06factors Influencing Voluntary Corporate Disclosure by Kenyan...

FACTORS INFLUENCING VOLUNTARY CORPORATE DISCLOSURE BY KENYAN COMPANIES 107
Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An International
Review0964-8410Blackwell Publishing Ltd. 2006
March 2006142107125ORIGINAL ARTICLES
FACTORS INFLUENCING VOLUNTARY CORPORATE
DISCLOSURE BY KENYAN COMPANIESDULACHA G.
BARAKO, PHIL HANCOCK AND H. Y. IZAN
Factors Inuencing Voluntary

Corporate Disclosure by
Kenyan Companies
Dulacha G. Barako, Phil Hancock* and H. Y. Izan
There has been considerable research in respect of voluntary disclosure by companies and
factors that may explain such disclosure. However, most of the research has been centred in
developed countries. This study extends the previous literature by examining voluntary
disclosure in a developing country, namely Kenya. Over the last decade, the Kenyan
Government has initiated several far-reaching reforms at the Nairobi Stock Exchange (NSE)
in order to mobilise domestic savings and attract foreign capital investment. These measures
include privatisation of state corporations through the stock exchange and allowing foreign
investors to own shares in the listed companies. This study provides a longitudinal
examination of voluntary disclosure practices in the annual reports of listed companies in
Kenya from 1992 to 2001. The study investigates the extent to which corporate governance
attributes, ownership structure and company characteristics inuence voluntary disclosure
practices.
Our results suggest that the extent of voluntary disclosure is inuenced by a rms corporate
governance attributes, ownership structure and company characteristics. The presence of an
audit committee is a signicant factor associated with the level of voluntary disclosure, and
the proportion of non-executive directors on the board is found to be signicantly negatively
associated with the extent of voluntary disclosure. The study also nds that the levels of
institutional and foreign ownership have a signicantly positive impact on voluntary
disclosure. Large companies and companies with high debt voluntarily disclose more
information. In contrast, board leadership structure, liquidity, protability and type of
external audit rm do not have a signicant inuence on the level of voluntary disclosure by
companies in Kenya.
Keywords: voluntary disclosure, corporate governance
Introduction cheaper sources of nance (Wagacha, 2001),

the level of information disclosed by listed
iven the crucial role that an exchange companies is of interest to the growing audi-
G plays in economic development,1 es-
pecially in a developing economy, it is not
ence of prospective local and foreign investors.
Crucial to investors participation at the stock
surprising that the Kenyan Government has exchange is access and availability of informa-
*Address for correspondence:
focused on transforming the Nairobi Stock tion about listed securities. The more accurate Graduate School of Manage-
Exchange (NSE) as a vehicle for mobilising and reliable information that companies dis- ment, The University of
domestic savings and attracting foreign capital close, the better is the public perception of Western Australia, 35 Stirling
Highway, Crawley 6009.
inows. As the NSE becomes an increasingly companies traded securities. This is particu- E-mail:
important avenue to companies for accessing larly relevant to Kenya, where there are con- phancock@biz.uwa.edu.au
2006 The Authors

Journal compilation 2006 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA Volume 14 Number 2 March 2006
108 CORPORATE GOVERNANCE
cerns about the quality of corporate nancial Okeahalam and Akinboade concluded that:
reports (World Bank, 2001). there has been limited published research
Published annual reports are used as a on corporate governance in Africa and even
medium for communicating both quantita- less rigorous academic or empirical research.
tive and qualitative corporate information to There is an urgent need to embark on a
shareholders, potential shareholders (inves- meaningful analysis of corporate governance
tors) and other users. Although publication [research] in Africa (2003, p. 28).
of an annual report is a statutory require- Finally, the World Bank Report in 2001 on
ment, companies normally voluntarily dis- the observance of standards and codes in
close information in excess of the mandatory Kenya, although specically examining
requirements. Company management recog- Kenyan companies compliance with Inter-
nises that there are economic benets to be national Accounting Standards (now Inter-
gained from a well-managed disclosure policy national Financial Reporting Standards), the
(Williams, 2001). Thus, information disclosure World Bank noted: weaknesses in corporate
in itself is a strategic tool, which enhances a governance practices, lack of pressure from
companys ability to raise capital at the lowest the users of nancial statements for high-
possible cost (Healy and Palepu, 1993; Lev, quality information . . . pervades the corporate
1992). In an attitudinal survey to explore why nancial reporting regime in Kenya (2001,
companies list on the Nairobi Stock Exchange p. 1).
(NSE), Wagacha noted that: The predominant It is against this background that we explore
reason for listing was identied as access to voluntary corporate disclosure practices of
cheaper resources of nancing . . . rms that listed companies in Kenya. This is the rst
list look to the access of non-bank nances as known study to utilise data on Kenyan com-
a principal motivation for listing (2001, p. 3). panies. To summarise, this study examines
two related research questions: Firstly, to what
extent do Kenyan companies disclose infor-
Motivation mation in the annual reports over and above
that which they are required to disclose.
There is currently no empirical evidence avail- Secondly, to what extent do corporate gover-
able on the extent to which listed companies nance attributes, ownership structure and
in Kenya provide information over and above company characteristics inuence the disclo-
that which is mandated, and whether there are sure decision. The study covers a ten-year
variations in the levels of such disclosure. period from 1992 to 2001, to enable us to ex-
Therefore, the motivation for this study is to amine the trend in disclosure practices over
examine the extent of voluntary disclosure in this period.
annual reports and whether the variables that
researchers have found to be signicant in
explaining voluntary disclosure practices by
companies in developed countries apply in a
Corporate reporting and governance
developing country like Kenya. in Kenya
The issue of corporate governance has
Corporate nancial reporting and
become an important issue in many countries
and the response has varied from a legislative regulation in Kenya
response like the Sarbannes-Oxley Act in the As the focus in this research is on voluntary
USA to an adoption of best practice principles disclosure, it is appropriate to provide a brief
in countries like the UK and Australia. The overview of the regulatory framework in
results of this research may be useful for regu- Kenya with respect to corporate nancial
lators in Kenya as they deliberate the appro- reporting. This will give the reader some ap-
priate corporate governance requirements for preciation of the corporate reporting environ-
that country. This study also adds to the litera- ment and place the extent of voluntary
ture on voluntary disclosure in developing disclosure of information into some context.
countries and extends that literature by Like most Commonwealth countries, the
including corporate governance variables as Kenyan Companies Act3 (Chapter 486, Laws
possible explanatory variables for voluntary of Kenya), is based on and is substantially the
disclosure.2 In addition to corporate gover- same as the UK Companies Act of 1948 (Ogola,
nance variables the paper also examines com- 2000). The Kenyan Companies Act sets the
pany attributes and ownership structure as general framework for nancial accounting
possible explanatory variables of the volun- and reporting by all registered companies in
tary disclosure decision. Kenya, and stipulates the basic minimum
Additionally, after reviewing the corporate requirements with regard to nancial report-
governance literature in the African context, ing. The Sixth Schedule of the Act sets out the
Volume 14 Number 2 March 2006 2006 The Authors

Journal compilation Blackwell Publishing Ltd. 2006
disclosure requirements in respect of the bal- Centre for Corporate Governance developed
ance sheet and the prot and loss account. principles for Corporate Governance in Kenya
Due to the limited details of the Companies to be adopted voluntarily by companies. This
Act, nancial reporting and regulation is document substantially constituted the draft
supplemented by the pronouncements of the Corporate Governance Practices for Listed
Institute of Certied Public Accountants Companies in Kenya (2000) issued by the
Kenya (ICPAK), a body established through Capital Market Authority, which subsequently
the Accountants Act. The Act also resulted in 2002 became a mandatory guideline for all
in the formation of the Kenya Accountants listed companies in Kenya. The guideline and
and Secretaries National Examinations Board the sample code mainly deal with issues of the
(KASNEB) and the Registration of Accoun- Board (for example, composition, role of audit
tants Board (RAB). committee, separation of the role of board
The ICPAK is responsible for the develop- chair and CEO) and the rights of shareholders.
ment and implementation of accounting and In 2005, in line with the emphasis on the
auditing standards and has been engaged in need to improve the quality of nancial
the setting of Kenyan Accounting Standards reporting and governance by Kenyan compa-
(KASs) since the early 1980s. In 1998 the nies, the Centre for Corporate Governance
ICPAK decided to adopt IFRSs without any issued a draft Corporate Governance Guide-
modication and as a result from 1999, nan- lines on Reporting and Disclosures in Kenya.
cial statements for all companies in Kenya The emphasis of the draft guidelines is on
have been required to comply fully with non-nancial disclosures, such as ownership,
IFRSs. board (composition, qualications, commit-
In order to enforce adherence to the highest tees, meetings) auditor independence and
standards of nancial reporting, the ICPAK corporate social responsibility.
maintains a close working relationship with The preceding discussion relating to the
regulatory institutions such as the Central Kenyan corporate governance environment
Bank of Kenya, and the Capital Markets presents an insightful summary that is gener-
Authority. Also, the ICPAK is represented on ally consistent with international practices.
the Disclosure and Standards Committee of More importantly, the study incorporates
the Capital Markets Authority. corporate governance attributes as possible
The Nairobi Stock Exchange like many other explanatory variables for the level of volun-
stock exchanges maintains listing rules for all tary disclosures. Thus, this study provides
listed companies across the Main Investment empirical validation of some of the corporate
Market Segment, the Alternative Securities governance practices adopted in the past few
Market Segment and the Fixed Income years by listed Kenyan companies.
Securities Market Segment. From this brief overview of the regulation of
corporate reporting and governance in Kenya
it is apparent that there are many similarities
Corporate governance in Kenya to what exists in many developed countries.
Consequently the list of items reported as
As is the trend in other countries, corporate voluntary disclosure items in other studies in
governance has gained prominence in the developed countries are likely to include items
Kenyan context. Not withstanding the corpo- that are also not part of the mandatory require-
rate governance concerns globally, the Kenyan ments in Kenya. This issue is explored in
environment is mainly shaped by corporate more detail later, where the selection of the
experiences, particularly corporate failures voluntary disclosure items for this study is
or poor performances of public and private discussed.
corporations. For instance, afrming this fact,
the former Governor of the Central Bank of
Kenya, presenting a paper on Kenyan cor-
porate governance experience in the banking Theoretical framework and
sector commented bad corporate governance literature review
has led to the failure of 33 banks in Kenya
in 1985 (Banki Kuu News, OctoberDecember Agency theory
2000, p. 4). Agency theory models the relationship be-
An important player in developing the tween the principal and the agent. Jensen and
appropriate corporate governance frame- Meckling dened an agency relationship as
work in Kenya is the Centre for Corporate a contract under which one or more persons
Governance (CCG) Kenya, an afliate of the (the principal(s)) engage another person (the
Commonwealth Association for Corporate agent) to perform some service on their behalf
Governance (CACG). In November 1999, the which involves delegating some decision
2006 The Authors Volume 14 Number 2 March 2006

making authority to the agent (1976, p. 308). oping countries include: India (Singhvi, 1968);
In the context of the rm, the agent (manager) Mexico (Chow and Wong-Boren, 1987);
acts on behalf of the principal (shareholder)4 Nigeria (Wallace, 1988); Malaysia (Hossain
(Eisenhardt, 1989; Fox, 1984; Jensen and et al., 1994); Bangladesh (Ahmed and Nicholls,
Meckling, 1976; Ross, 1973). 1994); Zimbabwe (Owusu-Ansah, 1998). We
This separation of ownership and manage- make reference to some of these papers in this
ment results in costs not present when the section. We are not aware of any published
owner and manager is the same person. Jensen study examining determinants of companies
and Meckling (1976) categorised this cost as voluntary disclosure practices in Kenya and
follows: hence one of the motivations for this paper.
A consistent nding in previous studies is
monitoring: expenses incurred by the prin-
that size is an important predictor of corpo-
cipal to limit aberrant activities of the agent;
rate reporting behaviour. Ahmed and Courtis
bonding costs: expenses incurred to ensure
(1999) conducted a meta-analysis of 29 dis-
that the agent does not undertake actions
closure studies, and found that size, listing
that are not in the principals interests; and
status and nancial leverage have a signicant
residual loss: due to sub-optimisation by
impact on disclosure level. Other company
the agent of the welfare-maximisation
attributes associated with corporate disclosure
objective.
include: multinationality (Raffournier, 1995;
In the context of the rm, a major issue is the Owusu-Ansah, 1998), performance (Singhvi
information asymmetry between managers and Desai, 1971), industry type (Cooke, 1989,
and shareholders (owners). In this agency 1992) and country of origin (Meek et al., 1995).
relationship, insiders (managers) have an With the exception of size, ndings concerning
information advantage. Owners therefore face association between company characteristics
moral dilemmas because they cannot accu- and corporate disclosure practices are mixed.
rately evaluate and determine the value of Craswell and Taylor (1992) and Inchausti
decisions made. The agent may take advan- (1997) found a signicant positive relationship
tage of the unobservability of his actions to between type of audit rm and disclosure
engage in activities to enhance his personal practices, whereas Raffournier (1995), Depoers
goals. Formal contracts are thus negotiated (2000) and Haniffa and Cooke (2002) found no
and written as a way of addressing agent signicant association. Similarly, Hossain et al.
shareholder conicts. It is also possible that an (1995) and Naser (1998) observed a positive
agent may voluntarily provide information in association between leverage and the level of
order to reduce bonding costs and encourage disclosure. Wallace et al. (1994) and Bradbury
outside investors to invest in his (her) (1992) found no signicant association be-
company. tween leverage and the extent of voluntary
Therefore, in this research, voluntary dis- disclosure.
closure presents an excellent opportunity to The inuence of ownership structure on
apply agency theory, in the sense that man- corporate disclosure practices has also been
agers who have better access to a rms pri- extensively studied. Chau and Gray (2002)
vate information than external owners and investigated the relationship between owner-
investors can make credible and reliable com- ship structure and voluntary corporate dis-
munication to the market to enhance the value closure practices of listed companies in Hong
of the rm by reducing the costs of the agency Kong and Singapore. They found the extent of
relationship. These are the monitoring costs voluntary disclosure is negatively associated
that managers voluntarily assume and include with the level of family ownership. Ho and
disclosures about investment opportunities, Wong (2001) observed a similar nding using
the nancing policies and other general a sample of Hong Kong listed companies.
information about the rm. Therefore, the Hossain et al. (1994) found a signicant nega-
hypotheses tested in this research are derived tive relationship between ownership disper-
from an application of agency theory. sion and the extent of disclosure by Malaysian
listed companies, and to the contrary, Haniffa
and Cooke (2002) reported a negative relation-
Literature review ship between ownership dispersion and level
A number of prior studies have investigated of disclosure by Malaysian listed compa-
various determinants of companies voluntary nies. McKinnon and Dalimunthe (1993) found
disclosure practices. However, most of the weak support for the relationship between
studies are concentrated in developed coun- ownership diffusion and the extent of volun-
tries and only a small number look at devel- tary disclosure by Australian diversied com-
oping countries. As stated in note 2, previous panies. Apart from ownership concentration,
studies on disclosure by companies in devel- foreign ownership has been a signicant de-

terminant of corporate disclosure practices. The importance of non-executive directors

Haniffa and Cooke (2002) documented strong has also been demonstrated in other settings:
support for the hypothesis that foreign owner- positive share price reactions to specic critical
ship is positively associated with the level of events when the rms board is dominated by
voluntary disclosure. Singhvi (1968) reported outside (non-executive) directors have been
a similar nding that foreign ownership in- documented. Examples of these events in-
uences companies corporate reporting clude tender offer bids (Byrd and Hickman,
practices. 1992; Cotter et al., 1997), the adoption of
Forker (1992) examined the relationship poison pills (Brickley et al., 1994), and manage-
between corporate governance and corporate ment buyout announcements (Lee et al., 1992).
disclosure for UK companies. The focus of These empirical research ndings verify the
his study was the disclosure of share options. relevance of non-executive directors as a
The results indicated that CEO dominance governance mechanism that enhances the
(dened as combined roles of CEO and the boards capacity to ameliorate agency conict
board chair) has a negative impact on the level between owners and managers, which may
of disclosure. Ho and Wong (2001) provide occur in the decision to voluntarily disclose
empirical evidence of a positive association information in the annual reports. Based on
between corporate disclosure practices and these earlier ndings the following hypothesis
the existence of an audit committee. Chen and is examined:
Jaggi (2000) observed a positive relationship
H1: The higher the proportion of non-executive
between the proportion of independent non-
directors, the higher the level of voluntary
executive directors and comprehensiveness of
disclosure.
nancial disclosures, and the relationship is
weaker for family controlled rms. Similarly, Within the context of corporate governance,
Ho and Wong (2001), and Haniffa and Cooke the central issue often discussed is whether
(2002) document evidence of a negative the chair of the board of directors and CEO
association between voluntary corporate dis- positions should be held by different persons
closure and the proportion of family members (dual leadership structure) or by one person
on the board. (unitary leadership structure). According to
We draw on previous studies to investigate agency theory, the combined functions (uni-
factors that may inuence voluntary dis- tary leadership structure) can signicantly
closure practices of listed companies. These impair the boards most important function of
factors include corporate governance attri- monitoring, disciplining and compensating
butes, ownership structure and rm-specic senior managers. It also enables the CEO to
characteristics. engage in opportunistic behaviour, because of
his/her dominance over the board. Forker
(1992) empirically studied the relationship
between corporate governance and disclosure
Hypotheses development quality, and presented evidence of a negative
relationship between disclosure quality and
Corporate governance characteristics dominant personality (measured as CEO
This paper examines the inuence of corporate and board chair combined). Hence, to the
governance characteristics, ownership struc- extent that the combined chair/CEO positions
ture and company attributes on voluntary dis- signals the absence of separation of decision
closure practices of companies. Corporate management and decision control (Fama and
governance characteristics studied in this re- Jensen, 1983, p. 314), the following hypothesis
search are: board composition, board leader- is examined:
ship structure and audit committee formation.
H2: The extent of voluntary disclosure is higher
Board composition refers to the number of
for rms with a dual leadership structure.
non-executive directors to the total number of
directors. According to Fama and Jensen Previous research provides evidence of a
(1983), non-executive directors act as a reliable positive association between the presence of
mechanism to diffuse agency conicts be- an audit committee and corporate disclosure
tween managers and owners. They are viewed practices (e.g. Ho and Wong, 2001). Similarly,
as providing the necessary checks and bal- McMullen (1996) reported that the presence of
ances needed to enhance board effectiveness an audit committee is associated with reliable
(Franks et al., 2001). Evidence of the relation- nancial reporting, such as, reduced incidence
ship between the proportion of non-executive of errors, irregularities, and other indicators
directors on the board and corporate disclo- of unreliable reporting. In addition, Bradbury
sure has been provided by Chen and Jaggi argued that: audit committees are commonly
(2000) and Haniffa and Cooke (2002). viewed as monitoring mechanisms that en-

hance the audit attestation function of external segment information, whilst Craswell and
nancial reporting (1990, p. 21). The board Taylor (1992) found no relationship between
usually delegates responsibility for the over- ownership structure and voluntary corporate
sight of nancial reporting to the audit com- disclosure. The following hypothesis is tested
mittee to enhance the breadth of relevance and in this study:
reliability of annual report (DeZoort, 1997;
H4: The higher the proportion of shares held by
Wolnizer, 1995). Thus, audit committees can be
the top 20 shareholders, the higher the extent of
a monitoring mechanism that improves the
voluntary disclosure.
quality of information ow between rm own-
ers (shareholders and potential shareholders) Haniffa and Cooke (2002) found a signicant
and managers, especially in the nancial positive relationship between the proportion
reporting environment where the two have of foreign ownership and the level of
disparate information levels. Given the in- voluntary disclosure by listed companies in
uence of audit committees on the context Malaysia. They argued that there is a greater
and content of corporate annual reports, the need for disclosure as a means to monitor the
following hypothesis is tested actions of management by foreign owners.
Similarly, Singhvi (1968) found that compa-
H3: The level of voluntary disclosure is higher
nies, in which foreigners owned a majority of
for rms that have an audit committee.
stocks, present higher quality disclosure than
locally Indian owned companies. He further
established that the difference between the
Ownership structure mean disclosure scores of foreign owned
Various aspects of ownership structures (40.66) and locally owned (34.82) companies
have been studied in previous research (e.g. were signicant at the 1 per cent level. This is
ownership concentration, family ownership, an indication of the foreign owners inuence
government ownership, foreign ownership, in- on corporate governance practices, which
stitutional ownership and managerial owner- impacts signicantly on rms corporate
ship). This study examines three aspects of a reporting practices. Moreover, most of these
rms ownership structure, namely, owner- companies are multinational subsidiaries, and
ship concentration, foreign ownership and in- the presence of foreigners on boards may
stitutional ownership. signicantly inuence their approach to cor-
Agency theory suggests that in a modern porate nancial reporting in order to meet for-
corporation, due to the separation of owner- eign reporting requirements. Consistent with
ship and control, there is a likelihood of previous research ndings, it is possible that
agency conicts (Jensen and Meckling, 1976), this group of investors can inuence corporate
with the potential for conict to be greater disclosure practices of listed companies in
where shares are widely held than when it is Kenya. Given the geographical separation of
in the hands of a few (Fama and Jensen, 1983). owners and management, company manage-
Thus, discretionary disclosure provides man- ment may be inclined to voluntarily provide
agers with an avenue to demonstrate that they more information in the annual reports. Thus,
act in the best interests of the owners (Craswell ownership by foreigners can be a signicant
and Taylor, 1992; McKinnon and Dalimunthe, determinant of the level of corporate dis-
1993). Managers may therefore voluntarily closure. Based on the discussion above, the
disclose information as a means to reduce following hypothesis is tested:
agency conicts with the owners. An alterna-
H5: The higher the percentage of shares held by
tive view is that a dispersed ownership struc-
foreigners, the higher the level of voluntary
ture implies a lack of monitoring capacity due
disclosure.
to low ownership stake of individual share-
holders (Zeckhauser and Pound, 1990). Due Due to the large ownership stake, institutional
to ownership diffusion, shareholders may not investors have strong incentives to monitor
be a formidable force to inuence companys corporate disclosure practices. Thus, man-
reporting practices. agers may voluntarily disclose information to
Empirical results of the relationship be- meet the expectations of large shareholders.
tween ownership concentration and corporate Carson and Simnett (1997) found that there
disclosure are mixed. Using a sample of is a signicant positive relationship between
Malaysian listed companies, Hossain et al. the percentage ownership by institutional
(1994) found a negative relationship, whereas investors and voluntary disclosure of corpo-
Haniffa and Cooke (2002) noted a positive re- rate governance practices by listed companies
lationship. McKinnon and Dalimunthe (1993) in Australia. Similarly, Bushee and Noe (2000)
observed a weak relationship between owner- documented a signicant positive association
ship structure and voluntary disclosure of between institutional shareholdings and cor-

porate disclosure practices, as measured by disclose more information in their annual

the Association for Investment Management reports. Moreover, such rms tend to prepare
and Research (AIMR). Given shareholder detailed information to enhance their chance
activism and the monitoring potential of in- of getting funds from nancial institutions.
stitutional shareholders, the following hypo- This is similar to the Kenyan environment in
thesis is tested: which nancial institutions play an active part
in the provision of funds to corporate bor-
H6: The higher the percentage of shares held by
rowers, some of which are the listed rms.
institutional shareholders, the higher the extent
Empirical results are mixed. Various studies
of voluntary disclosure.
have found a positive association between
leverage and the extent of disclosure
(Bradbury, 1992; Malone et al., 1993; Naser,
Company characteristics 1998). However, others did not establish a
The company characteristics examined in this signicant relationship between leverage and
research are: size, leverage, and type of audit disclosure (Carson and Simnett, 1997; Hossain
rm, protability and liquidity. Industry type et al., 1994; Malone et al., 1993; McKinnon and
is a control variable. Dalimunthe, 1993). The following hypothesis
In almost all disclosure studies, company is examined:
size has featured as an important determinant
H8: The higher the leverage, the higher the
of disclosure levels (Belkaoui-Riahi, 2001;
extent of voluntary disclosure.
Chow and Wong-Boren, 1987; Lang and
Lundholm, 1993; Owusu-Ansah, 1998; Singhvi Although it is entirely managements respon-
and Desai, 1971; Wallace and Naser, 1995; sibility to prepare annual accounts, an external
Wallace et al., 1994; Watson et al., 2002). Several audit rm can signicantly inuence the
reasons are advanced for the signicant inu- amount of information disclosed in their nor-
ence that size has on companies nancial mal course of duty. DeAngelo (1981b) argued
reporting practices. Information generation that large audit rms invest more to maintain
and dissemination are costly, and, therefore, their reputation as providers of quality audit
larger rms with more resources and superior than smaller audit rms. In the case of damage
expertise are better placed to produce compre- to reputation, large rms stand to lose more
hensive and detailed nancial statements than the small rms. It is also suggested that
(Buzby, 1975). Chow and Wong-Boren (1987) big audit rms have many clients and are
argued that agency costs increase with rm therefore likely to be less dependent on their
size. Thus large rms voluntarily disclose clients, which may compromise the quality of
more information in annual reports to ease their work to a greater degree than the small
agency conicts. It is also suggested that large audit rms (Owusu-Ansah, 1998). The in-
rms operate in a multi-product business dependence enjoyed by large audit rms
environment that requires the generation of enables them to inuence corporate nancial
several internal management reports for the reports to satisfy the external users needs for
purpose of achieving the overall organisa- reports, since their value as auditors, in part,
tional goal. These reports can, therefore, form depends on how users of annual reports per-
part of the voluntary information rms make ceive the auditors report (DeAngelo, 1981a).
available to shareholders, investors and the A number of previous studies have docu-
public (Owusu-Ansah, 1998). Based on the mented a relationship between audit rm size
above discussion, the following hypothesis is and corporate disclosure, e.g. Ahmed and
tested: Nicholls (1994), DeAngelo (1981b), McNally
et al. (1982), and Singhvi and Desai (1971).
H7: The larger the rm, the higher the extent of
Based on the above discussion, the following
voluntary disclosure.
hypothesis is examined:
Jensen and Meckling (1976) argued that
H9: The extent of voluntary disclosure is higher
agency conicts are exacerbated by the pres-
for rms that are audited by the big four audit
ence of bondholders in a rms capital struc-
rms.
ture. To cater for this, agency theory predicts
that restrictive covenants may be included in Prior empirical studies have shown that
written debt contracts. In their corporate dis- protability inuences the extent of disclo-
closure study of Bangladesh listed companies, sure in annual reports (Wallace and Naser,
Ahmed and Nicholls (1994) argued that in 1995; Inchausti, 1997; Owusu-Ansah, 1998).
countries where nancial institutions are a pri- Inchausti (1997) argued from the perspective
mary source of company funds, a priori there of agency theory that management of a very
is an expectation that companies, which have protable rm will use information in order to
large sums of debt on their balance sheet, will obtain personal advantages. Therefore, they

will disclose detailed information as a means accounting ratios than companies in the other
of justifying their position and compensation industries included in that study. They sug-
package (Singhvi and Desai, 1971). It may also gested that this may be due to companies in
be argued that poorly performing rms may these regulated industries feeling less need
disclose less information to conceal the poor to make additional disclosures to legitimise
performance, presumably from the share- their activities. The empirical ndings on this
holders. Wallace et al. (1994) found no relation- relationship are mixed. While Stanga (1976)
ship between protability and disclosure, and reported a positive relationship between
Lang and Lundholm (1993) suggested that the industry type and the extent of corporate
direction of the relationship is not clear. How- disclosure, Wallace et al. (1994) and Owusu-
ever, it is more likely that the management of Ansah (1998) found no signicant relationship
a protable enterprise will voluntarily disclose between industry type and extent of corporate
more to the market to enhance the value of the disclosure.
rm, as this also determines their compensa-
tion as well as the value of their human capital
in a competitive labour market. In light of the Research design and methodology
above discussion, the following hypothesis is
Disclosure index construction
examined:
and application
H10: The higher the protability, the higher the
Since the pioneering work of Cerf (1961),
several different approaches have been
Wallace and Naser (1995) argued that regula- adopted to measure disclosure quality and
tory institutions, as well as investors and lend- quantity, but there is no general theory that
ers, are concerned with the going concern offers guidance on the selection of items to
status of companies. Hence a rms ability to measure the extent of voluntary disclosure
honour its short-term obligations as they fall (Marston and Shrives, 1991). Disclosure, by its
due, without recourse to selling other assets- very nature, is an abstract construct that does
in-place, is expected. Belkaoui-Riahi and Kahl not possess inherent characteristics by which
(1978) and Cooke (1989) suggested that the one can determine its intensity or quality
soundness of the rm as portrayed by high (Wallace and Naser, 1995).
liquidity is associated with greater levels of To measure the dependent variable, either a
disclosure. On the other hand, Wallace et al. disclosure index or content analysis can be
(1994) argued that rms with a low liquidity used (Williams, 1998). Hackston and Milne
position might disclose more information to (1996) found that using a disclosure index or
justify their liquidity status. The empirical content analysis does not affect the regression
ndings are inconclusive. Whereas Belkaoui- results. To control for the issues associated
Riahi (1978) found no relationship between with content analysis such as counting words
liquidity and disclosure, Wallace et al. (1994) or sentences, how to deal with charts and
documented a signicant negative association pictures and consistent with prior studies
between liquidity and disclosure for listed and (Hossain and Adams, 1995; Hossain et al.,
unlisted Spanish companies. In this study, the 1995; Dixon et al., 1994), this study uses a dis-
following hypothesis is tested: closure index to measure the level of reporting
by companies. A disclosure index involves the
H11: The higher the liquidity, the higher the
researcher identifying whether an entity does
or does not disclose an item in the list. Para-
Industry type is included as a control variable. mount in enhancing the reliability of the index
Wallace et al. (1994) suggested that rms in a was the rigour that was applied in its construc-
specic industry might face particular circum- tion. The steps that were followed are dis-
stances that may inuence their disclosure cussed in the ensuing sections.
practice. For example, there are signicant dif- First, of primary importance is the deni-
ferences in the operations and reporting prac- tion of voluntary disclosure. For the purposes
tices of a rm in the manufacturing industry of this research, voluntary disclosure is de-
and another in the nancial services industry. ned as the discretionary release of nancial
In addition, Owusu-Ansah (1998) suggested and non-nancial information through annual
that rms that operate in a highly regulated reports over and above the mandatory re-
industry might be subjected to serious rigor- quirements, either with regard to the Kenyan
ous controls that can signicantly impact on company laws, professional accounting stan-
their corporate disclosure practices. In another dards or any other relevant regulatory require-
study, Watson et al. (2002) found that com- ments.
panies that are a utility or are in the media Second, an extensive review of prior studies
industry are less likely to disclose certain was undertaken to develop a list of items that

may be voluntarily disclosed by a company. unweighted disclosure index has been criti-
The main aim was to check for commonalities cised on its fundamental assumption that all
across the studies and to isolate those items items are equally important. Notwithstanding
that have been consistently identied as rele- the subjectivity in weighting, all items cannot
vant and which may be disclosed by compa- be of equal importance.
nies. For an item to be included, it must have In this research, therefore, a weighted dis-
been used in more than one previously pub- closure index is adopted on the premise that
lished study. Such an approach was applied in all items disclosed in rms annual reports are
prior studies by (Buckland et al., 2000; Firer not of equal importance. In scoring disclosure
and Meth, 1986; Hossain et al., 1994) in Jor- items, the mean of the banks loan ofcers
danian, South African and Malaysian studies responses to each item is applied as a numer-
respectively, all of which are based on dis- ical weight of each item. The weights of every
closure by companies in developing countries. item marked as disclosed are added together
In the initial stage of this research, a broad and to derive the total voluntary disclosure score
comprehensive list of items that may be for the company. Finally, to express it as a
voluntarily disclosed by companies in their percentage, the disclosure score is divided by
annual reports was identied. The list of the maximum possible score. Although the
disclosure items included both nancial and emphasis is on weighted disclosure index
non-nancial items that may be relevant to scores, as a robustness check, unweighted
investment decision-making, and which listed disclosure index scores were computed and
companies may disclose. This step culminated compared with the results of the weighted
in the generation of 106 items. disclosure index.
Since the focus of this research is voluntary Kenyan bank loan ofcers were asked to
disclosures, the preliminary list of 106 items rate the importance of the items on a scale of
was subjected to a thorough screening to 04. The values attached to the points are 0
eliminate those that are mandated. This list (unimportant), 1 (slightly important), 2 (mod-
was sent to various individuals chosen on the erately important), 3 (very important) and 4
basis of their expertise and knowledge of local (essential). The use of bank loan ofcers is
accounting practices, who work with or are relevant to Kenya for two reasons: there are far
members of institutions that inuence corpo- fewer corporate nancial analysts in Kenya
rate nancial reporting in Kenya. As a result than in industrialised countries and, as a pru-
of their feedback, the initial list of 106 items dential measure, the Central Bank of Kenya
was reduced to 47 items5 and is reported in require banks to seek annual reports of
Table 1. The disclosure items are classied borrowers (at least for the past three years)
into four categories: general and strategic prior to making a lending decision. The mean
information, nancial data, forward looking of the loan ofcers responses was applied as
disclosure and corporate social disclosure the weight for each item.
(employee, environmental and social informa- It is difcult in practice to establish the
tion) and board and senior management applicability of the disclosure items to every
information. company in advance. At the item-selection
Two important and contentious issues are stage, to control for this effect, the guiding
often debated in the literature on the construc- principle was to ensure that the selection pro-
tion of disclosure indices. The rst issue is cess was devoid of industry inclination. How-
whether some items should be weighted more ever important disclosure items may still
heavily than others. The second is whether the be inapplicable to an industry. For example,
weights should be externally generated (for Research & Development disclosure may not
example, with the aid of a user group such as be as applicable to the banking industry as it
nancial analysts and bank loan ofcers), or is to agriculture or manufacturing industry.
researcher-generated. Thus, companies in this industry should not
In the accounting research, both weighted be penalised for non-disclosure of Research &
(Botosan, 1997; Buzby, 1974; Choi, 1973; Chow Development information.
and Wong-Boren, 1987; Eng et al., 2001; Firer An independent evaluator was recruited
and Meth, 1986; Firth, 1984; McNally et al., to verify the company voluntary disclosure
1982; Singhvi and Desai, 1971; Stanga, 1976) scores through annual accounts. The indepen-
and unweighted (Cooke, 1989, 1991; Hossain dent assessor was an auditor with a local
et al., 1994; Owusu-Ansah, 1998; Raffournier, auditing rm. His local corporate nancial-
1995) disclosure indexes have been used. Both reporting experience was important in con-
approaches have shortcomings. The use of a trolling for subjectivity in interpreting annual
weighted disclosure index has been criticised reports. The independent evaluator controlled
because it may introduce a bias towards a errors, such as inadvertently awarding or fail-
particular user-orientation, and the use of an ing to award scores to a company for items

Table 1: Items in the voluntary disclosure categories
General and strategic information

Information relating to the general outlook of the economy
Companys mission statement
Brief history of the company
Organisational structure/chart
Description of major goods/services produced
Description of marketing networks for nished goods/services
Companys contribution to the national economy
Companys current business strategy
Likely effect of business strategy on current performance
Market share analysis
Disclosure relating to competition in the industry
Discussion about major regional economic developments
Information about regional political stability
Financial data
Historical summary of nancial data for the last 6 years or over
Review of current nancial results and discussion of major factors underlying performance
Statement concerning wealth created, e.g. value added statement
Supplementary ination adjusted nancial statement
Return on assets
Return on shareholders funds
Liquidity ratios
Gearing ratios
Forward-looking information
Factors that may affect future performance
Likely effect of business strategy on future performance
New product/service development
Planned capital expenditure
Planned research and development expenditure
Planned advertising and publicity expenditure
Earnings per share forecast
Sales revenue forecast
Prot forecast
Social and board disclosure
Number of employees for the last two or more years
Reasons for change in employee number
Productivity per employee
Other productivity indicators
Indication of employee morale e.g. turnover, strikes and absenteeism
Information about employee workplace safety
Data on workplace accidents
Statement of corporate social responsibility
Statement of environmental policy
Environmental projects/activities undertaken
Information on community involvement/participation
Names of directors
Age of directors
Academic and professional qualication of directors
Business experience of directors
Directors shareholding in the company and other related interests (e.g. stock options)
Disclosure concerning senior management responsibilities, experience and background

Table 2: Sector representation
Sector Number of Number included Percentage

companies listed in sample included
Agriculture 9 7 77.8
Commercial and services 12 10 83.3
Finance and investments 12 11 91.7
Industrial and allied 21 15 71.4
Total 54 43
disclosed. The disclosure-scoring process fol- ment sector disclosed at least 50 per cent of
lowed a systematic procedure. items contained in the disclosure index. In
1992, 27 companies scored less than 10 per cent
on the voluntary disclosure index; by 2001,
Sample selection and data sources only two companies were in this category,
illustrating a marked increase in the voluntary
Due to the relatively small number of compa-
disclosure practices of companies.
nies listed on the NSE (54), all companies were
Table 5 presents sample characteristics. In
considered for inclusion in the survey. The list
1992, only nine (21 per cent) companies had an
of companies is contained in the NSE market
audit committee, and this number substan-
fact le 2002. The main criteria used for
tially increased to 23 (52 per cent) over the 10-
sampling the rms were: (i) annual reports
year study period. Similarly, most (75 per cent)
must be available at the stock exchange and
companies voluntarily adopted the dual board
(ii) the rm must have been listed for the entire
leadership structure by 2001, and utilised the
period of the study 19922001.
services of the big international audit rms.
Firms that did not meet these criteria were
Most companies had a majority of non-
excluded. The companies listed on the NSE are
executive directors on the board. However,
classied into four main sectors: agriculture;
whether the non-executive directors are truly
commercial and services; nance and invest-
independent as dened in the Corporate Gover-
ments; and industrial and allied. Table 2
nance Practices for Publicly Listed Companies
summarises the distribution of sample rms
Guidelines draft (2000) is difcult to determine.
by sectors. At least 70 per cent of companies in
The board size ranged from 3 to 14 in 1992 and
each of the four sectors are represented in the
3 to 15 in 2001. The company with the largest
survey. Such a cohesive representation enables
board of 15 members in 2001 belongs to the
the research ndings to be generalisable to
manufacturing industry (industrial and allied
companies listed on the NSE.
sector), and the smallest board with three
Corporate-governance attributes and com-
members is in the agricultural sector.
pany characteristics were collected from the
In 1992, the size of sample companies
annual reports, while ownership information
ranged from 35 million to 25,866 million
was collected from shareholders monthly
Kenya shillings. Over the years this had
returns submitted by listed companies to
increased markedly in 2001, company size
the NSE. Table 3 provides a summary of the
ranged from 47 million to 102,018 million
operational denition of variables and their
Kenya shillings. Performance of the listed
sources.
companies measured as the return on equity
had been on the decline, reecting the general
decline in economic performance of Kenya
Results and discussion over the 10-year period.
Although a smaller proportion (33 per cent)
Descriptive statistics of companies utilised the services of the big
Table 4 presents a summary of the companies international audit rms in the early years,
voluntary disclosure scores for selected years. there is a noticeable increase in the number of
The level of voluntary disclosure is generally companies with auditors from the big-four
low. However, over the ten-year study period audit rms. By 2001, an overwhelming 91 per
(comparing data for 1992 and 2001) there is an cent of the companies used audit services of
increase in the extent of voluntary annual international audit rms (Pricewaterhouse-
report disclosure by Kenyan companies. By Coopers, Ernest and Young, Deloitte and
2001, one company in the nance and invest- Touch and KPMG Peat Marwick). Finally,

Table 3: Operational denitions of variables
Independent variables Operational denition Source of information
Corporate governance
Board composition Ratio of non-executive directors to Company annual reports
total number of directors on the and NSE records, i.e.
board annual fact book
Board leadership structure Dichotomous, 1 or 0 Company annual reports
Board size Total number of directors Company annual reports
Board audit committee Dichotomous, 1 or 0 Company annual reports
Ownership structure
Shareholder concentration Percentage of shares owned by top NSE company ling
20 shareholders to total number of
shares issued
Foreign ownership Percentage of shares owned by NSE company ling
foreigners to total number of
shares issued
Institutional ownership Percentage of shares owned by NSE company ling
institutional investors to total
number of shares issued
Firm characteristics
Firm size Total assets Company annual reports
Leverage Debt ratio dened as total debt to Company annual reports
total assets
External auditor rm Big four vs Non-Big four i.e. 1 for Company annual reports
Big four, 0 otherwise
Protability Return on equity dened as net Company annual reports
prot to total shareholders funds
Liquidity Current asset to current liabilities Company annual reports
Control
Industry type Agriculture, commercial and NSE Handbook 2002
services, nance and investments,
and industries and allied
Table 4: Voluntary corporate disclosure score: selected years
Disclosure 1992 1996 2001

score* (%)
No. of companies % No. of companies % No. of companies %
<=10 27 62.8 25 58.1 2 4.7

1120 10 23.2 8 18.6 16 37.2
2130 6 14.0 7 16.3 16 37.2
3140 0 0.0 3 7.0 5 11.6
4150 0 0.0 0 0.0 3 7.0
>50 0 0.0 0 0.0 1 2.3
*Disclosure score is computed as the total disclosure score obtained by a company expressed as a percentage
of the maximum possible score.

Table 5: Sample characteristics
Independent variables Max Min Mean Median SD
Board size
1992 14 3 7.8 8.0 2.7
2001 15 3 8.2 8.0 2.6
Board composition
1992 100 11 66.7 70.5 21.2
2001 90 11 68.0 71.5 20.5
Board audit committee
1992 21%
2001 52%
Dual board leadership
1992 21%
2001 75%
Big-four auditor
1992 33%
2001 99%
Total assets (Kenya Shillings)
1992 25,866 35 1,883 721 5,968
2001 102,018 47 7,440 2,259 17,024
Return on equity (%)
1992 72.38 4.68 18.52 14.93 15.77
2001 41.80 45.40 0.50 4.85 21.27
Liquidity (times)
1992 33.25 0.64 2.18 1.22 4.89
2001 13.88 0.91 2.14 1.27 2.14
Debtasset ratio (%)
1992 27.09 0.00 3.05 0.05 5.63
2001 66.80 0.00 9.03 2.40 14.21
Shareholder concentration
1992 95.13 42.1 71.5 74.8 15.2
2001 99.80 42.2 72.0 75.3 15.6
Foreign ownership
1992 87.1 0.0 28.1 13.4 30.1
2001 87.5 0.0 28.3 13.5 30.2
Institutional ownership
1992 91.5 7.2 60.1 65.3 23.2
2001 91.5 7.1 58.4 63.6 23.4
we note that there was a high concentration cluded year dummies in each of the regression
among the top 20 shareholders, high institu- equations. In addition, due to the panel nature
tional and foreign ownership. of our data, we estimated regression coef-
cients by performing pooled Ordinary Least
Square (OLS) with Panel-Corrected Standard
Results Errors (PCSEs). Our earlier observation that
The results of the multivariate test of the disclosure by Kenyan companies had in-
hypotheses developed above are documented creased over the 10-year period is clearly evi-
in Table 6. In conducting the test, we pooled dent by the positive estimated coefcients for
our cross-section and time series data. To the year dummies, and signicantly so over
accommodate the panel data, we have in- the most recent periods.

Table 6: Pooled regression estimates: 19922001 (dependent variable: weighted disclosure score)
Independent variables Predicted Estimated Asymptotic P-value

sign coefcient t-ratio+
Test variables
Board composition + 0.12 4.58* 0.000
Board leadership structure 0.71 0.87 0.387
Board audit committee + 6.00 5.83* 0.000
Shareholder concentration + 0.13 8.21* 0.000
Foreign ownership + 0.07 6.74* 0.000
Institutional ownership + 0.17 16.50* 0.000
Firm size + 0.00 3.18* 0.001
Leverage + 0.22 4.84* 0.000
External auditor type + 0.19 0.32 0.752
Protability + 0.01 0.59 0.550
Liquidity + 0.09 1.06 0.289
Constant 13.43 5.51 0.000
Control variables
Agriculture industry 2.33 4.14 0.000
Finance and investment 1.59 3.60 0.000
Industrial and allied 1.18 1.54 0.124
1993 0.58 3.22 0.001
1994 0.79 4.36 0.000
1995 0.71 3.11 0.002
1996 0.93 3.04 0.002
1997 1.88 5.40 0.000
1998 2.82 6.78 0.000
1999 3.35 8.41 0.000
2000 9.25 14.54 0.000
2001 10.29 14.92 0.000
R-square = 53.4%; F-value = 24.13; Sig. F = 0.000; N = 430.

*Signicant at less than 1% condence level.
+Based on Panel-adjusted standard errors.
The board composition variable is signi- signicant relationship between board leader-
cant but negative and this does not support ship structure and the extent of voluntary
the positive association predicted in H1. This disclosure by Hong Kong listed companies.
is consistent with the result of Eng and Mak However, it contradicts the ndings by Forker
(2002) for voluntary disclosure practices in (1992), who reported a weak relationship
Singapore. They suggest that one explanation between board leadership structures and the
for this result is that the presence of indepen- level of voluntary disclosure for the 100 largest
dent directors is a substitute for voluntary and smallest quoted companies in the United
disclosure. This may also be the case in Kingdom. However, it should be noted that
Kenya. Another possible explanation for the the Forker study only examined disclosures
result in Kenya is that while many directors about share options. Overall, the results here
may be outside the company they may not be suggest that a rms board leadership struc-
truly independent. Recent reforms in Kenya ture does not inuence the level of voluntary
aimed at tightening the denition of an disclosure by Kenyan companies.
independent director provide some support The presence of an audit committee is
for this assertion. positively and strongly associated with com-
Although it has the expected negative sign, panies voluntary disclosure practices and
the board leadership variable lacks statistical provides strong support for H3. It is the most
signicance ( > 0.01) and therefore H2 is not important predictor of the extent of voluntary
supported. This result is consistent with Ho disclosure, with the highest estimated coef-
and Wong (2001), who reported a lack of a cient of 6.00 signicant at less than the 0.001

level. This result is similar to that of Ho and the establishment of an audit committee and
Wong (2001), who reported a positive and sig- utilisation of the big-four audit rm service.
nicant relationship between the existence To investigate whether there is an asso-
of an audit committee and the extent of ciation between the presence of an audit
voluntary disclosure by the Hong Kong listed committee and the big-four audit rm, a chi-
companies. The board composition variable square test was conducted. The test yielded a
has signicant negative association with the chi-square value of 24.974 and suggests that
extent of voluntary disclosure, contrary to the there is a signicant ( < 0.001) association
hypothesised positive relationship. Eng and between the two variables. Hence, when
Mak (2002) found a similar result with respect simultaneously considered in a multivariate
to Singapore listed companies. test, audit committee appears to be a better
Although a signicant predictor, the result predictor of the level of voluntary disclosure
for shareholder concentration, however, is not in the annual report.
in the direction predicted and thus H4 is not Neither the protability nor the liquidity
supported. We nd that the higher the propor- variables are signicant in explaining corpo-
tion owned by the top 20 shareholders, the rate disclosure of companies and hence H10
lower the disclosure. This negative relation- and H11 are not supported. These results are
ship is consistent with the results of Hossain consistent with Wallace et al. (1994) who did
et al. (1994) and is evidence that a more dis- not nd any relationship between prota-
persed ownership structure implies a lack of bility and disclosure. Belkaoui-Riahi and
monitoring capacity due to the low ownership Kahl (1978) found no relationship between
stake of individual shareholders (Zeckhauser liquidity and disclosure, consistent with the
and Pound, 1990). nding in this study.
The proportion of foreign ownership and The results also suggest that disclosure by
percentage of institutional ownership are also rms in the agricultural sector is marginally
found to be signicant predictors of the extent higher relative to the other sectors.
of voluntary disclosure. Both variables have
the predicted positive signs and are signicant
at the 0.01 level and therefore both H5 and H6 Robustness checks
are supported. As Cooke suggested, no one procedure is the
Company size as measured by total assets is best but that multiple approaches are helpful
a very important rm attribute associated with to ensure the results are robust across
the voluntary disclosure in the annual reports. methods (1998, p. 209). The hypotheses were
As hypothesised in H6, company size has a also tested against an unweighted measure
positive relationship with the extent of volun- of the disclosure index. Although not reported
tary disclosure and thus provides strong sup- in detail here, the results for the unweighted
port for H7. Similarly, a companys leverage index mirrored those for the weighted index.
level is found to be signicantly and positively A summary of the results for all hypotheses
associated with the extent of voluntary dis- for both the weighted and unweighted in-
closure and H8 is supported. Hence, compa- dexes is shown in Table 7.
nies with large amounts of debt voluntarily Another approach we used as a robustness
provide more information in the annual report. measure is the rank regression analysis. With
The external audit rm variable lacks statis- respect to disclosure studies, as cited in Ho
tical signicance to show its impact on the and Mathews (2002) and Wallace et al. (1994),
extent of voluntary disclosure in our multi- Cheng et al. (1992) suggested that rank trans-
variate analysis and hence H9 is not sup- formation provides additional condence in
ported. A possible reason for this nding is statistical results because it: (i) yields a
that there may be an association between distribution-free data; (ii) provides results sim-
Table 7: Summary of the results of the hypotheses tested
Regression hypotheses H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11
Weighted index
Multiple regression SS NS SS SS SS SS SS SS NS NS NS
Unweighted index
Multiple regression SS NS SS SS SS SS SS SS NS NS NS
NS = not signicant; SS = strongly signicant ( < 0.05).

ilar to those that can be derived from ordinal owned by institutional shareholders are own-
transformation and (iii) mitigates the impact ership structures that inuence the level of
of measurement errors, outliers and residual voluntary disclosure. Company characteristics
heteroscedasticity on the regression results. related to the extent of voluntary disclosure
Although not reported in this paper, rank are size and leverage. Based on the explana-
regression results also support our nding tory power (R square) of the regression model,
about the signicant inuence of the presence board characteristics appear to have more
of an audit committee on disclosure practices, inuence on the extent of voluntary disclosure
and this is true for weighted and unweighted than company and ownership attributes.
rank regressions. The other variables found to While the ndings provide credence to pre-
have a signicant relationship with disclosure vious research ndings, they are of particular
are: board composition, foreign ownership, relevance for policy makers and regulators in
institutional ownership, rm size and lever- Kenya. In this regard, the ndings have direct
age. Common to the multivariate tests and implications on corporate governance issues
rank regression is the fact a companys volun- raised in the Corporate Governance Practices for
tary disclosure is explained by a blend of Listed Companies in Kenya Draft (2000). One
its governance attributes, ownership structure of the issues was the establishment of audit
and company-specic characteristic. committees, which since 2003 has become
mandatory for all listed companies. The strong
Summary and conclusions association between audit committee and the
extent of voluntary disclosures suggests that
A basic and fundamental concern is whether mandating companies to establish audit
listed companies in Kenya provide voluntary committee is a step in the right direction in
information in their annual reports. This study improving corporate governance practices
documents disclosures across a broad range in general and quality of nancial reporting
of items including General and Strategic; in particular.
Financial; Forward Looking; Social and Board Board composition measured as the ratio of
of Directors. The study then tests for correla- non-executive directors to total number of
tions with a number of independent variables directors was consistently negatively related
relating to corporate governance attributes, with the level of voluntary disclosure. One
ownership structure and company character- limitation we had was in the operational
istics. The independent variables tested were denition of an independent non-executive
derived from previous research largely based director. We have used non-executive directors
in developed countries. One of the aims of this in this study, but it is well known that in many
study is to investigate if variables that explain cases, they may not be independent.
voluntary disclosures in developed countries Institutional shareholding and foreign
also explain voluntary disclosure practices in ownership are positively related with the
developing countries. In general the results extent of voluntary disclosures. This therefore
conrm that many of the drivers of voluntary implies that companies with less or no institu-
disclosures in developed countries also apply tional shareholding and which are mainly
in developing countries. However, the aggre- locally owned should upgrade their voluntary
gate disclosure levels are lower than levels disclosure practices so as to effectively reach
that are generally reported in many studies in potential investors (locally and abroad). It is
developed countries. important that the management of Kenyan-
The study nds that in all years (19922001), owned companies understand that effective
listed companies do voluntarily disclose infor- communication with the market has a direct
mation in their annual reports. More impor- link with the cost of raising external nance,
tantly, the trend analysis suggests that there is which also impacts on the value of the rm
an increase in the level of information volun- and subsequently wealth creation for the
tarily disclosed by these companies. shareholders.
The extent of voluntary disclosure in the Size and leverage were signicantly and
annual report is related to a companys corpo- positively associated with voluntary dis-
rate governance attributes, ownership struc- closure practices. Larger rms appear to
ture and company characteristics. Corporate voluntarily provide more information. This
governance attributes associated with volun- could be due to greater nancial capacity and
tary disclosure are the audit committee and requirements of large enterprises. Creditors
board composition (ratio of independent non- such as banks also have an impact on dis-
executive directors to total number of direc- closure decisions.
tors), though the latter was in the opposite In this paper the disclosure index is based
direction to our expectations. The proportion on 47 items across four categories. In another
of foreign ownership and percentage of stock paper we test the same variables for the four

individual categories. The results overall are Belkaoui-Riahi, A. (2001) Level of Multinationality,
broadly consistent with the results reported Growth Opportunities and Size as Determinants
here, although there are some differences of Analysts Ratings of Corporate Disclosures,
in some categories, for example, the identity American Business Review, 19, 115220.
Belkaoui-Riahi, A. and Kahl, A. (1978) Corporate
of the external audit rm is a signicant
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Finally, this study focused on one avenue of of Capital, The Accounting Review, 72, 323349.
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reports and the extent to which companies Audit Committee Formation, Journal of Account-
voluntarily release information through other ing and Public Policy, 9, 1936.
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1. For further discussion on the role of stock market Buckland, R., Suwaidan, M. and Thomson, L. (2000)
in developing countries, see Tessema (2003). Companies voluntary disclosure behaviour when
2. Studies on disclosure by companies in develop- raising equity capital: A case study of Jordan. In
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Mexico (Chow and Wong-Boren, 1987); Nigeria S. M. Saudagaran (eds) Research in Accounting in
(Wallace, 1988); Malaysia (Hossain et al., 1994); Emerging Economies. Stamford, CT: Jai Press Inc.,
Bangladesh (Ahmed and Nicholls, 1994); 4, 247266.
Zimbabwe (Owusu-Ansah, 1998). Bushee, B. J. and Noe, C. F. (2000) Corporate Dis-
3. For details concerning statutory requirements closure Practices, Institutional Investors and
about corporate nancial reporting in Kenya, Stock Return Volatility, Journal of Accounting Re-
refer to The Companies Act, Chapter 486, Laws search, 38(Supplement), 171202.
of Kenya, 1978, pp. 109126. Buzby, S. L. (1974) Selected Items of Information
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rate Governance Forum.
completed his PhD with the Graduate School
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Attributes on the Extent of Mandatory Disclo- of Management at the University of Western
sure and Reporting by Listed Companies in Australia. His PhD research was in the area of
Zimbabwe, The International Journal of Accounting, corporate nancial reporting and corporate
33, 605631. governance practices of Kenyan companies.
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tary Financial Disclosure by Swiss Listed Compa- Phil Hancock is currently Associate Dean of
nies, The European Accounting Review, 4, 261280. Teaching and Learning at the Business School
Ross, S. A. (1973) The Economic Theory of Agency: and Senior Teaching Fellow at the Graduate
The Principals Problem, American Economic Asso- School of Management at the University of
ciation, 63, 134139. Western Australia. He is the author of many
Singhvi, S. S. (1968) Corporate Disclosure Through
Annual Reports in the United States of America
articles on nancial reporting and is also a
and India. Unpublished Thesis, Columbia co-author of a very successful introductory
University. accounting text-book used in over 16 tertiary
Singhvi, S. S. and Desai, H. B. (1971) An Empirical institutions in Australia and New Zealand.
Analysis of the Quality of Corporate Financial Phil was appointed to the Urgent Issues
Disclosure, Accounting Review, 46, 129138. Group in Australia on 1 May 2002. He is the
Stanga, K. G. (1976) Disclosure in Published Annual only academic member of the UIG. He is a
Reports, Financial Management, Winter, 4251. Fellow of CPA Australia and an Associate of
Tessema, A. (2003) Prospects and Challenges for the Institute of Chartered Accountants in
Developing Securities Markets in Ethiopia: An Australia.
Analytical Review, African Development Review,
15, 5065.
Wagacha, M. (2001) Kenyas Capital Market: To List Professor Izan is currently Deputy Dean of the
or Not to List A Survey of Enterprise Attitudes. Business School at the University of Western
Unpublished discussion paper, Institute of Policy Australia. Her research interests reect her
Analysis and Research, Nairobi. broad multidisciplinary background in eco-
Wallace, R. S. O. (1988) Corporate Financial Report- nomics, accounting and nance. She is a
ing in Nigeria, Accounting and Business Research, Fellow of the Australian Academy of Social
18, 352362. Sciences and a Fellow of the Australian CPA.
Wallace, R. S. O. and Naser, K. (1995) Firm-Specic Key appointments in the last ten years include:
Determinants of Comprehensiveness of Manda- Deputy Chair, UWA Academic Board; Execu-
tory Disclosure in the Corporate Annual Reports
tive Dean, Division of Business, IT and Law,
of Firms on the Stock Exchange of Hong Kong,
Journal of Accounting and Public Policy, 14, 311 Murdoch University; Chair, Promotions and
368. Tenure Committee, UWA; Head, Department
Wallace, R. S. O., Naser, K. and Mora, A. (1994) The of Accounting and Finance, UWA; Director,
Relationship Between the Comprehensiveness of AlintaGas; Director, Black Swan Theatre
Corporate Annual Reports and Firm Specic Company.


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FACTORS INFLUENCING VOLUNTARY CORPORATE DISCLOSURE BY KENYAN COMPANIES 107

Blackwell Publishing IncMalden, USA

BARAKO, PHIL HANCOCK AND H. Y. IZAN

Factors Inuencing Voluntary

Keywords: voluntary disclosure, corporate governance

Introduction cheaper sources of nance (Wagacha, 2001),

2006 The Authors

Volume 14 Number 2 March 2006 2006 The Authors

2006 The Authors Volume 14 Number 2 March 2006

Volume 14 Number 2 March 2006 2006 The Authors

terminant of corporate disclosure practices. The importance of non-executive directors

2006 The Authors Volume 14 Number 2 March 2006

Volume 14 Number 2 March 2006 2006 The Authors

porate disclosure practices, as measured by disclose more information in their annual

2006 The Authors Volume 14 Number 2 March 2006

Volume 14 Number 2 March 2006 2006 The Authors

2006 The Authors Volume 14 Number 2 March 2006

Table 1: Items in the voluntary disclosure categories

General and strategic information

Volume 14 Number 2 March 2006 2006 The Authors

Table 2: Sector representation

Sector Number of Number included Percentage

2006 The Authors Volume 14 Number 2 March 2006

Table 3: Operational denitions of variables

Independent variables Operational denition Source of information

Table 4: Voluntary corporate disclosure score: selected years

Disclosure 1992 1996 2001

<=10 27 62.8 25 58.1 2 4.7

Volume 14 Number 2 March 2006 2006 The Authors

Table 5: Sample characteristics

Independent variables Max Min Mean Median SD

2006 The Authors Volume 14 Number 2 March 2006

Independent variables Predicted Estimated Asymptotic P-value

R-square = 53.4%; F-value = 24.13; Sig. F = 0.000; N = 430.

Volume 14 Number 2 March 2006 2006 The Authors

Table 7: Summary of the results of the hypotheses tested

Regression hypotheses H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11

NS = not signicant; SS = strongly signicant ( < 0.05).

2006 The Authors Volume 14 Number 2 March 2006

Volume 14 Number 2 March 2006 2006 The Authors

2006 The Authors Volume 14 Number 2 March 2006

Volume 14 Number 2 March 2006 2006 The Authors

Australian Diversied Companies, Accounting Characteristics in Spain, Accounting and Business

2006 The Authors Volume 14 Number 2 March 2006

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