Consistent with Hussainey andAl-Najjar’s (2011) empirical evidence, we expect that greater director ownership in a firm leads tofewer forward-looking statements in the annual report narratives. This leads to our second hypothesis:

H2. A negative association exists between director ownership and forward-looking statements in thenarratives of UK annual reports.

Board size represents the total number of executive and non-executive directors on the board ofdirectors at the date of the annual meeting in each fiscal year. The literature finds that boards witha large number of directors are more likely to be ineffective and hence less likely to be involved indecision-making processes that include the decision on whether or not to increase the level of volun-tary disclosure (Herman, 1981; Goodstein et al., 1994). Communication and coordination-relatedproblems might exist in large boards and hence the effectiveness of these boards may be lower thanthat of small boards. Jensen (1993) and Yermack (1996) argue that small boards are more effective atmonitoring firms’ managers. No empirical evidence in the literature, however, exists that supports thisnegative association between board size and voluntary disclosure (Cheng and Courtenay, 2006).

On the other hand, the corporate governance literature shows that larger boards are more effectivethan smaller ones (i.e., Klein, 2002). In disclosures studies, researchers find a positive association be-tween board size and voluntary disclosures (i.e., Barako et al., 2006).

The literature shows no statistically significant association between earnings forecasts and boardsize either in the US context (Karamanou and Vafeas, 2005) or in the French context (Lakhal, 2005).We expect, however, to see a positive association between forward-looking statements and board sizefor two reasons. First, large boards can have a greater diversity of expertise that includes financialreporting expertise and, hence, more forward-looking statements can be expected. Second, largerboards are less likely to be dominated by insiders and can be more willing to disclose more informa-tion on forward-looking statements to outside investors in order to signal their future performance.This leads to our third hypothesis:

H3. A positive association exists between board size and forward-looking statements in the narrativesof UK annual reports.

Board composition (independence) is measured as the ratio of the number of non-executive direc-tors to the total number of directors. The literature shows that board independence reduces informa-tion asymmetry (Kanagaretnam et al., 2007) and leads to an increase in the levels of corporatedisclosure (Lang and Lundholm, 1993). A sizeable body of the literature examines the association be-tween board composition and voluntary disclosures; however, the results are mixed. A large numberof studies find a positive association between the two variables.4 An inverse relation between the twovariables, however, exists in several countries such as Singapore (Eng and Mak, 2003), Kenya (Barakoet al., 2006) and Malaysia (Haniffa and Cooke, 2005). Other studies find no significant association be-tween the two variables (Ho and Wong, 2001; Haniffa and Cooke, 2002; Mangena and Pike, 2005; Boessoand Kumar, 2007; Hoitash et al., 2009).

4 These include Chen and Jaggi (2000), Cheng and Courtenay (2006), Abraham and Cox (2007), Boesso and Kumar (2007), Limet al. (2007), Li et al. (2008) and Donnelly and Mulcahy (2008).





The literature shows that US firms are more likely to make earnings forecasts when their boards aremore independent of management influence (Karamanou and Vafeas, 2005). The findings for othercontexts, however, are mixed. For example, Lakhal (2005) shows no association between board com-position and earnings forecast disclosures in France, while Hussainey and Al-Najjar (2011) find thatthe sign and the significance of the association between the two variables in the UK context dependson the regression model used.

We believe that board composition is an interesting variable to consider because it reflects the roleof non-executive directors. As implied by resource dependence theory (Pfeffer, 1972; Pfeffer andSalancik, 1978), non-executive directors with their expertise, prestige and contacts, provide firms withlinks to the external environment. According to agency theory, non-executive directors can play a vitalrole in monitoring managers’ performance and limiting their opportunism (Fama, 1980; Fama andJensen, 1983). Such outside directors, who are less aligned with the firm’s managers, can be more in-clined to encourage the management to disclose more forward-looking information to outsiders suchas investors and financial analysts. Greater voluntary disclosures, therefore, may be expected ifnon-executive directors indeed carry out their perceived monitoring role. Moreover, if non-executivedirectors dominate the board, they may have the power to force the management to disclose moreforward-looking information to outside investors. Thus, a higher percentage of non-executive direc-tors on a board is more likely to result in lower information asymmetry (Kanagaretnam et al.,2007) and hence a higher level of corporate disclosures (Lang and Lundholm, 1993). This leads toour fourth hypothesis:

H4. A positive association exists between board composition and forward-looking statements in thenarratives of UK annual reports.

CEO duality (henceforth, in this paper, termed role duality) exists when, at the same time, the sameperson doubles as the chair of the board of directors and the CEO of the company. According to agencytheory, the main disadvantage of role duality is that it can lead to one person having dominance overthe board that can reduce the effective control of the board of directors (Jensen and Meckling, 1976;Fama and Jensen, 1983; Donaldson and Davis, 1991; Whittington, 1993). Personal dominance over theboard can also enable the CEO to engage in opportunistic behavior. Boards that have the CEO servingas the chairperson are generally expected to exhibit weaker monitoring capabilities.

On the other hand, role duality may have some benefits. Brickley et al. (1997) summarize thesebenefits in the following three points: the CEO is able to act rapidly, the chairperson is expected tobe in a good position to make relevant and timely decisions because of his or her better knowledgeof the firm and role duality can lead to a strong leadership style. We argue, however, that the abovebenefits do not necessarily lead to higher levels of forward-looking disclosures.

Although some studies (i.e. Cheng and Courtenay, 2006) report no association between role dualityand voluntary disclosure, Forker (1992), Haniffa and Cooke (2002) find a negative relation between thetwo variables. Lakhal (2005) examines the association between management’s earnings forecast dis-closures and role duality and finds a negative association. Similarly, we expect a negative associationbetween role duality and forward-looking statements. This leads to our fifth hypothesis:

H5. A negative association exists between role duality and forward-looking statements in thenarratives of UK annual reports.

2.2. Voluntary disclosure and firm characteristics

The research also finds that a set of firm-specific variables affects corporate voluntary disclosures.In their meta-analysis of 23 disclosure studies, Ahmed and Courtis (1999) find that firm size, listingstatus, audit size, and leverage are the key factors affecting corporate disclosure. In this study, weuse firm size and leverage as control variables. We exclude audit size from the analysis because, whenthe analysis was undertaken, the information was unavailable for a large number of firms. Althoughthe literature finds a relationship between the listing status and the disclosure levels in the US (Firth,1979), we exclude this variable from our analysis because our sample consists of UK-listed non-finan-cial companies.





Firm size is a determinant of corporate disclosure that has been investigated extensively. Signalingtheory suggests a positive association between corporate disclosure and firm size by proposing thatlarge firms tend to attract financial analysts and are subjected by them and their investors to greaterdemands for value relevant information (Schipper, 1991). In addition, large firms are more likely to beable to afford the cost of producing information for the users of annual reports while small firms aremore likely to suffer from competitive disadvantage if they increase the level of voluntary disclosures(Firth, 1979). Empirical studies consistently find a positive association between the level of disclosureand firm size (see, e.g., Adams and Hossain, 1998; Debreceny et al., 2002; Eng and Mak, 2003; Gul andLeung, 2004; Haniffa and Cooke, 2005; Kelton and Yang, 2008; Wallace and Naser, 1995; Xiao et al.,2004). However, strangely, Hoitash et al. (2009) report a negative association. The literature alsoshows mixed results on the relation between firm size and management earnings forecasts. Lakhal(2005) and O’Sullivan et al. (2008) find a positive association, while Karamanou and Vafeas (2005) findno association between the two variables. Based on these mixed results, the relationship between firmsize and the voluntary disclosure of forward-looking statements is an empirical issue that still requiresinvestigation. Consequently, this paper adds firm size to the analysis as a control variable.

Consistent with signaling theory, we expect leverage to be positively associated with the level ofcorporate disclosures. Jensen and Meckling (1976), for example, argue that highly leveraged firmshave higher monitoring costs. One possible response that enables highly leveraged firms to reducethese costs is to report more forward-looking information in their annual report narratives to conveyvalue relevant information to satisfy their creditors’ needs. Empirical studies on the determinants ofcorporate disclosures offer mixed results. Barako et al. (2006), for example, find that high leverage ra-tios lead to higher risk. Therefore, highly leveraged companies are expected to increase their level ofdisclosure to reduce financing costs and the required risk premiums at the required rates of return. Guland Leung (2004), Eng and Mak (2003) and Xiao et al. (2004), however, find evidence that lower lever-age has a relationship with greater disclosures. Other empirical studies find no statistical associationbetween leverage ratios and levels of corporate disclosures (Ho and Wong, 2001; Abraham and Cox,2007; Celik et al., 2006). Although Lakhal (2005) finds no association between leverage ratios andearnings forecast disclosures, O’Sullivan et al. (2008) find a positive association between the two vari-ables. Based on these mixed results, the relationship between leverage ratios and the voluntary disclo-sure of forward-looking information is an empirical issue that remains to be addressed in this paper.

We also consider dividend policy as one of the main drivers of forward-looking disclosures. Theassociation between dividend policy and forward-looking information has received much attentionin recent years. For example, Hussainey and Walker (2009) find that forward-looking informationand dividend propensity are substitute forms of communicating value relevant information for inves-tors. Their results are consistent with signaling theory but not with pecking order theory (Deshmukh,2005). Signaling theory suggests that firms with higher levels of asymmetric information (i.e., lowerlevels of forward-looking information) are more likely to pay higher dividends to signal their futureprospects to current and potential investors. Pecking order theory, however, suggests that firms withhigher levels of information asymmetry are more likely to suffer from under-investment and, to con-trol for this, are more likely to lower their dividends. Deshmukh (2003, 2005) and Li and Zhao (2008)find that dividend payments are lower in US firms that are subject to more information asymmetry.Similarly, Basiddiq and Hussainey (2012) find that UK firms with lower information asymmetry (mea-sured by the number of analysts following) pay higher dividends. This finding suggests that firms withhigher levels of disclosure pay more dividends. In addition, Hussainey and Al-Najjar (2011) find a po-sitive association between dividends and forward-looking information in the narratives of UK annualreports. We, therefore, expect a positive association between dividends and the voluntary disclosureof forward-looking statements.

Profitability is one of the main determinants of corporate disclosure (see Ahmed and Courtis, 1999,for a comprehensive review). Research on the association between profitability and disclosures offers,however, mixed results. In particular, Signaling theory suggests that profitable firms have an incentiveto disclose more information in order to signal their favorable results to stock market participants. We,therefore, anticipate that profitable firms are more likely to disclose future-oriented information intheir annual report narratives. Some empirical studies support this positive association (Haniffa andCooke, 2005; Li et al., 2008). Celik et al. (2006), Hoitash et al. (2009), and Wallace and Naser (1995)





find a negative association between disclosure and profitability while Mangena and Pike (2005) andBarako et al. (2006) find no association between the two variables. Research on forward-looking dis-closures find mixed results. Lakhal (2005) and O’Sullivan et al. (2008), for example, find no associationbetween profitability and forward-looking disclosures. Hussainey and Al-Najjar (2011) find a negativeassociation between profitability and forward-looking statements, but the significance of this relation-ship depends mainly on the regression model used. Given these mixed findings, this paper empiricallyanalyzes the relationship between profitability and the voluntary forward-looking disclosures.

2.3. Value relevance of voluntary forward-looking statements

The literature shows a considerable interest in examining the value relevance of quantitative man-agement earnings forecasts in the US context. Kim and Shi (2011), for example, find that these fore-casts are associated with the company’s cost of equity capital. The value relevance of voluntaryforward-looking statements, however, is under-researched. Schleicher and Walker’s (1999) work isthe first empirical investigation on the relevance of forward-looking disclosures to investors. Theyuse manual content analysis to identify forward-looking statements in OFRs and find their inclusionis a useful means of anticipating future earnings. Hussainey et al. (2003) use a content analysis soft-ware package to identify forward-looking statements in annual report narratives. They use the re-turns-future earnings coefficient model of Collins et al. (1994) with a research design closer tothose used by Gelb and Zarowin (2002) and Lundholm and Myers (2002). They find that the levelsof forward-looking statements in the annual report narratives improve share price anticipation of fu-ture earnings. In addition, the literature shows that the impact of forward-looking disclosures on shareprice anticipation of future earnings is significant for unprofitable firms but insignificant for profitablefirms (Schleicher et al., 2007); and is significant for high-growth firms but insignificant for low-growthfirms (Hussainey and Walker, 2009).

The above-mentioned research on the value relevant of forward-looking statements, however, doesnot consider the impact of corporate governance. Unlike these studies, we focus our investigation onthe impact of the forward-looking statements that are driven by governance on the share price antic-ipation of future earnings. We also expand the UK evidence by examining the value relevance of for-ward-looking statements for financial years ending on or before October 2007.5 Signaling theorysuggests that managers disclose value relevant information to meet investors’ demands for information.Following Lundholm and Myers (2002), we expect that, if the forward-looking information disclosed infirms’ annual report narratives is relevant to investors, it should be reflected in current stock returns. Weexpect that the forward-looking disclosures by firms with better quality of corporate governance aremore likely to contain value relevant information for investors for better forecasting future earnings.In other words forward-looking statements of better governed firms should be more informative aboutfuture earnings. This leads to our sixth hypothesis:

H6. Holding the number of forward-looking statements constant, forward-looking statements ofbetter governed firms are more informative about future earnings.

3. Measuring the levels of forward-looking statements

We use the computer-based content analysis procedure developed by Hussainey et al. (2003) toidentify the number of forward-looking statements in annual report narratives. Following Hussaineyet al. (2003), we use the following list of 35 forward-looking keywords developed by Hussainey et al.(2003): accelerate, anticipate, await, coming (financial) year(s), coming months, confidence (or confi-dent), convince, (current) financial year, envisage, estimate, eventual, expect, forecast, forthcoming,hope, intend (or intention), likely (or unlikely), look forward (or look ahead), next, novel, optimistic,outlook, planned (or planning), predict, prospect, remain, renew, scope for (or scope to), shall, shortly,

5 Due to the mandatory nature of the Business Review section of the annual report in the UK for financial years starting on orafter October 2007 and its close overlap with the OFR statements, we firmly believe that disclosures stipulated under OFRs forfinancial years starting on or after October 2007 are mandatory under the Business Review regulations.





should, soon, will, well placed (or well positioned), and year(s) ahead. We also take the future yearnumbers into account in the list of forward-looking keywords.

Following Hussainey et al. (2003), we generate the disclosure score for the sample following athree-stage procedure. In the first stage, we search the narrative sections of the annual reports (i.e.,OFR statements) for forward-looking information, because these sections are more likely to containthis type of information. In the second stage, we identify the information that is relevant to the stockmarket in terms of assessing the firm’s future earnings. For the purpose of this paper, we use the fol-lowing list of twelve earnings-related keywords from Hussainey et al. (2003): benefit, breakeven, bud-get, contribution, earnings, EPS (Earnings per Share), loss, margin, profit, profitability, return, andtrading. Finally, we use the NUD � IST version 6 software, developed by QSR International, to identifythe number of sentences that contain at least one forward-looking keyword and at least one earnings-related keyword.

Hussainey et al. (2003) use Pearson’s and Spearman’s correlation analyses to assess the strengthand direction of the relation between the manual content analysis and the computer content analysis.They find a strong positive Pearson’s correlation (0.96, significant at the 0.001 level) between the num-ber of forward-looking statements, identified by the manual content analysis and the number identi-fied by NUD � IST. In addition, they find a strong positive Spearman’s rank correlation (0.95, significantat the 0.001 level) between the two types of analyses. These findings suggest that the disclosure scorescreated by the computer software are reliable.

4. Research design and sample

4.1. Regression models

Apart from using a multivariate OLS regression, we also use a panel regression procedure to con-sider the random effects within or between firms on the dependent variable, the disclosure scores.The panel regression technique also allows us to undertake a more accurate examination of the asso-ciations between corporate governance and the voluntary disclosure of forward-looking statements. Inorder to investigate such associations and test our research hypotheses, we develop the followingmodels and estimate them using both OLS and panel regressions with random effects.

Pleaseporatej.jaccp

DSi;t ¼ a0 þ a1IOi;t þ a2DOi;t þ a3BSi;t þ a4BCi;t þ a5Dualityi;t þ a6DYi;t þ a7FSi;t þ a8ROAi;t

þ a9LEVi;t þ ei;t ð1Þ

DSi;t ¼ b0 þ b1IOi;t þ b2DOi;t þ b3BSi;t þ b4BCi;t þ b5Dualityi;t þ b6DYi;t þ b7FSi;t þ b8ROAi;t

þ b9LEVi;t þX8

n¼1

b9þnINDn þ ei;t ð2Þ

where DS is the disclosure score (the number of forward-looking statements); BS (board size) is thetotal number of directors on the board; BC (board composition) is the percentage of non-executivedirectors, that is, the number of non-executive directors divided by the board size; Duality is a dummyvariable for role duality (one for the duality and zero for the separation); DO (director ownership) isthe aggregate percentage of the shares owned by directors; IO (institutional ownership) is the aggre-gate value of the shares owned by all institutional investors holding at least 3% of the shares in thefirm; DY (dividend) is the dividend yield; FS (firm size) is the natural logarithm of the market capital-ization; ROA (profitability) is the return on assets and LEV is the leverage ratio (total debt/total assets).

In the above models, two explanatory variables (IO and DO) capture the ownership structure whilethree explanatory variables (BS, BC, and Duality) capture the board characteristics. The aggregate insti-tutional ownership (IO) shows the ownership concentration for institutional investors who are ex-pected to be effective external monitors of managerial discretion in financial reporting. If our firsthypothesis holds, we expect that the coefficients a1 and b1 should be positive. The independent var-iable DO measures the executive directors’ aggregate shareholdings. We expect that the higher thepercentage held by executive directors, the more likely that the entrenchment effect protects the

cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/

ubpol.2013.02.009




management from the external monitoring. As a consequence, we expect the coefficients a2 and b2 tobe negative. The BS (board size) is the total number of directors sitting on a board. The larger theboard, the greater the difficulty for the management to dominate the board and in order to constrainthe moral hazard of the firm’s management, the more likely it is that the board encourages greatervoluntary disclosure of forward-looking information in the annual reports. We, therefore, expectthe coefficients a3 and b3 to be positive. The BC (board composition) measures the proportion ofnon-executive directors on the board. A series of corporate governance best-practice guides, startingwith Cadbury Committee (1992), highlight the important role played by non-executive directors. Gi-ven the effectiveness of non-executive directors, we expect the disclosure score to be positively asso-ciated with BC and, therefore, we expect the coefficients a4 and b4 to be positive. The dummy variableDuality reflects whether or not the chairperson also has the role of corporate CEO. Under duality, thefirm’s management has greater power over the board’s decision-making process and, therefore, thefirm might be less likely to voluntarily disclose a large amount of forward-looking information inits annual reports. Therefore, we expect the coefficients a5 and b5 to be negative. Other control vari-ables are proxies for the remaining characteristics of the firm.

Furthermore, regression model (2) adds industry dummy variables (IND) that are used to accountfor the possibility that the voluntary disclosure of forward-looking information may be influenced bythe general practice within specific industries. The industry dummies are created using the FTSEIndustry Classification Benchmark (ICB) that groups the stocks listed on the LSE into nine industry sec-tors: Basic Materials, Consumer Goods, Consumer Services, Health Care, Industrials, Oil & Gas, Tech-nology, Telecommunications, and Utilities. We construct nine corresponding dummy variables(IND1–9) taking the value one if the company is a member of that sector and zero otherwise. We choosethe Industrials sector (IND5) as the reference sector for the regression analyses. We are only able toestimate the panel regression for random effects rather than fixed effects because the industry dummyvariables do not change over the years for the same individual sample firm.

In order to measure the value relevance of the forward-looking statements, we use Collins et al.’s(1994) returns-future earnings model as follows:

6 Ouret al. (2looking

Pleaseporatej.jaccp

Ri;t ¼ h0 þ h1Xi;t þ h2Xi;tþ1;tþ3 þ h3Ri;tþ1;tþ3 þ h4EPi;t�1 þ h5AGi;t þ et ð3Þ

where the current return (Ri,t) is defined as the buy-and-hold returns from 8 months before the cur-rent financial year-end t to 4 months after the current financial year-end t, the future returns (Ri,t+1,-t+3) are the buy-and-hold returns from 8 months before the financial year-end t + 1 to 4 months afterthe financial year-end t + 3, the Xi,t is the current earnings growth measured by the annual change inactual EPS for year t scaled by the EPS for year t � 1, the Xi,t+1,t+3 is the future earnings growth mea-sured by the sum of the earnings growth from year t + 1 to year t + 3, the EPt�1 is the earnings yieldmeasured by the reported actual EPS for the year t � 1 divided by the share price at the beginningof the year t, and the asset growth (AGt) is the growth rate of the total book value of assets for year t.

In order to test Hypothesis 6, we introduce the governance-driven forward-looking statements(GovDS) of Collins et al.’s (1994) returns-future earnings model. The variable GovDS is estimated asthe fitted values of our regression model (2). The fitted values indicate the component of the voluntarydisclosure of forward-looking statements that are driven by corporate governance factors.6 We link theearnings growth variables (Xi,t and Xi,t+1,t+3) in model (3) with the variable GovDS that yields the followingequation:

Ri;t ¼ h0 þ h1Xi;t þ h2Xi;tþ1;tþ3 þ h3Ri;tþ1;tþ3 þ h4EPi;t�1 þ h5AGi;t þ h6GovDSi;t þ h7GovDSi;t

� Xi;t þ h8GovDSi;t � Xi;tþ1;tþ3 þ ut ð4Þ

As defined, the variable GovDS is the fitted value from regression model (2) generated by using theestimated coefficients of the corporate governance factors. So, given the same level of voluntary dis-closure, the forward-looking statement of better governed firms should be more informative about fu-ture earnings if Hypothesis 6 holds. As a result, the current stock returns partially anticipate the

research design of using fitted values in the second stage of regression analyses is closely related to the one used in Bowen008) and discussed in Guay (2008). We also, however, add the residuals from the regression model (2) as the forwardstatements that are not driven by governance in the returns-future earnings model.


ubpol.2013.02.009




realized future earnings. If this is the case, then the coefficients of the linked near-term and long-termfuture earnings, GovDS � Xi,t, and GovDS � Xi,t+1,t+3, should be positive in the modified regression (4) forthe returns-future earnings. In other words, forward-looking statements of better governed firms dis-close more value-relevant information about future earnings.

4.2. Sample selection and data collection

We focus our investigation on the FTSE All-Share non-financial UK companies for the financialyears ending within the period January 1996–December 2007. Following prior research, we excludefinancial firms from our analysis. Our sample period starts in 1996 as a large cross-section of annualreports became available in text file format on the Dialog database in that year. We end our analysis in2007 since the Business Review section of the annual report, which overlaps closely with the OFRstatements, became mandatory in the UK after that year.7

We collect annual reports from Dialog and Northcote databases. The annual reports for companiesfor financial years ending within the period January 1996 and December 2002 are collected from theDialog database provided by Thomson Financial. Thomson Financial, however, discontinued support ofthe Dialog database in mid-2004 which implies a full coverage extends only to the financial year end-ing in 2002. We, therefore, use the Northcote database (http://www.northcote.co.uk) to collect annualreports for companies for financial years ending within the period January 2003–December 2007. Wethen convert these reports into text format. We finally use the NUD � IST 6 software to calculate thenumber of forward-looking statements in each annual report.

The total number of annual reports available from Dialog and Northcote for non-financial firmsover the period of 1996–2007 is 10,258. Only 7977 of these firm-year observations have Datastreamcodes. We delete firms that changed their financial year-end during the time period (1489 firm-years)and those with missing corporate governance or accounting data. These deletions leave a final sampleof 5489 usable firm-year observations. We use this sample to test the impact of corporate governancemechanisms on the level of forward-looking disclosures. Table 1 illustrates the sample selection pro-cess and the yearly breakdown of observations. The sample is further reduced because of the unavail-ability of stock return data. We use a sample of 4579 firm-year observations, therefore, to examine thevalue relevance of the forward-looking statements that are driven by corporate governance.

The numbers and identities of the incumbent directors and CEOs are hand-collected from the Com-pany REFS CDs for each company-year in order to calculate the board’s composition and size and tocreate the dummy variable for role duality. Director ownership data are also hand-collected fromthe Company REFS CDs. We collect the aggregate institutional ownership (IO) at the firm level fromThomson Financial. Financial and accounting data for the share return, the market capitalization,the dividend yield, the earnings, the total assets, and the total debts are collected from Datastream.

4.3. Descriptive analysis

Table 2 provides the descriptive statistics. The highest disclosure score of the sampled firms is 45while the lowest is zero. This range indicates that significant variation exists between UK companiesin terms of their decisions to disclose voluntarily forward-looking information. The sample firms havean average disclosure score of 5.62. Institutional investors own an average of 51% of the firms’ shares.On average, directors hold 7% of the outstanding shares; and there are 8.39 directors in each firm, 51%of whom are non-executive directors. The largest board has 26 directors and the smallest only three.On average, firms pay dividends of 4%. The mean market capitalization of the firms in the sample is£2.55 billion with a maximum of £155.85 billion and a minimum of £18 million. The average returnon assets is 6.82 with a maximum of 45.63 and a minimum of �41.32. An average firm has 14.49pence of total debt per pound of total assets.

7 As part of the directors’ reports, UK-quoted companies were required to follow the enhanced business review reportingrequirements set out in section 417 of the Companies Act 2006 for all years beginning on or after October 1, 2007. For more detail,see http://www.frc.org.uk/asb/technical/operating.cfm.


http://www.northcote.co.uk

http://www.frc.org.uk/asb/technical/operating.cfm



Table 1Sample selection and yearly observations.

No. ofobservations

Panel A: Sample selection processAll firm years for annual reports of non-financial firms in Dialog and Northcotea for

1996–200710,258

Less: firms without Datastream codes 2281Less: firms that change their financial year-ends 1489Less: firm years without sufficient data on Company CD Refs for board

characteristics743

Less: firm years without sufficient data on Thomson Financial for institutionalownership data and firm characteristics

256

Sample firm years 5489

Panel B: Yearly observations1996 3241997 4031998 4921999 5552000 5362001 5972002 4632003 3032004 4792005 4612006 5282007 348

a Northcote Database (http://www.northcote.co.uk).

Table 2Descriptive statistics.

Mean Median St. dev. Min Max

DS (disclosure score) 5.62 5.00 4.34 0.00 45.00IO (institutional ownership) 0.51 0.49 0.18 0.00 1.00DO (director ownership) 0.07 0.01 0.13 0.00 0.82BS (board size) 8.39 8.00 2.54 3.00 26.00BC (board composition) 0.51 0.50 0.14 0.00 1.00Duality (role duality dummy) 0.30 0.00 0.46 0.00 1.00DY (dividend yield) 0.04 0.03 0.03 0.00 0.33FS (market capitalization) 1821.75 250.50 1042.20 1.80 15585.20ROA (return on assets) 6.82 7.04 10.49 �41.32 45.63LEV (leverage ratio) 14.49 9.53 16.81 0.00 100.00

Industry dummiesIND1 (basic materials) 0.13 0.00 0.34 0.00 1.00IND2 (consumer goods) 0.12 0.00 0.33 0.00 1.00IND3 (consumer services) 0.16 0.00 0.37 0.00 1.00IND4 (health care) 0.06 0.00 0.23 0.00 1.00IND5 (industrials) 0.27 0.00 0.45 0.00 1.00IND6 (oil and gas) 0.02 0.00 0.15 0.00 1.00IND7 (technology) 0.09 0.00 0.28 0.00 1.00IND8 (telecommunications) 0.08 0.00 0.26 0.00 1.00IND9 (utilities) 0.03 0.00 0.17 0.00 1.00

Notes: DS – voluntary disclosure score; IO – aggregate institutional ownership; DO – aggregate directors’ ownership; BS – boardsize (total number of directors on board); BC – board composition (percentage of non-executive directors on board); Duality –dummy variable for the duality of board chairperson and CEO (1 for separation and 0 for duality); FS – market value measure asyear-end market capitalization of firms; DY – dividend yield; ROA – return on asset; and LEV – leverage ratio (total debt/totalasset).



http://www.northcote.co.uk



Table 3Pearson correlations.

DS IO DO BS BC Duality DY FS ROA LEV IND1 IND2 IND3 IND4 IND5 IND6 IND7 IND8

IO �0.08a 1.00DO �0.15a �0.20a 1.00BS 0.26a �0.16a �0.14 a 1.00BC 0.09a 0.20a �0.19a 0.05a 1.00Duality 0.00a 0.19 0.00a 0.08 a 0.12a 1.00DY 0.10a 0.00a �0.10a �0.06a �0.09a �0.14 1.00FS 0.33a �0.26a �0.25a 0.59a 0.20a 0.12a �0.18a 1.00ROA 0.01b �0.17a 0.09a �0.06a �0.18a �0.27a 0.21a 0.07a 1.00LEV 0.12a �0.10a �0.06a 0.07a 0.04 �0.39c 0.07a 0.10a 0.15a 1.00IND1 0.02 �0.01c 0.01 �0.03b �0.05 a �0.05c 0.16a �0.05 a 0.05a 0.01c 1.00IND2 0.04b 0.03 0.00 0.01 0.01 �0.02 0.00a 0.04c �0.03 0.14a �0.16a 1.00IND3 0.01 �0.01 0.06a 0.01 �0.08a 0.00a 0.12a �0.03c 0.04b �0.10a �0.18a �0.17a 1.00IND4 �0.05a 0.03 �0.01 0.04 0.10a 0.04a �0.23a �0.02b �0.28a �0.09a �0.10a �0.09a �0.10a 1.00IND5 0.00 0.01 �0.08a �0.11a �0.06a 0.03b 0.10a �0.09a 0.10a �0.02 �0.27a �0.25a �0.28a �0.15a 1.00IND6 �0.03c 0.02 0.01c 0.07a 0.04a �0.01 �0.10a 0.05a �0.01 0.01 �0.07a �0.06a �0.07a �0.04a �0.11a 1.00IND7 �0.11a �0.05a 0.08a �0.12a 0.03c 0.00a �0.21 a �0.07a �0.04c �0.07a �0.12a �0.12a �0.13a �0.07a �0.20a �0.05a 1.00IND8 0.05a 0.02c 0.01b 0.18a 0.06a 0.00 �0.16 a 0.17a 0.03b 0.10a �0.12a �0.11a �0.12a �0.07a �0.19a �0.05a �0.09a 1.00IND9 0.07a �0.08a �0.09a 0.09a 0.07a 0.00 0.12 a 0.17a �0.01 0.07a �0.07a �0.07a �0.08a �0.04a �0.11a �0.03a �0.05c �0.05a

DS – voluntary disclosure score. IO – aggregate institutional ownership; DO – aggregate directors’ ownership; BS – board size (total number of directors on board); BC – board composition(percentage of non-executive directors on board); duality – dummy variable for the duality of board chairperson and CEO (1 for separation and 0 for duality); DY – dividend yield; FS – firmsize measure as natural logarithm of market value; ROA – return on asset; and LEV – leverage ratio (total debt/total asset).

a Significance level at the 1% for two-tailed t-tests.b Significance level at the 5% for two-tailed t-tests.c Significance level at the 10% for two-tailed t-tests.

M.W

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j.jaccpubpol.2013.02.009




Market capitalization (MV) is skewed by a few extremely large firms with the mean much higherthan the median. Thus, we use the formula FS = Ln(1 + MV) to calculate the natural logarithm of themarket capitalization to reduce this skewness so that the mean and median statistics are approxi-mately equal. Similarly, we measure the variable BS (board size) as the natural logarithm of the totalnumber of directors in order to minimize the effects of skewness and outliers. We also use a Shapiroand Wilk’s (1965) test to check the normality of the dependent variable (disclosure score) and theexplanatory variables.8 The results are all close to one, which indicates normal distributions.

Table 3 presents the Pearson correlation analyses. Only the correlation coefficient between boardsize (BS) and firm size (FS) is relatively high. However, no concerns about the multicollinearity prob-lem exist because the correlation is still less than 0.70. Our measure of forward-looking disclosures isstatistically correlated with corporate governance and firm characteristics variables except for the roleduality and the industry dummy variables.

5. Empirical results

5.1. Determinants of earnings forecast disclosure

Table 4 reports the random effects results from the OLS and panel regressions in models (1) and (2).Although we believe the panel regression provides more accurate estimations of the models, the OLSestimates are also reported to allow comparison with the empirical evidence presented in other stud-ies. Overall, models (1) and (2) are significant at the 1% level.

The results for the corporate governance mechanisms are generally consistent between the twoestimation methods. The results for the control variables such as firm size and leverage ratio are moresignificant under the OLS. This significance is because such characteristics tended to be persistent overyears for individual sample firms. While panel regressions remove these fixed effects, the OLS poolsthem and hence results in more significant coefficients.

The coefficients for the aggregated institutional ownership are positive but insignificant. Thesecoefficients, therefore, reject Hypothesis 1. Institutional investors, who typically hold around 60% ofthe shares in our sample of firms, appear not to be associated with the level of voluntary disclosureregarding future earnings. As powerful investors, they might have other more efficient means of com-municating with the firm’s management; for example, one-to-one meetings (Barker, 1998; Holland,1998; Marston, 2008).

Table 4 shows that a negative association exists between forward-looking statements and execu-tive directors’ ownership. The coefficient is statistically significant in both models and both estimationmethods (significance levels between 1% and 10%). This finding suggests that managers might bemotivated to maximize their control over private benefits by reducing the level of voluntary disclo-sure. The finding, therefore, supports Hypothesis 2. This result can also indicate that internal share-holders are more likely to have advance access to forward-looking information, hence reducing thefirm management’s incentive to disclose such information voluntarily in annual reports.

The regression results show that our disclosure measure has a positive association with board size(significant at the 1% level) and the percentage of non-executive directors sitting on the board (signif-icant at the 10% level). These findings are consistent with the predictions of Hypotheses 3 and 4 thatsuggest firms with larger boards and higher proportions of non-executive directors are more likely todisclose information related to future earnings. This result might be because greater financial report-ing expertise exists on such boards.

The negative coefficients reported for the duality dummy variable also support Hypothesis 5.Although the significance level of 10% is lower than the other board characteristics, it is consistentin both regression models. For our sample firms, the lower significance level may be the result ofthe lack of variation in this variable. A closer investigation on the dispersion of the duality dummy var-iable shows that only 10% of our sample firms have role duality.

8 The Shapiro and Wilk (1965) test is the ratio of the best estimator of the variance to the usual corrected sum-of-squaresestimator of the variance.




Table 4Board characteristics and voluntary forward-looking statements in annual reports narratives.

Explanatory variables Pooled OLSmodel (1)

Random-effect panelregression model (1)

Pooled OLSmodel (2)


Constant 0.97** �0.05 0.69 0.15IO (institutional

ownership)0.07 0.05 0.24 0.15

DO (directors’ ownership) �1.20*** �1.44** �1.20** �1.42**

BS (board size) 0.12*** 0.12*** 0.12*** 0.12***

BC (board composition) 0.65* 0.74* 0.91* 0.90*

Duality (boardchairperson’s roleduality)

�0.32* �0.30* �0.31* �0.28*

DY (dividend yield) 24.66*** 20.47*** 21.47*** 18.51***

FS (firm size) 0.77*** 0.62*** 0.76*** 0.61***

ROA (return on asset) �0.02*** �0.02** �0.02*** �0.02***

LEV (leverage) 0.02*** 0.03*** 0.02*** 0.02***

Industry dummiesIND1 (basic materials) 0.07 0.20IND2 (consumer goods) 0.01 0.07IND3 (consumerservices)

0.01 0.03

IND4 (health care) �0.69** �0.62IND5 (industrials) Reference

sectorReference sector

IND6 (oil and gas) �1.26*** �1.01IND7 (technology) �0.85*** �0.99**

IND8

(telecommunications)�0.03 �0.03

IND9 (utilities) �0.58** �0.48

No. of observations 5489 5489 5489 5489Wald v 285.04 299.99b

F-test 81.07a 44.66a

Adjusted R2 (%) 14.96 14.97 15.34 15.45

Dependent variable is DS – voluntary disclosure score.* Significance at the 10% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.** Significance at the 5% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.*** Significance at the 1% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.

a Significance at the 1% level for F-test.b Significance at the 1% level for Wald v2 test.


The results for all controlled firms’ characteristics, that is, dividend yield, firm size, profitability,and leverage ratio, are significant. Table 4 shows that firms that pay high dividends are more likelyto report more forward-looking statements in the annual report narratives. The regressions for models(1) and (2) show consistently significant positive coefficients for the variable DY; in all cases, these arestatistically significant at the 1% level. This finding is consistent with previous UK research (e.g.,Hussainey and Al-Najjar, 2011; Basiddiq and Hussainey, 2012) and suggests that firms with higherlevels of forward-looking statements pay more dividends. Both the OLS and the random effects meth-ods show a significantly negative association between the level of forward-looking statements and thefirm’s operating performance (significance level 1%). This finding suggests that forward-looking state-ments are more likely to be used by unprofitable than profitable firms. Furthermore, according to Ta-ble 4, the disclosure scores have a positive relationship to the firm size and the leverage ratio(significance levels 1%) that suggests large and highly geared firms are more likely to disclose for-ward-looking information.

In the random-effect panel regression model, the level of voluntary disclosure is significantly loweronly for Technology sector (IND6). The level of voluntary disclosure is significantly lower for Technol-ogy, Health Care, Oil & Gas and Utilities sectors when the model estimates use the pooled OLS method.These estimates indicate that the observed negative associations between the dependent variable (DS)





and the Health Care, Oil & Gas, and Utilities industries are likely to be caused by fixed effects over time.In addition, as the constant becomes insignificant in model (2), the inclusion of industry dummy vari-ables appears to capture some effects that are unexplained by the board characteristics and the otherexplanatory variables.

5.1.1. EndogeneityThe positive associations between corporate governance and the level of forward-looking informa-

tion may be driven by unmodeled or imperfectly measured factors that affect both governance anddisclosure. For example, a firm operating in a riskier environment can have higher governance andproduce more forward-looking statements to help outsiders determine the appropriateness of man-agement’s decisions. If this is the case, then ignoring the firm’s risk in the analysis biases the OLS esti-mate of the effect of the governance upwards. The upward bias favors the hypothesis that an improvedgovernance leads to more forward-looking statements. The absence of a consensus in the finance lit-erature on which risk factors are the best proxies for the information environment make the identifi-cation of acceptable control variables or instruments difficult, however. In addition, the choice ofappropriate instruments, while never easy, is challenging in our context because we add multipleendogenous variables as measures of corporate governance, that is, institutional ownership, executivedirector ownership, board size, board composition and role duality. Larcker and Rusticus (2010) sug-gest an alternative approach that involves assessing how large the endogeneity problem has to be tochange the OLS results and, in particular, how large it has to be to make the coefficient statisticallyinsignificant. Since the estimated OLS coefficients for the corporate governance measures are statisti-cally significant, we examine the potential impact of unobserved or unmodeled variables using the ap-proach described by Frank (2000). He derives the minimum correlations necessary to turn statisticallysignificant results into borderline insignificant results. These correlations are based on the conceptthat for an unobserved variable to affect the results, it has to be correlated with both the independentvariable and the dependent variable (controlling for the other variables). The impact threshold for anunmodeled variable is defined as the lowest product of the partial correlation between the dependentvariable and the unmodeled variable and the partial correlation between the endogenous independentvariable and the unmodeled variable that makes the coefficient statistically insignificant. If the impactthreshold is high (low), then the OLS results are robust (not robust) to concerns about the omitted var-iable. For each of the endogenous independent variables (DO, BS, BC, and Duality), we calculate an im-pact statistic that indicates the minimum impact of a confounding variable that is needed to renderthe coefficient statistically insignificant.

Without some benchmark, difficulty exists in determining whether or not an impact threshold issmall enough to conclude that the significant associations between the voluntary disclosure scoresand corporate governance measures (DO, BS, BC, and Duality) are fragile. While, by definition, we donot have access to the unobserved and unmodeled variable, we do have other control variables: div-idend yield, firm size, profitability, and leverage ratio. We observe all these to be significant determi-nants of voluntary disclosure scores. We are able, therefore, to calculate the impact of the inclusion ofeach control variable on the coefficient of the endogenous independent variable. Similarly, the impactof each control variable is the product of the partial correlation between the endogenous independentvariable and the control variable and the correlation between the dependent variable and the controlvariable (taking out partially the effects of the other control variables). Table 5 reports the results ofthis analysis.

The threshold value for executive director ownership is �0.14 which suggests the correlations be-tween this and the dependent variable and between the dependent variable and the unobserved andunmodeled variable need to be about 0:374ð¼

ffiffiffiffiffiffiffiffiffiffi0:14p

Þ for the OLS result to be overturned. Because therelationship is negative, one of these two correlations is expected to be negative. Firm size has thelargest impact, �0.10. The threshold value for board composition (BC) is 0.05 suggesting each of therelevant correlations requires to be about 0:283ð¼


Þ for the OLS result to be overturned. The var-iable with the largest impact on the coefficient of board composition is, again, firm size with a value of0.05. The threshold value for role duality is�0.05. This value implies that, for the OLS result to be over-turned in this case, the relevant correlations have to be about 0:224ð¼


Þ. Since the dependentvariable is related negatively to duality, one of these two correlations would have been expected to




Table 5Impact of unmodeled variables.


Impactthresholds

Impact onX1

Impact onX2

Impact onX3

Impact onX4

Constant 0.97��

Endogenous variablesInstitutional ownership 0.07X1 – directors’ ownership �1.20�� 0.14X2 – board size 0.12�� 0.22X3 – board composition 0.65� 0.08X4 – board chairperson’s roleduality

�0.32� �0.05

Control variablesDividend yield 24.66�� 0.03 0.01 0.00 0.00Firm size 0.77�� 0.10 0.20 0.05 �0.02Return on asset �0.02�� 0.01 0.01 0.01 0.00Leverage 0.02�� 0.00 0.01 0.00 0.00

Notes: The number of firm-year observations (n) is 5489. For each of the endogenous independent variables, an impact statisticis calculated (ITCV) indicating the minimum impact of an unobserved and unmodeled variable that is needed to render thecoefficient statistically insignificant. The ITCV is defined as the product of the correlation between the endogenous independentvariables (X1–X4) and the unmodeled variable and the correlation between the dependent variable (forward-looking disclosure)and the control variables partialling out the effect of the other control variables). The sign of the impact measure indicates howthe inclusion of the control variable affects the coefficient for the endogenous independent variables (X1–X4) respectively. Theimpact results also help in assessing the likelihood that such an unmodeled variable exists. The sign of the impact scoreindicates how the inclusion of each control variable affects the coefficient of each endogenous independent variable. A positiveimpact score indicates that inclusion of the control variables makes the coefficient on the endogenous independent variablemore positive or less negative. A negative impact score has the opposite effect.


be negative; otherwise, the unmodeled variable would have strengthened rather than weakened ourfindings on role duality. Once again, firm size is the variable with the largest impact on the coefficientof duality with a value of �0.02. To overturn these threshold values, therefore, we need an unmodeledvariable with a stronger impact than firm size. The threshold value for board size (BS) is 0.22 that sug-gests the correlations between the dependent variable (DS) and the endogenous independent variable(BS) and between DS and the unobserved and unmodeled variable need to be about 0:469ð¼


Þ forthe OLS result to be overturned. The variable with the largest impact on the coefficient of board size isfirm size measured by market capitalization with a value of 0.20 that suggests we require an unmod-eled variable with a stronger impact than firm size to overturn the results for board size. In otherwords, the unmodeled variable has to be more highly correlated than firm size with both the depen-dent variable and board size.

Since, however, we have a comprehensive set of control variables, which are all associated with thedependent variable at the 1% significance level, we can confidently rule out the suspected endogeneityproblem related to the independent variables of executive director ownership, board size, board com-position, and role duality in our findings.

5.1.2. Missing valuesIn order to examine the extent to which excluding firms with missing data biases our sample, we

also use multiple-imputation estimates for models (1) and (2). Table 6 reports the results that showthe overall model is significant at the 1% level. All of the coefficients for corporate governance indica-tors, except that related to aggregate institutional ownership, are statistically significant. These areconsistent with those reported in Table 4.

5.1.3. Audit committee characteristicsAlthough, for the reasons mentioned earlier, we are unable to test the relationship between the vol-

untary disclosure of forward-looking statements and the quality of external auditors, we control forthe audit committee characteristics in the regression models. The extended regression models canbe expressed as follows:




Table 6Multi-imputation estimation to treat for missing data.


Robust regressionmodel (1)

Pooled OLSmodel (2)

Robust regressionmodel (2)

Constant 0.87�� 0.05 0.55 0.42IO (institutional ownership) 0.23 0.35 0.44 0.59DO (directors’ ownership) �1.31�� 1.51�� 1.35�� 1.64��

BS (board size) 0.12�� 0.09�� 0.12�� 0.09��

BC (board composition) 0.71� 0.67� 0.98�� 0.96��

Duality (board chairperson’srole duality)

�0.37� �0.26� �0.36� �0.24�

DY (dividend yield) 24.49�� 21.54�� 21.10�� 18.42��

FS (firm size) 0.75�� 0.59�� 0.73�� 0.57��

ROA (return on asset) �0.01� �0.01 �0.01� �0.01LEV (leverage) 0.02�� 0.01�� 0.02�� 0.01��

Industry dummiesIND1 (basic materials) 0.07 0.03IND2 (consumer goods) 0.01 0.03IND3 (consumer services) 0.03 0.06IND4 (health care) �0.63 �0.96��

IND5 (industrials) Reference sector Reference sectorIND6 (oil and gas) �1.26�� 1.31��

IND7 (technology) �0.91�� 0.78��

IND8 (telecommunications) 0.12 0.08IND9 (utilities) �0.73� �1.22��

No. of observations 6488 6488 6488 6488F-test 58.61a 48.48a 33.19a 28.08a

Notes: Dependent variable is DS – voluntary disclosure score.


Pleaseporatej.jaccp

DSi;t ¼ a00 þ a0l

IOi;t

DOi;t

BSi;t

BCi;t

Dualityi;t

0BBBBBB@

1CCCCCCAþ a0a

ASi;t

ACi;t

FExpi;t

0B@

1CAþ a0m

FSi;t

DYi;t

ROAi;t

LEVi;t

0BBB@

1CCCAþ ei;t ð5Þ

DSi;t ¼ b00 þ b0l

IOi;t

DOi;t

BSi;t

BCi;t

Dualityi;t

0BBBBBB@

1CCCCCCAþ b0a

ASi;t

ACi;t

FExpi;t

0B@

1CAþ b0m

FSi;t

DYi;t

ROAi;t

LEVi;t

0BBB@

1CCCAþ

X8

n¼1

b012þnINDn þ ei;t ð6Þ

where

a0l ¼ ða01 a02 a03 a04 a05 Þ; b0l ¼ ðb01 b02 b03 b04 b05 Þ; a0a ¼ ða06 a07 a08 Þ;

b0a ¼ ðb06 b07 b08 Þ; a0m ¼ ða09 a010 a011 a012 Þ; and b0m ¼ ð b09 b010 b011 b012 Þ

In the above regression models, we use three variables to capture the audit committee characteristicsin addition to the corporate governance measures and other firm characteristics. These comprise thesize of the audit committee (AS) calculated as the total number of audit committee members, the pro-portion of non-executive directors on the audit committee (AC) and the proportion of audit committeemembers who have relevant financial experience (FExp).

For the sample firms in the period of 2003–2007, we hand-collect the data on audit committeecharacteristics from BoardEx. The sub-sample period for the tests on audit committee characteristicsstarts in 2003 since the Combined Code introduced in June 2003 sets out the main responsibilities foraudit committees. These include raising concerns about financial reporting, monitoring and reviewing


ubpol.2013.02.009




internal audits, and appointing external auditors (Financial Reporting Council, FRC, 2003). The Com-bined Code states: ‘‘The board should establish an audit committee of at least three, or in the caseof smaller companies two, independent non-executive directors. The board should satisfy itself thatat least one member of the audit committee has recent and relevant financial experience’’ (FRC,2003: 16). The Code also requires companies listed on the LSE to comply, or explain in their annualreports their non-compliance with the Code’s recommendations for audit committees. Since theimplementation of the Combined Code, the regulatory changes might have changed the characteristicsand functions of the audit committees of the UK-listed companies; and, therefore, we restrict the sam-ple period to 2003–2007 for this aspect of the analysis.

Table 7 reports the regression results for the above models (5) and (6). Of the three explanatoryvariables relating to audit committee characteristics, only the audit committee size in the random ef-fects regression models has a negative association with the voluntary disclosure level. The results forthe corporate governance measures and other firm characteristics are generally consistent with those

Table 7Audit committee characteristics and voluntary forward-looking statements in annual reports narratives.



Pooled OLSmodel (6)


Constant 0.75** 3.22*** 0.53 3.38***

IO (institutionalownership)

0.51 0.74** 0.55 0.78**

DO (director ownership) �1.89** �1.29** �1.79** �1.19**

BS (board size) 0.10** 0.17** 0.11*** 0.17***

BC (board composition) 1.56* 1.77** 1.55* 1.79***

Duality (boardchairperson’s roleduality)

�0.37* �0.42* �0.32* �0.40*

AS (audit committee size) �0.03 �0.12*** �0.01 �0.12***

AC (audit committeecomposition)

0.46 0.14 0.43 0.17

FExp (members withfinancial experience)

0.82 0.16 0.69 0.14

DY (dividend yield) 21.04*** 18.21*** 19.58*** 17.70***

FS (firm size) 0.79*** 0.26*** 0.76*** 0.22***

ROA (return on asset) �0.01 �0.03*** �0.01 �0.03***

LEV (leverage) 0.04*** 0.04*** 0.04*** 0.04***

Industry dummiesIND1 (basic materials) 0.30 0.24IND2 (consumer goods) 0.27 0.29IND3 (consumer services) 0.38 0.14IND4 (health care) �0.13 �0.32IND5 (industrials) Reference

sectorReference sector

IND6 (oil and gas) �1.19* �0.31IND7 (technology) �1.85*** �1.87*

IND8

(telecommunications)�0.24 �0.92

IND9 (utilities) �0.19 �0.41

No. of observations 1508 1508 1508 1508Wald v2 412.11b 421.47b

F-test 18.87a 12.83a

Adjusted R2 (%) 11.94 11.17 11.37 11.29

Dependent variable is DS – voluntary disclosure score;* Significance at the 10% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.** Significance at the 5% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.*** Significance at the 1% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.

a Significance at 1% level for the F-test.b Significance at 1% level for the Wald v2 test.





reported in Tables 4 and 6. The only exception is that, in the random effects regression models, aggre-gate institutional ownership becomes positively associated with the voluntary disclosure of forward-looking statements. This association indicates that, with the existence of an audit committee onboards, institutional investors may have some impact on the voluntary disclosure of forward-lookinginformation.

5.2. The value relevance of forward-looking statements

Table 8 contains the regression results for the tests on the value relevance of forward-looking state-ments. The first column reports the panel regression for model (4) in which we include the

Table 8The value relevance of governance-driven forward-looking statements.

Explanatory variables Expected sign Random-effect panel regression

Model (4)Constant 0.19 �0.05 0.20Xt + 0.32*** 0.15*** 0.27**

Xt+1,t+3 + 0.27*** 0.09*** �0.26***

Rt+1,t+3 � �0.14*** �0.12*** �0.14***

EPt�1 + 0.51 0.56 0.47AG � �0.00 �0.00 �0.00GovDS � �0.57* �0.61**

GovDS � Xt + 0.03 0.02GovDS � Xt+1,t+3 + 0.03** 0.03**

Non-GovDS ? �0.08 �0.12Non-GovDS � Xt ? �0.02* �0.02*

Non-GovDS � Xt+1,t+3 ? �0.00 �0.00

Industry dummiesIND1 (basic materials) 0.08 0.03 0.08IND2 (consumer goods) 0.20** 0.15 0.20*

IND3 (consumer services) 0.01 0.01 0.02IND4 (health care) 0.03 0.01 0.05IND5 (industrials) Reference sector Reference sector Reference sectorIND6 (oil and gas) 0.23 0.28 0.23IND7 (technology) 0.47*** 0.56*** 0.47***

IND8 (telecommunications) 0.25* 0.17 0.26IND9 (utilities) 0.09 0.01 0.12

No. of observations 4579 4579 4579Wald v2 161.39b 141.56 b 167.36b

Adjusted R2 (%) 8.30 7.26 8.55

Dependent variable: Ri,t – share returns from 8 months before the current financial year-end t to 4 months after the currentfinancial year-end t.Explanatory variables: Xt – current earnings growth measured as the annual change in I/B/E/S reported actual EPS for year tscaled by the I/B/E/S reported actual EPS for year t � 1.Xt+1,t+3 – future earnings growth measured as the sum of the earnings growths from year t + 1 to year t + 3.Rt+1,t+3 – the buy-and-hold returns from 8 months before the financial year-end t + 1 to 4 months after the financial year-endt + 3.EPt�1 – defined as I/B/E/S reported actual earnings per share for year t � 1 divided over beginning of year share price.AGt – Asset growth measured as the growth rate of the total book value of assets for the year t.GovDS – governance-driven voluntary disclosure score for forward-looking statements generated as the fitted values of dis-closure score (DS) from regression model (2).GovDS � Xt – the interaction term of GovDS and current earnings growth in year t.GovDS � Xt+1,t+3 – the interaction term of GovDS and future earnings growth in from year t + 1 to year t + 3.Non-GovDS – voluntary disclosure score for forward-looking statements unrelated to corporate governance which is generatedas the residuals of regression model (2).Non-GovDS � Xt – the interaction term of Non-GovDS and current earnings growth in year t.Non-GovDS � Xt+1,t+3 – the interaction term of Non-GovDS and future earnings growth in from year t + 1 to year t + 3.* Significance at the 10% level for the two-tailed t-test.** Significance at the 5% level for the two-tailed t-test.*** Significance at the 1% level for the two-tailed t-test.

b Significance at the 1% level for the Wald v2 test.





governance-driven forward-looking statements and the interactive terms with future earningsgrowths. In the second column we instead analyze the effects of the forward-looking statements thatare not driven by governance and in the last column we consider the impact of both governance-dri-ven and non-governance-driven forward-looking statements on share price anticipation of earnings.

As evidenced by Lev (1989), Collins et al. (1994), and Hussainey and Walker (2009), the coefficientsof current earnings growth (Xt), future earnings growth (Xt+1,t+3) and prior earnings yield (EPt�1) are allpositive at the 1% significance level. The coefficient of the future stock returns (Rt+1,t+3) is significantlynegative as expected. The coefficient of AGt is also negative but statistically insignificant. The coeffi-cient of GovDS is negative at the 10% significance level in model (4) indicating the governance-drivenforward-looking statements reduce information risk and hence lower equity cost (i.e., share return).The coefficients of interest are GovDS � Xt+1,t+3. In support of Hypothesis 6, the coefficient Gov-DS � Xt+1,t+3 is positive at the 5% significance level. Our findings suggest that the governance-drivenvoluntary disclosures of forward-looking statements enhance the share price anticipation of futureearnings. These findings, therefore, support Hypothesis 6.

In the second column of Table 8, we analyze the effects of Non-GovDS, that is, the voluntary disclo-sure of forward-looking statements that are not driven by corporate governance. The results show thatthese statements have no significant impact on the share return-earnings association because thecoefficient Non-GovDS � Xt+1,t+3 is insignificant. Forward-looking statements that are not driven bycorporate governance appear to reduce the share price anticipation of future earnings given thatthe coefficient Non-GovDS � Xt is significant at the 10% level. The last column in Table 8 reports theregression results for model (4) including GovDS, Non-GovDS and their interaction terms for thecurrent and future earnings growths. The coefficient of the interaction term GovDS � Xt+1,t+3 remainssignificant at the 5% level, although the value of the coefficient is around 0.03 indicating that theforward-looking statements that are driven by corporate governance have somewhat of a positiveimpact on the share price anticipation of future earnings.

6. Conclusion

In this paper, we examine the associations between corporate governance mechanisms and volun-tary forward-looking statements. We further examine whether voluntary forward-looking statementsthat are driven by governance are informative about future earnings, by using a large sample of listedfirms in the unique setting of the regulatory environment in the UK. To the best of our knowledge, thisis the first paper to examine the impact of a comprehensive set of corporate governance factors on for-ward-looking statements which focuses on a large sample of UK firms. We use a computerized contentanalysis to measure disclosure, and we hand-collect corporate governance information for a sample of5489 firm-year observations.

We find, in the UK context, that board size and board composition (the proportion of non-executivedirectors) are related positively to the level of voluntary earnings disclosures. Director ownership androle duality have a negative relationship to the level of voluntary forward-looking statements. Fur-thermore, the size of the audit committee has a substitute relationship with the volume of voluntaryforward-looking statements. Firms’ characteristics such as dividend propensity, firm size, profitability,leverage and industry type affect the volume of forward-looking statements disclosed in the narrativesof annual reports. Furthermore, we find that the voluntary disclosure of forward-looking statementsrelated to corporate governance helps investors to better anticipate future earnings. The forward-look-ing statements unrelated to corporate governance, however, have no impact on the share price antic-ipation of future earnings.

Nevertheless, this paper contributes to the literature by offering new empirical evidence that effec-tive corporate governance mechanisms are correlated significantly with the levels of forward-lookingstatements in the narrative sections of annual reports. The US studies that focus on managements’earnings forecasts report no evidence on the effect of board size. No study has explicitly tested the ef-fect of role duality or the impact of director ownership on the voluntary disclosure of forward-lookinginformation. In the narratives of UK annual reports, the level of forward-looking statements is higherin firms with larger boards and more non-executive directors but lower in firms with higher director





ownership and role duality. These findings provide an empirical rationale for the current debate on thepotential benefits of improving the quality of corporate governance in the UK. UK corporate gover-nance guidance encourages the use of non-executive directors and the separation of the CEO andthe chairperson. The insignificant evidence on the independence and the financial expertise of auditcommittee members, however, shows that, although recommended in the UK corporate governancecode, these audit committee characteristics are ineffective in improving narrative reporting in the UK.

Finally, our findings indicate that institutional setting at the national level should be considered infurther research on forward-looking statements. The set of effective corporate governance mecha-nisms, associated with less information asymmetry between management and shareholders, appearsto vary even between Anglo-Saxon countries. For example, in the US, institutional ownership is asso-ciated with greater forecast occurrence and precision (Karamanou and Vafeas, 2005) but this has nosignificant relationship with the level of voluntary forward-looking statements in the UK.

We are aware that our empirical findings, despite their robustness, are subject to limitationsregarding our measure of the disclosure scores. For example, our measure of the disclosure scoresis not able to consider the quality of the information in forward-looking statements. Users of corporatenarrative reporting may be more interested not only in disclosure quantity but also in disclosure qual-ity. Further research could benefit from developing a quantitative measure for the disclosure quality ofnarrative reporting which is considerably difficult for studies with large-scale samples.

Acknowledgements

We would like to thank the anonymous referee for insightful comments on the previous versions ofthis paper, Ian Fraser, Colin Clubb, Richard Laughlin, the editor of JAPP (Martin P. Loeb) for their helpfulcomments. The paper has also benefited from comments by participants at the 2012 Journal ofAccounting and Public Policy Conference (LSE). Dr. Khaled Hussainey gratefully acknowledges the finan-cial support from the British Academy (Grant Reference No: SG091190).

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Voluntary forward-looking statements driven by corporate governance and their value relevance

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