Economic consequences of key performance indicators' disclosure quality

Abstract

Starting from 2006, UK listed companies are required to analyse their performance by using Key Performance Indicators (KPIs) in specific sections of their annual reports and the UK Accounting Standard Board (ASB) provides companies with guidelines for the best practice regarding KPI disclosure. Motivated by the possible effects of the KPI disclosure quality, we examine their potential economic consequences for a sample of UK listed firms for the period 2006 to 2010. Our sample consists of 448 firm-year observations. We first develop a measure for the quality of the KPI disclosure based on the ASB's guidelines. We then test the economic consequences of financial and nonfinancial KPIs disclosure quality both separately and combined into one variable. Our findings, after conducting various sensitivity tests, suggest that only the disclosure quality of financial KPIs matters. We find a significantly negative (weakly positive) relationship between disclosure quality of financial KPIs and the implied cost of capital (firm value). These results inform regulatory bodies as well as the academic literature about the potential economic consequences of this type of disclosure.

Value Relevance of Voluntary Risk Disclosure Levels: Evidence from Saudi Banks

“…Adjusted R Square: 0.678;F value: 6.651; The mixed results of this study are in line with Vafaei et al, (2011) who reports significant and insignificant association between disclosure and firm value in one study. These results confirm the findings of previous studies such as Uyar and Kilic (2012) and Elzahar et al, (2015) who claimed that the association between voluntary disclosure and firm value varies according to the proxy employed for the market value of the firm. Where, this study found in the first model based on the market based measure (MTBV) an insignificant correlation between firm value and the levels of voluntary risk disclosure.…”

“…Out of the many studies reported in the literature, only a few have explored firm value and disclosure in developed countries (Healy et al, 1999;Leuz and Verrecchia, 2000;Baek, Kang and Park, 2004;Da Silva and Alves, 2004;Uyar and Kilic, 2012;Elzahar et al, 2015) and only one study has examined firm value and disclosure in emerging economies . To the best of the researcher's knowledge, not a single study has explored the effect of voluntary risk disclosure on firm value and thus this is the first to do so.…”

“…This study focuses particularly on the market valuation in relation to voluntary risk disclosure reported by all Saudi listed banks. It is worth noting that most of the preceding investigations into firm value have concentrated on disclosure in non-financial corporation (Baek et al, 2004;Hassan et al, 2009;Nekhili et al, 2012;Elzahar et al, 2015), leaving the association between the two variables in the banking industry completely un-researched. This study is intended to shed light on the effect of banks' voluntary risk disclosure on firm value in an emerging market.…”

“…This direct effect of the levels of disclosure on firm value influences administrators' decisions and effects the distribution of future cash flows (Lambert et al, 2007). Also, according to Elzahar et al, (2015) augmented disclosure will possibly enhance the market valuation of firms.…”

“…Correspondingly, Silva and Alves (2004) established that financial information discretionarily reported by Latin American companies has a significant and positive relationship with company value. However, Uyar and Kilic (2012) and Elzahar et al, (2015) claimed that the link between discretionary exposure and company value differs according to the proxy employed for the market value of the firm, and Hassan et al, (2009) reported that the association between the two variables depends on the type of disclosure used. Vafaei et al's (2011) study included both developed and developing countries and documented that there is a significant association between disclosure and firm value for Hong Kong and the UK and reported a negative relationship between the two variables for Singapore and Australia.…”