the use of disclosure indices in accounting research: a review article

Britirh Accounting Review (1991) 23, 195-210

THE USE OF DISCLOSURE INDICES IN ACCOUNTING RESEARCH: A REVIEW

ARTICLE

CLAIRE L. MARSTON Newcastle upon Tyne Polytechnic

PHILIP J. SHRIVES Newcastle upon Tyne Polytechnic

This article is concerned with the measurement of disclosure in published financial reports. In particular, the use of a disclosure index is examined by reviewing the literature that has made use of this measurement technique.

Disclosure indices are extensive lists of selected items which may be disclosed in company reports. Calculating an index score for a particular company can give a measure of the extent of disclosure but not necessarily the quality of the disclosure. Items included in the disclosure index may be weighted in order to take account of the fact that some items are viewed as more important than others. The aim of this article is to bring together and summarise a selection of projects that have employed disclosure indices and to comment on the work carried out to date.

INTRODUCTION

The disclosure of information in company reports is an area that has Aroused a great deal of academic interest in recent years, see for example: Mautz & May (1978), Nair & Frank (1980), Lee & Tweedie (1981), Gray, McSweeney & Shaw (1984) and Gray & Roberts (1989). One research instrument that has been used in numerous publications is an index of disclosure of particular information in company reports. Such an index aims to show the level of disclosure in a set of company accounts. It can be used to show compliance with regulations if the items in the index are so chosen or conversely it can be used to show the level of voluntary disclosure. Also, an index can include a mixture of items required by regulation and voluntary items if this suits the purpose of the research project.

Items chosen for the index are likely to be a fairly small sub set of the population of all the items that could be disclosed. The number of items that could be disclosed by a company is very large, if not infinite. The usefulness of the disclosure index as a measure of disclosure is therefore critically dependent on the selection of items to be included in the index.

The author, would hkc to acknowledge the helpful comments of the referee, K. H. Gray, S. J. Gray and C. Dracur.

Address for correspondence: Miss C. L. Marston, Newcaatlc Busimx Srhool. Ncwcastlc Poly- technic, Northumberland Building, Newcastle-upon-Tyne NE1 XST

1~8')~~~389/')1/030195+15 $03.00/O 8~‘ 1 YY 1 Academic IJress Limited

196 C. L. MARSTON AND P. J. SHRIVES

The aim of this article is to carry out a descriptive review of the literature. In particular, the approaches of different authors to selecting and weighting items in the index will be discussed. Second, the use made of the resulting index scores will be reviewed. In conjunction with this review the research method will be considered critically in the context of the reliability and validity of the data obtained.

CONSIDERATION OF THE NATURE OF INFORMATION DISCLOSURE AS A MEASURABLE VARIABLE

Information is disclosed by companies in a number of ways. The main disclosure vehicle is the annual report and accounts. In addition there may be interim and quarterly reports, prospectuses, employee reports, announcements to the Stock Exchange and other printed material. Infor- mation can also be disclosed more informally, at meetings with analysts or in telephone conversations. This article is concerned with the information disclosed in the annual report and accounts. This information can be divided into two broad categories, required disclosure and voluntary disclosure.

Required disclosure is laid down by statute, professional regulations and the listing requirements of stock exchanges. The extent to which companies comply with legal and regulatory requirements depends on the strictness or laxity of the government, professional and other regulatory bodies.

Voluntary disclosure, in excess of the minimum, may arise where corporate perceptions of the benefits arising outweigh the costs. (See, for example Gray & Roberts, 1989, pp. 117-118.)

Information in the annual report consists of qualitative and quantitative data. The quantitative data is both financial and non-financial. In addition many annual reports contain illustrations, diagrams and graphical pres- entations. One method of measuring the information disclosed would be to count all the data items, i.e. the number of words and numbers, shown in the accounts. Copeland & Fredericks (1968) have suggested this approach to evaluate disclosure of changes in common stock. They contrasted this objective approach with a subjective procedure for grading disclosure as excellent, average or poor. In fact, they did not choose the counting method, but developed an index based on their subjective views about the needs of an ‘educated investor’.

Measuring information disclosure by counting data items is not a satis- factory solution to the problem because there are repetitions of certain numbers and words in annual reports. Moreover, numbers cannot be viewed in isolation as having any informational content, they need to be accompanied by explanatory words. Companies differ in the complexity

DISCLOSURE INDICES IN ACCOUNTING RESEARCH 197

of their operations. A multinational multi-product company would have more to disclose than a simpler organisation. It would be difficult to rank companies without adjusting for this problem.

Most of the papers cited have proposed the USC of a disclosure index without making explicit the fact that this is a testing device designed to provide information about an underlying variable that is not amenable to measurement. An analogy with the behavioural sciences can be drawn here, intelligence tests are an attempt to measure the underlying variable, the ‘intelligence’ of a subject. An IQ score can certainly be obtained for a particular subject but as a measure of intelligence it does not have the same authority as a measure in the natural sciences, such as the charge on an electron. Cooke and Wallace (1989, p. 51) do however recognise explicitly the problem inherent in measuring financial disclosure. They state that financial disclosure is an abstract concept that cannot be measured directly. It does not possess inherent characteristics by which one can determine its intensity or quality like the capacity of a car.

In view of the nature of the variable, information disclosure, and the measuring device, a disclosure index, it is necessary to consider two criteria that are typically employed in the social sciences when evaluating measurements. These criteria are reliability and validity.

RELIABILITY OF INDEX SCORES

The index scores awarded to companies can be considered to be reliable if the results can be replicated by another researcher. Since the scores are extracted from printed annual reports which remain constant over time there is no obstacle to repetition. (This problem is more difficult in behavioural science experiments dealing with living subjects.) The researchers, however, did experience a number of practical problems in awarding scores. In particular, there were problems of partial scores and decisions as to whether a non-disclosed item was, in fact, applicable to a particular company. These problems are discussed in detail later in this article. In order for a subsequent researcher to be able to replicate the scoring, clear instructions are needed on problem areas. This requirement was met by Buzby (1974) h w o included three pages of instructions in his work sheet along with a nine-page listing of the items of information and their related sub-elements. Similarly, Cooke (1989) provided a rule for deciding on whether an item was relevant to a particular company.

Tonkin (1989) has been criticised by Cooke & Wallace (1989) for failing to provide evidence that his measures of disclosure are valid and reliable. They complain that the operational procedures by which numericals, weights or other symbols were assigned to empirical properties (items of disclosure) were not specified.

198 C. L. MARSTON AN11 P. J. SHRIVES

VALIDITY OF INDEX SCORES

The index scores can be considered to be valid if they mean what the researchers intended. That is to say, do the index scores have any meaning as a measure of information disclosure? This question has not been considered explicitly by the majority of the authors cited. Cooke & Wallace (1989), as noted above, have stated that researchers should provide evidence that the measures are valid and reliable.

One reason why the meaningfulness of disclosure index scores has been accepted without comment is possibly due to the pervasiveness of economic indices in everyday life. We are all familiar with the retail price index and the various stock exchange indices and attach a meaning to them. Price indices are, however, rather different in nature to disclosure indices. Both are concerned with measuring a magnitude which is not directly measurable but the measurement scale is different. [See, for example, Allen (1975, pp. l-7).] Th e components making up a price index are amounts of money whereas the components making up a disclosure index are obtained using a dichotomous procedure. A non-disclosure results in a score of zero and disclosure results in a score of one. Where weightings and partial scores are employed a variety of positive scores can be obtained. The level of measurement achieved by means of a disclosure score will be discussed in the next section.

The validity of disclosure indices as a measure of information disclosure cannot be accepted without question. However, no other method for measuring disclosure has been developed. The method of counting all data items, mentioned above, has been discussed but not attempted.

The fact that no one particular index has gained favour with researchers illustrates another facet of the validity problem. Most researchers adapt and tailor existing indices to meet their own perceived needs. This is an attempt to create an index that is valid in the particular research environ- ment being investigated. For example, Belkaoui & Kahl (1978) adapted the work of Cerf (1961), Barrett (1976), Singhvi 81 Desai (1971) and Buzby (1975) to construct an index suitable for use in the Canadian context. Firer & Meth (1986) adapted the index of Firth (1979) to achieve an index relevant to South Africa. Researchers have implicitly considered it more advantageous to employ different indices and thereby to lose the advantage of direct comparison with earlier projects. The desirability of developing a standard multi-purpose index has not been considered explicitly. This can be contrasted with developments in the behavioural sciences where standardised aptitude tests, such as the Graduate Management Admission Test, have become commonplace. Cooke & Wallace (1989) do, however, consider the problems of devising an index suitable for cross national studies. There is no theory of financial reporting for the ‘inter-


national capital market operator’ and it is extremely difficult to obtain an internationally agreed perception of disclosure items. Any attempt to construct a universally valid disclosure index is unlikely to be meaningful unless such an agreement can be established.

LEVELS OF MEASUREMENT IN THE CONTEXT OF DISCLOSURE INDEX SCORES

There are four distinct levels of measurement. The nominal or classi- ficatory scale, the ordinal or ranking scale, the interval scale and the ratio scale. Siegel (1956, pp. 21-29) p rovides a discussion of these different levels of measurement and notes that in the social sciences nominal and ordinal measurement are commonly achieved. A disclosure index achieves the level of ordinal measurement but whether it achieves the level of interval measurement is less clear. The permissible operations which may be carried out on the index scores may be dependent on the level of measurement achieved.

In order to consider the level of measurement achieved by a disclosure index the weighted and the non-weighted index need to be considered separately. In the case of a non-weighted index an interval scale is not achieved unless a disclosure of one particular item in the index is exactly equivalent to the disclosure of another item (Siegel, 1956, p. 28). This is obviously a debatable point and on consideration it is probably safer to consider that index scores only achieve the level of measurement of an ordinal scale. The use of weightings in the disclosure index appears to be an attempt to achieve measurement on the level of an interval scale. However, weightings are typically achieved by conducting attitude surveys among relevant user groups. Items of disclosure are rated but these ratings cannot be said to achieve the level of measurement of an interval scale. Buzby (1974) had respondents rate items from zero (not necessary) to four (essential). There is no reason to suppose that an item rated as a four is four times as important as an item rated as a one.

If the level of measurement that has been achieved with a disclosure index corresponds to an ordinal rather than an interval scale this has implica- tions for the permissible operations on the scores. In particular, the question of the suitability of parametric and non-parametric statistical tests arises. None of the authors cited appears to have explicitly considered whether or not their index scores achieve the level of measurement of an interval scale.

THE RELATIONSHIP BETWEEN THE LEVEL OF MEASUREMENT AND APPROPRIATE STATISTICS

Stevens (1946) first proposed a relationship between level of measurement and appropriate statistics. Parametric statistical tests are only appropriate when measurement on an interval or ratio scale has been achieved and the


population is normally distributed. Non-parametric statistical tests should be employed when nominal or ordinal scale measurement has been achieved. For a discussion of these matters see, for example, Siegel (1956, pp. 30-34).

While this was accepted in the behavioural and social sciences it met with resistance from statisticians and mathematicians. Gaito (1980) considers that the ideas of Stevens and Siege1 are misconceptions. He asserts that statistical procedures do not require specific scale properties-‘the numbers do not know where they came from’. In support of his assertion he refers to the work of a number of statisticians and concludes that confusion between measurement theory and statistical theory has led to the persistence of this misconception.

In connection with this area of controversy and debate, Gregoire & Driver (1987) have shown empirically that using parametric tests on ordinal data does not lead to great problems. Davison & Sharma (1988) provide a theoretical proof that there is no need for the measurements to be on an interval scale if the assumptions of parametric tests (normality and homogeneity of variance) are met.

Most of the authors cited did not discuss explicitly the suitability of the statistical tests they applied to their disclosure scores. For example, Buzby (1975) states that ‘a set of statistical procedures was applied to the relative disclosure scores’. He proceeds to employ non-parametric statistical tests and cites Siegel (1965) in a footnote. Firth (1980) uses the parametric t test to examine for statistically significant differences in group mean disclosure scores without discussion of whether the assumptions underlying this test are met.

A more rigorous approach was adopted by Cooke (1989), who tested to see whether his disclosure indices data was normally distributed and whether the variances of all groups were equal before applying the parametric F test. Roberts & Gray (1988) decided to relate their disclosure scores to five independent variables (turnover, gearing etc.). Noting that the independent variables were not normally distributed, they stated that non-parametric testing was more appropriate. This decision was made without reference to the distribution of the disclosure index scores.

Clearly, a mixture of parametric and non-parametric tests are being carried out using index scores. The arguments of statisticians seem to indicate that parametric methods are permissible despite the fact that measurement on an interval scale has probably not been achieved.

SURVEY OF THE USE OF DISCLOSURE INDICES IN ACCOUNTING RESEARCH

A review of the literature was carried out to establish the progress that has been made into the study of disclosure using an index. Eleven papers were


selected for detailed review. A summary of these papers in tabular form can be obtained from the authors. Appendix A provides an outline of the information provided in the summary.

The papers were reviewed in chronological order in order to identify trends over time. The first use of a disclosure index occurred in 1961 when Cerf published the results of his research. Cerf’s ideas were taken up in the 1970s by Singhvi & Desai (1971), Buzby (1974 & 1975) and Barrett (1976). Use of this research technique has continued into the 1980s with Firth (1978, 1979, 1980 & 1984), Chow & Wong-Boren (1987) and Cooke (1989). It can therefore be concluded that some researchers find this technique useful.

The number of items in the index was seen to vary from 17 (Barrett, 1976) to 224 (Cooke, 1989).

CONSTRUCTION OF A DISCLOSURE INDEX

The first step in the construction of a disclosure index is the selection of items. Since the number of items that could possibly be disclosed is very large, practical reasons dictate taking a selection of items. Some criterion is therefore needed for making the choice.

Different user groups may tend to view different items as important. This underlying assumption has been stated explicitly, with no further justification, by Cooke (1989, p. 115) as follows: ‘Clearly one class of user will attach different weights to an item than another class of user.’ Gray, McSweeney & Shaw (1984, pp. 20-47) outline the information demands of the ‘major participant groups’ such as financial analysts and employees. Information needs of different groups are likely to overlap even though the main focus may differ. For example, financial analysts will be more interested in disclosures relating to financial performance and earnings potential whereas employee groups will be more interested in disclosures relating to employment conditions, remuneration and job prospects. Thus, the selection of items by authors often depends on the user group orientation of the index. Buzby (1974, p. 424) makes this explicit: ‘Since a measure of the extent of disclosure is related both to the nature of the user and his purpose, a user group and a purpose were selected.’

The adoption of a user group orientation for a disclosure index and selection of items accordingly may have intuitive appeal. In effect, authors attempt to select items which are seen as important by the user group. The problem of establishing the consensus of the group then arises. Authors such as Buzby (1974) appear to assume that this is a valid way to proceed. However, Wallace (1988) considers the problem of consensus within user groups and he questions the assumption that the perception of users can be elicited by investigation. In his view, consensus may relate to three

202 C. L. MARSTON AND I’. J. SHRIVES

interrelated issues; perception stability, user group homogeneity and disclosure item homogeneity, only one of which can be studied at a time. Perception is stable if all users hold identical views on the level of importance of an item regardless of their different needs for the item. A user group is homogeneous if there are not major differences within the group on the degree of importance of an item. An item is homogeneous if it means one thing to every member of a user group and a different thing to every member of a different user group. He makes explicit the underlying assumption used by authors such as Buzby (1974) and Firth (1978). In his opinion, this general assumption is ‘the belief that the information needs of users are (and should be) dissimilar within a nation and cross-nationally because items of information are capable of discriminating among users and users’ perceptions of those items are stable’.

Cooke & Wallace (1989) have criticised the use of a disclosure index in a world survey of accounts by Tonkin (1989). They consider that since there is no theory of financial reporting for the ‘international capital market operator’ it is, therefore, difficult to assess the relevance, to the users, of the information items evaluated in Tonkin’s index of disclosure. They state that unless one is aware of the needs of such a user, it would be difficult to measure the quality of information found in the annual report of any company.

The majority of the papers surveyed emphasised the needs of the financial analyst user group when selecting items. This seems natural since this is in line with much accounting research which concentrates on the most ‘sophisticated users’ although Wiseman’s (1982) paper using an index of ‘environmental items’ of interest to society in general takes a different approach and Cooke (1989) adopted a wide-ranging approach that was not directed at any specific user groups.

The purpose of the study also has some bearing on the selection of items. If an international comparison is being carried out the items selected will tend to differ from those selected for a study within a single country. Barrett (1976) carried out a review of the literature on disclosure indices and constructed his index on the basis of his personal experience of the countries to be surveyed. For studies within a single country voluntary disclosures can be identified and mandatory disclosures omitted from the index (Firth, 1980).

Methods of selection generally include a review of the relevant literature (Chow & Wong-Boren, 1987) and subsequently the relevant user group may be subjected to a survey (Firth, 1980, Cerf, 1961 etc.). Cooke (1989) based his selection on items in previous studies, disclosures recommended by the International Accounting Standards Committee, disclosures recommended by the Swedish public sector accounting standards body, legal requirements and items considered to be desirable by two out of three


Swedish practising accountants who were consulted at the pilot study stage.

An existing index from the literature can also be employed if it appears to be appropriate. Marston (1986) used Barrett’s (1976) index in carrying out a comparison of financial disclosure in the UK and India. Using an existing index has an advantage in that direct comparisons with previous research work can be made. This opportunity is denied to the researcher who constructs a new index. However, it appears from the survey that authors do tend to start afresh with a new index while drawing on the experience of previous researchers.

WEIGHTING THE INDEX

Since different items of information can be perceived as having varying degrees of importance for the user group the question of weighting the items in the index arises. Cerf (1961) assigned weightings by reviewing the literature and surveying the user group. His final weightings were integers whereas Buzby (1974 & 1975) surveyed a number of respondents and took the resulting means as his weighting.

If there are a large number of items in the index one might expect that the weighted and unweighted scores would give the same result. That is to say, a sample of companies would be ranked in the same way using the unweighted index as they would be using the weighted index. Chow & Wong-Boren (1987) noted this in their study and subsequently restricted their statistical analysis to the unweighted results. Firth (1980) also noted that unweighted and weighted scores showed similar results.’

Cooke (1989) used an unweighted index. He acknowledged the fact that different classes of user attach different weights to different items. Since the focus of his research was not on one particular user group but rather on all users he decided that weighting would be unwieldy and probably futile. He assumed, in effect, that the subjective weights of the different user groups would average each other out. In support of this assertion he relied on the findings of Spero (1979) who reported that attaching weightings was irrelevant because those enterprises that are better at disclosing ‘important items’ are also better at disclosing ‘less important items’.

In conclusion, it can be said that if a weighted index is constructed then it is probably advisable to calculate unweighted scores as well to see the effect of the weighting on the ranking of companies.

PROBLEMS IN CALCULATING INDEX SCORES

When calculating the index score for a particular company various practical problems can arise.


Buzby (1974) categorised his disclosure items into three groups. Group (i) contained items which were self contained e.g., number of stockholders. These items could either be disclosed or not. Group (ii) consisted of items which could be disclosed in varying degrees of specificity e.g., earnings per share for the next year could be specifically estimated or a general comment on the expected direction of change could be given. Buzby’s approach in these cases was somewhat subjective, in the example quoted above he gave half credit for a general comment and full credit for a specific comment.

Others have used a similar system, e.g. Wiseman (1982) rated disclosure according to the degree of specificity of each of the information items. A score of three was awarded for items disclosed in quantitative terms, two was awarded for specific but non-quantitative information and one was assigned where items were referred to only in general terms. Although this appears to be more precise than Buzby’s method it is equally subjective since it is not necessarily the case that a number is worth three times as much as a comment. Barrett (1976) awarded four marks for disclosure of financial history for 10 or more years, three marks for 5 to 9 years and two marks for 2 to 4 years. Essentially giving different or partial scores is an extension of the weighting system. Finally, Buzby (1974) defined group (iii) items as categories of information that could be expressed in terms of sub-elements of information. A review of the relevant literature was used to develop the sub-elements and judgement was used to select the most important ones.

An example of an item that was broken down into a number of sub- elements was information about the company’s employee pension plan. These sub-elements were employee groups covered, accounting and fund- ing policies, charges to income for pension costs and the relationship of funded to vested benefits. Items in group (iii) had to have a maximum possible score equal to the mean response score which was used as a weighting. The granting of partial credit was accomplished by distributing the maximum score among the sub-elements. This was achieved by using information obtained by two pilot study questionnaires in which the sub- element items had been separate components.

Another problem that arises is the fact that certain items of disclosure may not be applicable to a particular company. Companies should obviously not be penalised for non-disclosure in this case. In some cases this problem can be eliminated by ensuring that all disclosure items are relevant to all companies in the sample (Buzby, 1974). If this is not possible or desirable, index scores can be converted by dividing the actual score by the maximum score possible for that company. Buzby (1975) used this technique and termed the results relative scores. Cooke (1989) noted that in cases of non-disclosure it is not always clear whether the item is relevant


or not. For example, if no contingent liabilities are disclosed does this mean that there are none or that the company is declining to disclose them? He decided to read the whole of the annual report and make a suitable judgement as to whether an item was either not disclosed or irrelevant to the company.

USE OF THE DISCLOSURE INDICES

On reviewing the papers cited it was apparent that the relationship between level of disclosure and selected company characteristics was frequently tested.

It is a fairly natural assumption that large companies will tend to disclose more information than small companies. Singhvi & Desai (1971) presented a number of reasons why a positive relationship can be expected to result between the asset size of a corporation and the quality of disclosure. They suggested that the cost of accumulating detailed information is relatively higher for smaller companies, whereas in larger companies the information is already accumulated for internal reporting purposes. Second, the management of a larger corporation is more likely to realise the possible benefits of better disclosure, such as easier marketability of securities and greater ease in financing. Smaller corporations do not usually raise money in the securities market and, therefore, cannot realise the possible benefits of better disclosure. Finally, they proposed that smaller corporations are more likely to feel that full disclosure of information could endanger their competitive position.

Cooke (1989) also suggested several reasons for expecting a positive association between the size of firm and the extent of disclosure. In the context of the Swedish economy he suggested that large enterprises suffer political costs. They therefore employ devices such as social responsibility accounting to prevent further regulation or nationalisation. Another reason for increased disclosure by large firms is that such businesses are likely to be more complex in terms of product areas and geographical locations. The subsequent establishment of sophisticated management information facilitates more complex external reporting. The size of the corporation does not, therefore, cause differing levels of disclosure. It is rather that a large company is more likely to have underlying reasons for increased disclosure than a small company.

The idea of a possible link between company size and extent of disclosure was formulated as an hypothesis and tested by a number of researchers. Cerf (1961) found that high disclosure firms were larger in total assets. Singhvi & Desai (1971), Buzby (1975) and Chow & Wong-Boren (1987) also found that larger firms tended to disclose more. Cooke (1989) found that company size was an important explanatory variable.

206 C. L. MARSTON AND P. J. SHRIVBS

Company size is not the only characteristic to be associated with information disclosure. Singhvi & Desai (1971) noted that the quality of disclosure in the USA is influenced to a great extent by the listing requirements of the various stock exchanges and the Securities and Exchange Commission reporting rules. Thus, listed companies are likely to disc1os.e more than unlisted companies. Cooke (1989) noted that the Stockholm Stock Exchange does not require additional disclosures, all reasonably sized entities in Sweden are subject to the same disclosure requirements. Swedish companies do, however, obtain listings on overseas stock exchanges and become subject to more than one set of disclosure requirements. This may lead them to disclose a greater number of items in their corporate reports. Multiple listing can indicate a greater need for external capital and this need is a possible explanation for increased disclosure.

The possible link between listing status and extent of information disclosure was formulated as an hypothesis and tested by a number of researchers. Cerf (1961) found that New York Stock Exchange companies disclosed more than those listed on regional stock exchanges. Singhvi & Desai (1971) found that unlisted companies were more likely to disclose inadequate information. Cooke (1989) found a significant relationship between disclosure and listing status. However, Buzby (1975) found that the amount of disclosure was not affected by listing status.

The need to raise new capital may be an explanatory factor leading to increased disclosure over time. This idea was investigated by Firth (1980), who found that small firms increased disclosure when raising new stock market finance whereas no such relationship seemed to exist for larger firms.

Chow & Wong-Boren (1987) employed agency theory to suggest variables for explaining cross-sectional variation in voluntary disclosure. In particular, financial leverage can be hypothesized to affect voluntary financial disclosure by influencing the magnitude of agency costs and/or the costs of manager-external owner contracting. However, they found that financial leverage had no significant effect on voluntary disclosures.

Examining the relationship between internal firm-specific characteristics and the extent of information disclosure can be extended to include an external firm-specific characteristic, the market performance of the firm’s quoted stocks. Increased information disclosure should reduce investor uncertainty and may therefore contribute to the market’s assessment of the risk associated with a particular stock. However, Firth (1984) found no significant association between amounts of disclosure and systematic risk, unsystematic risk or variance of return.

An example of a longitudinal study and an international comparison is provided by Barrett (1976). H e used his disclosure index to measure increasing disclosure in seven countries over the period 1963-1972. He


also compared levels of disclosure internationally and found wide levels of variance between American and British firms on one hand and Japan, France, Germany and Sweden on the other.

One aspect of voluntary disclosure is the area of social and environmental reporting. It might be expected that companies making extensive voluntary disclosure in these areas would also carry out appropriate social and environmental policies. Wiseman (1982) noted that the previous research investigating the relationship between social performance and social disclosure had mixed results. Her study expanded on previous work by examining the specific contents of corporate environmental disclosures, using an indexing procedure, and comparing this with actual environmental performance. No relationship was found to exist between disclosure and performance.

In concluding this section it can be said that the researchers used disclosure indices as a device to measure the underlying variable, corporate disclosure. In several cases, the relationships between company-specific variables and the index of disclosure scores were investigated using appropriate statistical techniques. In most, but not all, cases the null hypothesis was rejected. This indicated that the expected relationship between level of disclosure and possible explanatory variables apparently existed. Use of the disclosure index has thus provided researchers with the ‘right’ answers when testing their hypotheses. Obtaining reasonable results is a necessary, but not sufficient, condition for acceptance of the technique as useful in empirical research.

The use of the disclosure index to carry out international comparisons of corporate disclosure seems to be relatively neglected.

CONCLUSIONS

A number of research projects over the years have made use of a disclosure index as a research tool. One test of the usefulness of a research tool is the extent to which it is used. In this case it has persisted over time, from the 1960s to the present, and has been used by many different researchers. A research tool will not continue to be used if it produces poor results. The disclosure index has provided researchers with the expected answers to their hypotheses in many cases. If company information disclosure con- tinues as a focus of research it is likely that the disclosure index will continue to be used.

However, it is clear from the review of the literature that construction of an index is a difficult matter that generally involves subjective judgement on the part of the researchers. In addition, awarding scores to companies also seems to involve subjective judgement in many cases. In the social sciences many common research tools attract some controversy and dis-

208 C. L. MARSToN AND P. J. SHRIVES

agreement. Measuring company information disclosure cannot be carried out in a precise scientific way. Researcher subjectivity cannot be com- pletely removed, nor is it reasonable to expect that it can be. The value of the resulting disclosure scores and their subsequent use in testing hypotheses cannot, therefore, be viewed uncritically. The efforts of the researcher to minimise subjectivity and design a more objective disclosure index are of relevance here.

NOTE

1. It is easy to construct a counter example which illustrates the fact that weighted and unweighted scores do not necessarily give the same results. Consider an index of 100 items that is weighted with the first 50 items having a weight of two and the remaining 50 items having a weight of one. Company A discloses all of the first 50 items and no others and company B discloses all of the second 50 items and no others. Using the unweighted index both companies will score 50. Using the weighted index company A will score 100 and company B will score 50.

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I)ates: Received March 1990; final version received April 1991.

APPENDIX A

SUMMARY OF SELECTED PAPERS

A number of papers [Cerf (1961), Singhvi & Desai (1971), Buzby (1974 & 1975), Barrett (1976), Firth (1978, 1980 & 1984). Wiseman (1982), Chow & Wong-Boren (1987) and Cooke (1989)] were selected for a detailed summary in tabular form. The items considered in the summary are as follows:

1 Author and date 2 Number of items in index


3 Method of selection of items for index 4 Weighted or unweighted index 5 Range of size of weightings and whether integers or survey means were used 6 Method of deciding on weightings 7 User group orientation of index 8 Sample details of companies surveyed 9 Analysis carried out, including hypotheses tested

10 Results of analysis

Copies of the summary can be obtained from the authors.

the use of disclosure indices in accounting research: a review article

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