The Relevance of Financial Ratio Disclosure

1820 not comprehensively presented in any single media Watson et al. 2002. This information would be more meaningful for non-sophisticated users in evaluating and making informed investment decisions. Further, some ratios are not possible to be calculated by readers because of the non- availability of inside information Gibson 1982. Therefore, providing ratios such as account receivables turnover in the annual report could offer important insights of firms‘ financial health position to the readers. Alternatively, disclosure of financial ratios would efficiently reduce the time and cost of obtaining and processing information Watson et al. 2002 elsewhere. Graham et al. 2005 suggests that among the reasons why companies choose to provide voluntary information is the reduction of the cost of capital and to provide important information to investors that is not included in the mandatory financial statements. Arguably, when company disclose financial ratio in the annual report, the management is communicating the importance of financial ratio information to be provided to the stakeholders. By providing such voluntary disclosure, managers must believe that the benefits outweigh its cost Watson et al. 2002.

2.2 Theoretical Background and Hypotheses Development

This study employs agency theory to investigate the determinants of financial ratio disclosures in the companies‘ annual reports. It is argued that by disclosing voluntary information to users, the information asymmetry problem arising from conflicting agency relationship is reduced Healy and Palepu 2001. Similarly, it is believed that corporate governance, capital management initiatives, ownership concentration and firm size will impact on financial ratio disclosure. 1821 2.2.1 Corporate governance Corporate governance may positively impact on the corporate reporting practices, including voluntary disclosures. Barako et al. 2006; Bassett et al. 2007; Beasley et al. 2000; Beekes and Brown 2006; Chau and Gray 2002; Denis and McConnell 2003; Haniffa and Cooke 2002; Lakhal 2005; Taylor et al. 2008. Taylor et al. 2008, Barako‘s 2004 and Eng and Mak 2003 findings reveal that the presence corporate governance elements positively explain the level of voluntary disclosure in Australia, Kenya and Singapore respectively also see Beekes and Brown 2006. These previous studies highlight the importance of corporate governance practices of the firms towards their financial reporting policy. The requirement of ASX listed firms to disclose the extent to which they adhere to the best practice corporate governance principles and recommendations facilitates a comparison between a firm‘s corporate governance characteristics and financial ratio disclosures. Consistent with this rationale, it is expected that the extent of financial ratio information disclosed is positively related to the strength of corporate governance structure. Therefore, the following hypothesis is proposed: H 1 : The extent of financial ratio disclosures is positively associated with a stronger corporate governance structure. 2.2.2 Capital Management Initiatives In this study, core capital management initiatives include capital raising activities, takeover and merger activities, overseas cross-listings and the existence of international operations. Using agency theory, it is argued that firms engaging in such capital management initiatives provide more disclosure in order to reduce agency conflicts.