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INTRODUCTION AND MOTIVATION
Voluntary disclosures are the focus of an increasing amount of attention by accounting researchers. Voluntary disclosures--disclosures in excess of requirements--represent free choices on the part of company managements to provide accounting and other information deemed relevant to the decision needs of users of their annual reports. Firms have incentives to provide voluntary disclosures. For example, Foster
1986, pp. 31-33
summarizes the influence of capital markets on financial reporting. Companies compete with each other in capital markets on the types of securities offered and on the terms and expected returns promised. There is also uncertainty about the quality of firms (e.g., in terms of the nature of their assets and riskiness of cash flows) and their securities. Investors demand information to assess the timing and uncertainty of current and future cash flows so that they may value firms and make other investment decisions such as choosing a portfolio of securities. Companies satisfy this demand in part by supplying voluntary accounting information, thereby enabling them to raise capital on the best available terms.
As discussed more generally by Foster
1986, Chaps. 1 and 2
, accounting and reporting are influenced by a diverse and complex set of supply and demand forces. Employees, customers, and regulatory agencies demand information in addition to that demanded by investors. Supply is affected by existing regulations and by the costs associated with disclosure, such as information collection and processing costs, litigation costs, and proprietary (i.e., competitive disadvantage and political) costs. The latter appear to be particularly important in decisions about voluntary disclosures. Proprietary costs arise when information is revealed that potentially damages the firm, such as if it results in increased competition or government regulation. To illustrate, Choi and Levich
1990
interviewed executives of multinational corporations. These executives reported that they balance the benefit of a lower cost of capital with the costs of providing and preparing information and the potential effects of disclosure on their competitive status. Thus, companies can be expected to provide voluntary disclosures when the benefits exceed the direct and indirect costs of doing so. Multinational corporations (MNCs), in particular, face a variety of national accounting and reporting requirements besides those of their respective home countries. Choi and Levich
1990
also report that voluntary...