Why Do Firms Voluntarily Disclosure Information Essay

Why Do Firms Voluntarily Disclosure Information - Essay Example Economic theories propose that it is better for firms to provide additional information to investors and financial analysts, because the voluntary disclosure assists investors and shareholders to analyse the firm and thereby to estimate future rate of returns on their investment. This paper will discuss why modern firms voluntarily disclose their information. Voluntary disclosure of information While analysing modern corporate culture, it seems that organisations voluntarily disclose more information in their annual reports than what is actually required to comply with the basic financial and accounting regulations. Firms voluntarily disclose three types of information such as strategic, non-financial, and financial information. As per the logical conclusions made by Kim, better informed shareholders were satisfied with less disclosure whereas uninformed shareholders preferred more disclosure (as cited in Cataldo, 2003, p.68). Thus, Kim linked voluntarily disclosure of information wi th shareholder interests. According to Williams (2008), nowadays firms engage in operations that are not captured by accounting process but have an impact on the firm’s profitability; therefore, such activities of firms have considerable significance in the sense that they may cause changes to investment decisions. Hence, firms make voluntary disclosures so as to overcome these troubles. It is relevant to use normative and positive accounting theories to explain the reasons for firms’ voluntary disclosure of information. The normative accounting theory justifies the feasibility of an accounting treatment whereas the positive accounting theory scientifically shows the truth of an accounting phenomenon. More simply, the former approach illustrates accounting taxonomies as an art while the latter represents accounting as a science of economy. The normative theories deal with intangibles and corporate, social, and environmental reporting while the positive theories represe nt social and environmental disclosures. Normative theories The normative approaches reflect the direct economic benefits of information disclosures. Economists identify that the major portion of the real value of a company is based on intangibles assets including goodwill and brand loyalty; a firm’s value of intangible assets is represented by the difference between market value and book value of the firm (Lecture 4, slide 7). In addition, the real value of a firm also embraces the intellectual capital of the firm including patents, computer programs, customer relationship, and trademarks (Lecture 4, slide 11). Traditional accounting systems do not provide investors with adequate information about intangible assets and intellectual capital. Hence, investors find difficulty in estimating the real value of the company. This is one of the main reasons why firms voluntarily disclose their information. Since modern societies give great emphasis on environment safety and public we lfare, organisations cannot vie with the market competition unless they maintain effective corporate responsibility policies. As Deegan (2002) reports, nowadays majority of the multinational corporations prepare an annual sustainability report in order to promote their social responsibility policies. Even though firms set different goals while initiating corporate sustainability reporting, their main focus is to enhance the firms’ international operations and to convince investors. Healy and Palepu (2001) argue that corporate disclosure is essential for the effective functioning of capital market. In total, normative theories