[cg-frd] hasan et al - 2010 - corporate governance and financial reporting disclosures - bangladesh perspective

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Corporate Governance and Financial Reporting Disclosures:
Bangladesh Perspective


Dr. Md. Shamimul Hasan
Assistant Professor, Department of Business Administration
World University of Bangladesh, Dhaka, Bangladesh,

Dr. Syed Zabid Hossain
P
rofessor, Department of Accounting and Information Systems, University of Rajshahi,
Former Pro-vice Chancellor, University of Khulna, Bangladesh

Dr. Robert J. Swieringa

Professor of Accounting, Anne and Elmer Lindseth Dean Emeritus, John Graduate School of Management,
Cornell University, Ithaca, New York, Former Board Member of FASB

ABSTRACT
Financial reporting disclosures are very essential to the shareholders of a company because
they frequently use these disclosures for their economic decisions about the business
enterprise. Board of directors, corporate management and external auditor may have an
influence on financial reporting disclosures. From this perspective, the study investigates the
influence of corporate governance on financial reporting disclosures. The results show that
corporate governance is significantly associated with the extent of financial reporting
disclosures. External auditor, multilisting and profitability are significantly (5 percent level)

associated with overall financial reporting disclosures index.
Keywords: Bangladesh, financial reporting disclosure, corporate governance
1. Introduction
This research investigates the influence of corporate governance on corporate financial
reporting disclosures. The scandals of high profile companies such as Enron, WorldCom,
Tyco and some other firms in the U.S, have realized the question of the effectiveness of
monitoring mechanisms in organizations (Raphaelson and Wahlen, 2004). Corporate
governance refers to the structures and processes for the direction and control of companies.
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Good governance contributes to sustainable economic development by enhancing the
performance of companies and increasing their access to outside capital. Corporate
governance reduces emerging market vulnerability to financial crises, reinforces property
rights, reduces transaction costs and the cost of capital, and leads to capital market
development. Weak corporate governance frameworks reduce investors’ confidence, and can
discourage outside investment. Also, as pension funds continue to invest more in equity
markets, corporate governance is crucial for preserving retirement savings (World Bank:
2009). Corporate governance is affected by the relationships among participants in
governance system. Controlling shareholders, which may be individuals, family holdings,
bloc alliances, or other corporations acting through a holding company or cross holdings, can
significantly influence corporate behavior. As owners of equity, institutional investors are
increasingly demanding a voice in corporate governance in some markets. Individual
shareholders usually do not seek to exercise governance rights but may be highly concerned
about obtaining fair treatment from controlling shareholders and management. Creditors play
an important role in a number of governance systems and can serve as external monitors over
corporate performance. Employees and other stakeholders play an important role in
contributing to the long-term success and performance of the corporation, while governments

establish the overall institutional and legal framework for corporate governance (OECD:
2004).
In Bangladesh, January 10, 2011 is called Black Monday because the stock market collapsed
on that date and has not yet recovered. Though a lot of measures have been taken by the
Securities and Exchange Commission (SEC), Dhaka Stock Exchange (DSE), Chittagong
Stock Exchange (CSE), Bangladesh Bank (BB), and Ministry of Finance (MoF), there is no
result of these efforts. Almost every day of the year 2011, small investors were engaged in
many activities, including procession, press-conference, hunger-strike, block the roads, and
close the stock market trade as a part of their expression of frustration. They solicited
intervention of the Prime Minister for stabilizing the market. Even they expressed their
anguish and frustration by opening their chest and inviting government officials to shoot
them. The probe report opined that there are many issues that are responsible for collapse of
the market. Governance of SEC and other institutions could not satisfy the probe committee
(PC). One of the main recommendations of the committee was the removal of chairman,
executive director and directors of SEC (
SMIR, 2011). This recommendation clearly indicates
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a red flag for corporate governance. Whereas, SEC is the only regulating authority of the
listed companies that regulates annual financial reporting disclosures of the companies, it is
expected that the financial reporting disclosures of the companies are not regularly monitored.
Under these crucial circumstances, investors believe that the capital market in Bangladesh is
volatile up till now.
Good corporate governance is an important prerequisite for attracting the patient capital
needed for sustained long-term economic growth, and can lead to better relations with
workers, creditors, and other stakeholders. Corporate ownership is concentrated and
companies are often controlled by a small number of related shareholders. A few companies

have dispersed ownership. Most securities in Bangladesh are held by individuals- the
controlling family or members of the public – rather than institutions or other companies: 43
percent of market is held by sponsors who are from the founders’ families, and 38 percent is
held by the public at large. Sponsors often have management and or board positions in
companies. Institutional investors hold only 10 percent of the market but are sometimes
represented on company boards. Foreigners hold 1 percent of the market (World Bank: 2009).
There is no single model of corporate governance (OECD: 2004). The SEC issued Guidelines
on Corporate Governance in 2006. Listed companies are required to “comply or explain”. The
Guidelines cover some key topics, including the functioning of the board, and internal and
external controls. The Guidelines do not deal with other aspects of corporate governance,
including shareholder rights. Compliance is at its early stage – in 2007, about 33 percent of
companies declared full compliance with the Guidelines and 60 percent declared partial
compliance (World Bank: 2009). There are no provisions for punitive measures for non-
compliance of any one of the conditions mentioned in the notification. Only “comply or
explain” basis is not enough in Bangladesh for ensuring good governance.
Although financial information disclosed by the Bangladeshi companies is increasing day by
day, the reliability of this reporting is decreasing day by day due to lack of practices of
corporate governance. Adherence to corporate governance practices will help improve the
confidence of investors, reduce the cost of capital, underpin the good functioning of financial
markets, and ultimately induce more stable sources of financing (OECD: 2004). Good
governance in the corporate sector is a burning issue in Bangladesh.
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In this paper we argue that there is obviously an influence of corporate governance on
corporate financial reporting disclosures index. The researchers commence their analysis by
measuring overall disclosure index by twenty non-financial companies included in DSE. The
researchers use a comprehensive measure of disclosure that captures the nature and extent of

information and are able to glean insights about the disclosures index. This would be the first
known study to examine the association between corporate governance and overall financial
reporting disclosures index. The weak form of corporate governance in Bangladesh allows the
researchers to (1) overview corporate financial reporting practices by non-financial
companies listed in DSE, (2) identify different aspects of corporate governance , and (3) to
examine the association between corporate governance and corporate financial reporting
disclosures index.
Next, the researchers test hypotheses about the relationship between corporate governance
and corporate reporting disclosures index. The researchers capture the impact of corporate
governance using three measures, such as dependent variable (corporate financial reporting
disclosures index), independent variables, and linkage between dependent and independent
variables.
Present examination of the relationship between corporate governance and corporate financial
reporting disclosures index extends the literature on the determinants of corporate reporting
disclosures index. Previous researches have investigated a range of factors potentially
associated with disclosures including board independence, dominant personality, board size,
institutional ownership, external auditors, general public ownership, leverage, asset size,
profitability, multilisting, and number of shareholders. However, the influence of corporate
governance on corporate financial reporting disclosures index has not been examined
previously. Present finding of significant relationship between external auditor and corporate
reporting disclosures index supports the tenets of principal-agent theory and demonstrate the
potential for this powerful and legitimate stakeholder group to influence corporate financial
reporting disclosures index in Bangladesh. Several other factors found to be associated with
corporate financial reporting disclosures in prior researches have been controlled. A final
contribution of this research relates to the growing body of literature on corporate governance
(external auditor engagement) and corporate financial reporting disclosures. Present study
extends this area of research by investigating and finding support for the role of external
auditor in relation to corporate financial reporting disclosures. The research provides robust
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empirical evidence in support of claims in the literature that external auditor’s demand can
drive corporate action.
The remainder of the paper is organized as follows. The next section reviews the prior
literature and develops the hypotheses for the study. Section 3 outlines the data and method,
section 4 presents the results of the analysis and Section 5 concludes.

2. Literature Review and Hypotheses Development
2.1 Prior Literature
One function of financial reporting is to restrain management to act against the
shareholders’ interest (Watts and Zimmerman, 1978). Due to increasing complexity of
business today, there is a demand for disclosure of more comprehensive information in the
annual report as both potential and existing investors make their economic decision by
using this information. In the global investor opinion survey of McKinsey & Company
(2002) on corporate governance issues, a majority of the investors agree that corporate
governance remains a great concern with strengthening the quality of accounting
disclosures as a top priority. Majority of institutional investors is willing to pay a high
premium for companies having good governance. The survey also provides evidence that
a majority of respondents (71 percent) states that accounting disclosures are the most
important factor that influences their investment decisions and 52 percent of respondents
identify that improving financial reporting quality is a governance priority for
policymakers.
Good governance goes hand-in-hand with reduced risk of financial reporting problems
and other bad accounting outcomes (Hermanson, 2003). Information disclosed by the
companies in their annual report can be used as important input in various corporate
governance mechanisms (Bushman and Smith, 2001).
Good governance by board of directors can influence financial reporting disclosures,
which in turn has an important impact on shareholders confidence (Levitt, 1998 and

2000). There has been a considerable debate in recent times about the need for strong
corporate governance (McConomy and Bujaki, 2000), with the countries around the world
drawing up guidelines and codes of practice to strengthen governance (
Cadbury, 1992;
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Corporate Governance Code of Bangladesh, 2006). The rationale for this emphasis can be
linked to growing concerns over the integrity of stock markets (International Federation of
Accountant – IFAC, 2010; Millstein, 1999). Previous studies have shown that good
corporate governance reduces adverse effects of earnings management as well as
likelihood of creative financial reporting arising from fraud or errors (Beasley, 1996;
Dechow, et al, 1996; McMullen, 1996). Traditionally, the external auditor has also played
an important role in improving the credibility of financial information (Mautz and Sharaf,
1961; Wallace, 1980).
The differences in corporate governance across countries emerge as a result of the
variations in the ownership structure and understanding the effects of various ownership
structure variables is vital to shed light on corporate governance and control process of
firms under difference national types of institutional arrangements (Li, 1994). Recent
empirical works on the association between traditional financial reporting disclosures and
corporate governance Chen and Jaggi (2000) and Eng and Mark (2003). Chen and Jaggi
(2000) find a positive association between the proportion of independent non-executive
directors and the comprehensiveness of information in mandatory financial disclosure of
Hong Kong companies. Eng and Mark (2003) find that lower managerial ownership and
significant government ownership are associated with increased disclosure and that an
increase in outside directors reduces the corporate disclosure of firm listed on the Stock
Exchange of Singapore.
In Malaysia, one-man or family run companies (Halim, 2001) and significant government

equity holdings (Abdullah, 2006) distinguish the ownership pattern of Malaysian
companies that may complicate the corporate governance systems. Extensive occurrence
of individual and family run companies tends to discourage professionalism, encourage
non-compliance and facilitate creative accounting as well as to result in severe conflicts of
interests (Halim, 2001).
2.2 The Variables and Hypotheses Development
2.2.1 Dependent Variable:
An Overall Disclosures Index (ODI) of sample companies was used as the dependent
variable and several corporate governance and control variables were used as the
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independent variables to test the influence or impact of the corporate governance variables
over the ODI.
2.2.2 Primary Independent Variables (Corporate Governance Variables):
1. Board Independence (bi)
2. Dominant Personality (dp)
3. Board Size (bs)
4. Institutional Ownership (io)
5. General Public Ownership (gp)
6. External Auditor (ea)
2.2.3 Secondary Independent Variables (Control Variables)
1. Leverage (lvg)
2. Asset Size (asstsz)
3. Profitability (profitab)
4. Multi Listing (multilis)
5. Number of Shareholders (shareholders)
Board Independence

The board, which comprises a number of independent directors, has a greater monitoring and
controlling ability over management (Fama and Jensen, 1983). The state of ‘independence’ is
met when a director inter alia is neither holding significant ownership nor holding any
executive position in the company (Bursa Malaysia, 2006). In Bangladesh, SEC corporate
guidelines stated that one-tenth of the total number of the company’s board of directors,
subject to a minimum of one, should be independent directors. But in Malaysia, if a company
has only three board members, two of them are required to be independent (Bursa Malaysia,
2006). Fama and Jensen (1983), Ho and Wong (2001), Cheng and Courtenay (2004) and
Norita and Shamsul-Nahar (2004) found a significant positive association. On the other hand,
Eng and Mark (2003), Gul and Leung (2004) and Barako et al. (2006) found a negative
association. This variable is taken in this study as an independent variable and the hypothesis
is as follows:
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Ho: There is no association between board independence and overall disclosures
index.
CEO Duality / Dominant Personality
The corporate governance literature has emphasized the need to separate the position of CEO
(chief executive officer) and board chairman to guarantee the board independence and
improve transparency (Jensen, 1993). In this respect, Dechow et al. (1996) revealed that the
duality CEO-chairman increases the likelihood of violating the accounting principles in
American firms. Byard et al. (2006) indicated that the presence of a CEO who serves also as
the board chairman is associated with poor quality of financial information. Similarly, Beeks
et al. (2004) and Firth et al. (2007) reported that the financial reporting is more relevant in the
case of separating the positions of CEO and board chairman for British and Chinese firms.
Nevertheless, other authors did not detect a significant association between CEO duality and
financial reporting (Ahmed et al., 2006; Bradbury et al., 2006; Petra 2007). CEO duality is

considered as an independent variable in this study and the hypothesis is as under:
Ho: There is no association between CEO Duality and overall disclosures index
Board Size
The number of directors is an important factor in the board of directors’ effectiveness. A
larger board size may bring a greater number of directors with experience (Xie et al., 2001)
that may represent a multitude of values (Halme and Huse, 1997) on the board. On the
contrary, a reduced number of directors imply a high degree of coordination and
communication between them and managers (Jensen, 1993). Chaganti et al. (1985) claimed
that smaller boards are manageable and more often play a role as a controlling function
whereas larger boards may not be able to function effectively as the board leaves the
management relatively free. Indeed, Vefeas (2000), Ahmed et al. (2006) and Bradbury et al.
(2006) found that large board size reduces the information content of income and intensifies
the earning management respectively for American, Singapore and New Zealand firms.
However, several authors argued that the high number of directors ensures the value relevance
of financial statements (Byard et al., 2006), while others did not confirm this link (Firth et al.,
2007). The study by Bonn (2004) found no relationship between board size and firm
performance. She further argued that the board size only measures the factual number of
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directors without capturing their task. Hence, one could argue that it is the skills and
knowledge base that the board brings to the firm not the number. In contrast, Dwevedi and
Jain (2005), found an insignificant positive relationship. They conclude that larger boards are
in a position to improve the governance of the company. As such, board size is used as an
independent variable in the current study and the hypothesis is as follows:
Ho: There is no association between board size and overall disclosures index.
Institutional Ownership
Considering the influence of shareholder activism in governance reforms is important to

obtain insight into governance practices (Daily et al., 2003). To date, institutional investors’
participation has emerged as an important force in corporate monitoring mechanism to protect
minority shareholders’ interest. The significant increase in the institutional shareholdings has
led to the formation of a large and powerful constituency to play a significant role in
corporate governance. In the UK, institutional investors own between 65 to 75 percent of the
UK stock market, which suggest a prominent role that institutional shareholders can play as
an agent to the governance systems (Mallin,2003). To mitigate the problems associated with
conflict between controlling owners and minority shareholders in Asian firms, the
involvement of institutional investors’ equity participation may improve corporate
governance practices (Claessen and Fan, 2002). Concentrated shareholdings by institution
provide an incentive for diligent monitoring as they have the resources, expertise and stronger
incentives to actively monitor the actions of management and prevent managers’
opportunistic behavior (Wan Hussin and Ibrahim, 2003).
Institutional shareholders are often characterized in academic research as sophisticated
investors who have advantages in acquiring and processing information compared with other
investors (Bartov et al., 2000; Jiambalvo et al., 2002). Consequently, institutional investors
can be more effective as traders and monitors than can small, diffuse retail investors.
Intuitional investors could actually prefer that information not be broadly disseminated
because they are concerned about either a decline in the quality of the information
communicated or a loss of their information advantage (NIRI, 2000). Recent studies indicate
a negative relation between institutional ownership and voluntary disclosure (Kelton et.al.
2004). While examining the determination of a firm’s decision to provide shareholders access
to conference calls, Bushee at al. (
2003) find that firms that provide open conference calls
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have a lower institutional ownership than firms that do not provide open calls. Institutional

ownership is accepted in the present study as an independent variable and the hypothesis is as
given below.
Ho: There is no association between institutional ownership and overall disclosures
index.
General Public
Differences in the proportion of a firm that is owned by outsiders may account for some of the
observed differences - in the comprehensiveness of mandatory disclosure, because the greater
number of people who need to know about the affairs of a firm, the greater will be the details
required of an item of information and the more comprehensive the disclosure of a firm will
be (Apostolou and Nanopoulos, 2009). Leftwich et al. (1981) suggested that issuing financial
reports could solve monitoring problems associated with increases in the proportion of the
firm owned by outsiders. If this is true, one would expect to find from a population of
reporting firms that, as the number of shareholders or the proportion of the firm owned by
outsiders’ increases, the financial information disclosed in annual reports will become more
comprehensive. It is expected that if a company has a large proportion of public ownership,
the political cost will be bigger and the company will decide to disclose more information.
General Public is an independent variable and the hypothesis is-
Ho: There is no association between general public and overall disclosures index.
External Auditor
The external audit can be an effective control mechanism to monitor the managers and
guarantee the integrity of financial reports (Jensen and Meckling, 1976; Watts and
Zimmerman, 1983). The appointment of an independent external auditor can reduce the
probability of earnings manipulation by shrinking managerial opportunism (DeAngelo, 1981;
Becker et al., 1998; Chung et al., 2003). In practice, the auditor reputation or quality is
associated with being part of or affiliated with a major international auditing firm (Brown et
al., 2010). Several authors advocated that financial information is more reliable for “BIG 4”
clients in comparison with other companies (Teoh and Wong, 1993; Becker et al., 1998). In
Bangladesh, there are six audit firms that have international links. The following table
presents the list of those audit firms:
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Table-3: International Link of Audit Firms
Name of the firm International firm with which linked
Rahman Rahman Haq and Co. KPMG
Hoda Vasi Chowdhury and Co. Delloite Haskins and Sells
S.F. Ahmed and Co Earnest and Young
Howlader Younus and Co. Arther Young
A Quasem and Co. Cooper and Lybrand
M.J. Abedin and Co. Moor Stephen

External auditor is an independent variable and our hypothesis is-
Ho: There is no association between external auditor and overall disclosures index.

Leverage
Business enterprises may borrow from different sources. Lending institutions always want to
ensure security of their supplied funds. Lenders want reliable information about borrowers.
That is why borrowers usually furnish more information in their annual reports to meet the
information needs of creditors, investors and other stakeholders. So, there is an association
between the amount of loan and the level of disclosure of the reporting entity. Considering,
these things, a few disclosure studies were conducted to examine the association, if any,
between gearing ratio and corporate disclosure level. Ahmed and Nicholls (1994) and Chow
and Wong-Boren (1987) have found no significant association between leverage ratio and the
extent of voluntary disclosure in Bangladesh and Mexico respectively. Karim (1996) and
Belkaoui et al. (1977) have observed a significant negative relationship between the
mentioned variables. On the contrary, Robbins and Austin (1986) had found a significant
positive correlation between debt and municipal disclosures. Leverage is selected as an
independent variable and our hypothesis is-

Ho : There is no association between leverage and overall disclosures index.
Asset Size
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Many disclosure studies e.g., Chow and Wong-Boren (1987); Cooke (1991, 1992 and 1993);
Ahmed and Nicholls (1994) suggest that there is a significant relationship between company
asset size and the extent of voluntary disclosure. Ahmed and Courtis (1999) carried out a
meta-analysis of 28 disclosure studies and found that a significant association exists between
corporate size and disclosure levels. Marston and Shrives (1996) reviewed a number of
disclosure studies and reached the same conclusion. Therefore, asset size is selected as an
independent variable and our hypothesis is –
Ho : There is no association between asset size and overall disclosure index.
Profitability
Profitability affects the level of disclosures. Adelberg (1979) found that the narrative
disclosures were deliberately made complex to communicate bad news and made more lucid
and easily understandable to communicate good news. As profits are always good news to the
investors and other stakeholders, therefore, management discloses more information about
this variable in their annual reports. Profitability was used by a number of researchers as an
independent variable for fluctuations in disclosure level. There are mixed results found about
the association between profitability and disclosure. Singhvi (1967), Singhvi and Desai
(1971), Inchausti (1997), Raffournier (1995), Wallace and Naser (1995), Cerf (1961),
Hossain (1998), Razzaque (2004), Ahmed (2009) and Hasan (2011) found a positive
association between profitability and the extent of disclosure. But, Belkaoui and Kahl (1978)
found a negative association between them. Again, McNally et al. (1982), Malone et al.
(1993), Meek et al. (1995), Suwaidan (1997), and Abd Elsalam (1999) found no association
between them. Profitability is used as an independent variable and our hypothesis is -
Ho : There is no association between profitability and overall disclosures index.

Multiple Listing
The capital orientation of companies may also influence companies in making differential
disclosure. Voluntary disclosures may be associated with the objective of raising capital
(Horngren, 1957; Cooke, 1991). Listing status may also be viewed as a screening scenario.
Firms listed in more prestigious markets may provide signals to customers, suppliers and
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creditors about the strength of the company and that may also encourages brand recognition.
It also provides signals about the future prospects of the company (Mittoo, 1992). That also
impacts on the perceptions of other groups like government and local authorities, consistent
with Roberts et al. (1998); Wallace, Naser and Mora (1994) are also in the same opinion.
Listing status has been tested and identified to be significant by Firth (1979), Cooke (1989),
Meek and Gray (1989), Wallace et al. (1994), Hossain et al. (1995), Meek et al. (1995) and
Inchausti (1997). Multiple listing is used as an independent variable and our hypothesis is -
Ho : There is no association between multiple listing and overall disclosures index.
Shareholders
Shareholders are the real owners of a company. They are also treated as internal and external
stakeholders. They have direct interest to the company. They can change the management and
appoint new agents if they believe that the existing management is not managing the entity
efficiently. It is expected that a large number of shareholders will exert more pressure on
management. Number of shareholders is an important factor in determining the corporate
disclosure level (Alam, 2008) and as such it is taken as independent variable in this study.
The hypothesis is-
Ho:
There is no association between number of shareholders and overall disclosures
index.

3. Methodology
3.1 Selection of Sample
Stratified sampling technique was used as our populations were heterogeneous and it reduces
the sampling error. Each business segment was considered as a stratum and accordingly four
stratums had been selected purposively and five companies were then selected from each
stratum as shown in the following table.
Table -1: Distribution of Population and Sample Size of the Companies
Stratum Population Size Sample Size
Sample as percent
of Population
Percent of total
Sample
Textile 12 5 42 25
Pharmaceuticals 13 5 38 25
Cement 7 5 71 25
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Food & Allied 8 5 63 25
Total 40 20 214 100

Total size of population was 40 and sample size was 20 which represent 50 percent of total
population. The sample size in terms of percentage of population was dissimilar and the
percent of sample size of each stratum was equal i.e., 25 percent.
3.2 Selection of Disclosure Items
A draft check list was prepared that provided the basis for a survey with yes / no questions
that was used to select the individual items for the final checklist. Finally, two-hundred items
were used to measure a company disclosure score. The 200 items reflect the following

disclosure items of an annual report.
Table -2: Summary of Draft and Final Disclosure Checklist
Parts
Disclosure
Key
Total Items (Draft) Items accepted (Final)
Percentage of
items accepted
Number % Number %
General Disclosure Items GDI 25 11 20 10 80
Company Profile Items CPI 25 11 15 8 60
Directors Report Items DRI 30 14 28 14 93
Financial Highlight Items FHI 30 14 27 14 90
Accounting Polices Items API 26 12 26 13 100
Income Statement Items ISI 14 6 14 7 100
Balance Sheet Items BSI 48 22 48 24 100
Cash Flow Statement Items CFSI 22 10 22 11 100
Overall Disclosure 220 100% 200 100% 91%

3.3 Scoring the Disclosure Items
Various approaches are available to develop a scoring scheme to determine the disclosure
level of corporate annual reports. The items were considered equally important to disclose and
hence a dichotomous unweighted approach was used for scoring. If a company discloses an
item it will be awarded one and if not it will be awarded zero.
3.4 Developing Overall Disclosure Index
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Partial Compliance Unweighted Approach was used to measure the overall disclosure index.
This is the first time that this approach is used in Bangladesh to measure the overall disclosure
index because the level of compliance of the companies is not the same. The formula is as
follows:

Where,
PCJ = Total compliance score for each company and
Xi = Level of compliance with each part of disclosure requirement.
Rj = Total number of disclosure part of each company.
6. Statistical Analysis
6.1 Descriptive Statistics for Surveyed Companies
Descriptive analysis of a company is essential in order to measure the company performance
in disclosing information in the annual report. In this overall disclosure indexes, standard
deviation, coefficient of variation and rank of the companies have been calculated. Ranking
has been made on the basis of coefficient of variation of the company; the lowest coefficient
of variation means the company is more consistent in disclosing information in annual report
and received upper rank.



Table-3: Descriptive Statistics of Surveyed Companies
Serial
No.
Company Name Rank
Descriptive Statistics
Mean SD CV
ODI
Textile Segment:
0.67
1

HR Textile Mills Limited
12 0.56
0.26 0.46
0.63
2
BEXTEX Limited
5 0.76
0.14 0.19
3
Apex Weaving and Finishing Ltd
8 0.66
0.14 0.22
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4
Saiham Textile Mills Ltd.
11 0.49
0.16 0.33
5
Alltex industries limited
8 0.69
0.15 0.22
Pharmaceuticals Segment:
6
IBN SINA
7 0.74
0.16 0.21

0.72
7
LIBRA
3 0.73
0.13 0.17
8
SQUARE
4 0.80
0.14 0.18
9
BEXIMCO
10 0.71
0.18 0.26
10
ORION
10 0.62
0.16 0.26
Cement Segment:
11
Heidelberg cement Bangladesh
Ltd.
1 0.81
0.10 0.12
0.67
12
Meghna Cements Mills Ltd.
11 0.62
0.20 0.33
13
Aramit Cement Ltd.

9 0.62
0.15 0.24
14
Confidence Cement Ltd.
2 0.63
0.09 0.14
15
Lafrage Surma Cement Ltd.
9 0.65
0.15 0.24
Food and Allied Segment:
16 Apex Foods Ltd
2
0.74 0.10 0.14
0.66
17 Fu-Wang Foods Ltd
8
0.66 0.15 0.22
18 Gulf Foods Ltd
6
0.65 0.13 0.20
19 Fine Foods Ltd
9
0.61 0.15 0.24
20
Rahima Foods Corporation
Ltd
11
0.65 0.21 0.33

6.2 Descriptive Statistics for Independent Variables
There is diversity of the levels of financial disclosures across companies. The overall financial
disclosures index score assigned to the companies had a mean disclosure index of 67 percent,
a standard deviation of 0.07, a maximum score of 81 percent, and a minimum score of 49
percent. Hence, the aim of the analysis was to identify the variables, both quantitative and
qualitative, that were responsible for such variations in the level of financial disclosures. The
descriptive statistics for the dependent and independent variables are presented in the
following table.
Table- 4: Descriptive Statistics for Dependent and Independent Variables
Variables N Minimum Maximum Mean Std. Deviation
Odi 20

0.49

0.81

0.67

0.08

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Bi 20

0.00

60.00

17.50

12.21

Dp 20

0.00

1.00

0.30

0.47

Bs 20

4.00

11.00

7.15

2.01

Io 20

0.00

83.90

28.42

23.03

Gp 20

12.35

68.33

37.65

16.07

Ea 20

0.00

1.00

0.25

0.44

Lvg 20

0.00

1.00

0.75

0.44

Asstsz 20

14.74

12218.00

2272.72

3914.73

profitab 20

-15.66

156.56

21.87

41.19

multilis 20

0.00

1.00

0.95

0.22

sholders 20

545.00

65556.00

13567.25

17622.87


6.3 Correlation Matrix and Multicollinearity Analysis
Pearson’s Pair Wise Product Moment Correlation Coefficient (r) is computed in order to
examine the correlation between dependent and independent variables. A correlation matrix
of all the values of r for the independent variables along with the dependent variables had
been constructed by using Statistical Package for Social Science (SPSS), which is shown in
the following table.
Table- 5: Correlation Matrix
Variable odi bi Dp Bs Io Gp ea lvg astsz pftab multilis sholders
Odi 1
Bi -0.10 1
Dp 0.37 -0.14 1
Bs 0.21 -0.44* -0.44* 1
Io 0.30 -0.01 -0.19 0.62** 1
Gp 0.05 -0.26 0.10 -0.13 -0.57** 1

Ea 0.48* -0.17 0.13 0.37 0.34 -0.07 1
Lvg 0.43* 0.11 0.38 0.16 0.36 -0.44* 0.33 1
Astsz 0.33 -0.27 -0.04 0.76** 0.57** -0.22 0.45* 0.32 1
Pftab 0.54** -0.21 0.20 0.39* 0.45* -0.09 -0.04 0.26 0.39* 1
Multilis 0.54** 0.06 0.15 0.02 0.12 -0.16 0.13 0.40* 0.12 0.05 1
sholders 0.42* -0.22 0.13 0.42* 0.13 0.17 0.41* 0.39* 0.64** 0.31 0.12 1
* Correlation is significant at the 0.05 level (1-tailed).
**Correlation is significant at the 0.01 level (1-tailed).

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Multicollinearity in the independent variables had been diagnosed through bivariate analysis.
The above table represents the correlation matrix of the dependent and independent variables.
Judge et al. (1985) and Bryman and Cramer (1997) suggested that simple correlation between
independent variables should not be considered harmful until they exceed 0.80 or 0.90. The
highest value of the observed correlations is 0.76; therefore, the observed correlations are not
harmful. These finding suggest that multicollinearity between independent variables is
unlikely to pose a serious problem in the interpretation of the results of the multivariate
analysis.
6.4 ANOVA Technique
One way ANOVA technique was used to have a concrete outcome of accepting or rejecting
the hypothesis. The following table shows the ANOVA and the level of significant at 5
percent.
Table- 6: ANOVA (b)
model sum of squares df mean square F sig.
1

Regression 0.097358001 11 0.008850727
3.3332935 0.049186143

Residual 0.021241999 8 0.00265525
Total 0.1186 19
a predictors: (constant), sholders, multilis, io, bi, dp, ea, gp, profitab, lvg, asstsz, bs

b dependent variable: odi

The table-6 gives us a direction regarding the acceptance or rejection of hypothesis. P value
indicates that there is a significant relationship between corporate governance and overall
disclosure index. Therefore, null hypothesis (Ho) is rejected.

6.5 Empirical Model
It is already observed from the above analysis that there is a relationship between corporate
governance and the extent of disclosure, but the effect of each variable on the disclosure level
is still unknown at this stage. The following Ordinary Least Square (OLS) regression model is
developed in order to identify the effect of each variable on the disclosure level.
Where,
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ODI = Overall Disclosure Index
α = the intercept
ε = the error term
In regression analysis, the enter method of Statistical Package (SPSS) was used in order to

verify the influence of independent variable that were chosen for the study over the dependent
variable. The summary output of the model for the all sample companies is shown in the
following table.
Table – 7: Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .906(a) 0.821 0.575 0.05153
a Predictors: (Constant), sholders, multilis, io, bi, dp, ea, gp, profitab, lvg, asstsz, bs


The adjusted coefficient of determination of R
2
indicates that around 57 percent of the
variation in the dependent variable is explained by variations in the independent variables.
Thus the model is capable of explaining 57 percent variability of disclosed information in the
annual reports of sample companies.

Table- 8: Coefficients (a)
Model Variables
Unstandardized
Coefficients
Standardized
Coefficients
T Sig.
B Std. Error Beta
1

(Constant) 0.438 0.175 2.495 0.037

Bi 0.001 0.002 0.093 0.340 0.743

Dp 0.007 0.072 0.042 0.097 0.925

Bs -0.005 0.025 -0.118 -0.189 0.855

Io 0.000 0.001 0.038 0.131 0.899

Gp 0.001 0.001 0.250 0.944 0.373

Ea 0.092 0.038 0.519 2.414 0.042

Lvg 0.006 0.056 0.032 0.103 0.921

Asstsz 0.000 0.000 -0.058 -0.138 0.894

Profitab 0.001 0.000 0.611 2.500 0.037

Multilis 0.161 0.058 0.455 2.752 0.025

Sholders 0.000 0.000 -0.003 -0.012 0.991

A Dependent Variable: odi


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It is observed that external auditor, profitability and multi listing are significantly associated
with disclosures level. The coefficient of external auditor, profitability and multi listing are
statistically significant at 5 percent level.
The board independence, board size, dominant personality, institutional ownership, general
public, leverage, assets size, and number of shareholders are not statistically significant even
at 10 percent level.
6.
Discussions

The purpose of the current study is to examine the level of financial disclosures among
Bangladeshi companies and its association with corporate governance characteristics. On the
whole, the study concludes that the level of financial disclosures in Bangladesh is increasing
gradually but it is still below the level of expectation. Besides, the reliability and transparency
level of financial disclosures is very low and hence the confidence level of external users’ is
also at a very low stage. Therefore, shareholders do not use the information provided in the
annual report in making their economic decisions as they do not have confidence on it. The
study found that there is an association between corporate governance characteristics and the
level of financial disclosures. The authors used six corporate governance variables in the
current study. Only the association between external auditor and the level of financial
disclosures is found significant. In support of agency-theory and involvement of competent
auditors’, the authors provide evidence of the ability of a competent auditor to influence
corporate financial disclosures reporting. World Bank report stated that audits are not

reviewed in Bangladesh and many market participants are skeptical of audit quality. There
are some key weaknesses in the non-financial disclosure frame work, especially in the
disclosure of ownership and control.
Other variables such as board independence, board size, dominant personality, institutional
ownership and general public are not significantly associated with the level of financial
disclosures. The weakness of these variables indicates that corporate governance structure of
Bangladesh is weak. World Bank (2009) assessed corporate governance scenario in
Bangladesh. According to the report, ‘some companies have one independent director, some
have none, board size is about 6 to 8 members, ownership is concentrated by a small number
of related shareholders- sponsors held 43 percent of the market, general public held 38 percent
and institutional investors held 10 percent’. The WB report clearly shows that board
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independence, board size, institutional ownership and general public are not in a position to
influence corporate financial reporting disclosures.
The more powerful the stakeholders, the more prepared the company to adapt to meet the
stakeholders expectations (Cotter, 2011). According to this statement, only concentrated
ownership has the power to influence the level of corporate financial reporting disclosures in
Bangladesh. Stakeholders’ theory typically views the world from the perspective of the
management of the organization who are concerned strategically with the continued success
of the company (Roberts, 1992). External users rely on the report provided by external auditor
as they cannot access to the information of companies directly. These external users would
like to have more relevant and reliable information which is used in making their economic
decisions. According to agency theory, there exists a conflict of interest between concentrated
ownership and external users. Again, as per stakeholder theory, a company’s continued
existence needs the support of its stakeholders and their approval must be sought

and the
activities of the corporation be adjusted to meet their expectations (Cotter, 2011). Thus, the
management of corporations always tries to make them successful by providing a rosy picture
of companies. Under these circumstances, the opinion about the financial disclosures of
external auditor plays an important role to the external users. The primary objective of
appointing an external auditor is to protect the right of external stakeholders by producing a
true and reliable audit report. In Bangladesh, external auditors work for clients like other
employees and their activities cannot protect the right of external stakeholders and this is the
only reason for which external stakeholders do not fully rely on annual report in making their
economic decisions. It is commonly believed that auditors are working only for their own
incentives and companies disclose information only to comply with the

SEC rules and
regulations. But, SEC does not examine the compliance of financial disclosures and corporate
governance code. Consequently, the image of external auditor in Bangladesh is degrading day
by day. Although concentrated ownership has the power to influence the level of corporate
disclosures but they do not have sufficient knowledge about accounting and financial
reporting in Bangladesh.
External auditor (an expert in accounting, reporting and auditing) is the only authority (as per
the Companies Act. 1994) to certify the financial statements of limited companies. External
stakeholders are to rely on the audit report. Obviously, the audit report is an influential factor
about level of disclosures, reliability, relevancy, consistency, transparency and so on. But,
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external users do not have faith on audited financial statements and disclosures. In the
International Conference of Chartered Accountants in Dhaka, the Honourable President of the
People’s Republic of Bangladesh Md. Zillur Rahman (2010) warned the professional

accountants that “The government mostly depends on direct and indirect taxes to meet budget
expenditure but many individuals or institutions for avoiding the tax amounts prepare their
balance sheets in ways which do not reflect the real accounts,”. Again in 19
th
Convocation
organized by ICAB, President Md. Zillur Rahman (2011) urged the Chartered Accountants to
show utmost honesty and integrity alongside their professionalism in preparing the financial
statements for government and corporate entities. He opined that the professional Chartered
Accountants must always work to ensure transparency and accountability. Therefore, the
result of our study is fully supported by the assumptions of external stakeholders and others.

7. Conclusion
It is evident from the above discussion that external auditor, a corporate governance variable,
can significantly influence the level of corporate financial disclosures. Other variables, such
as, board independence, board-size, dominant personality, institutional ownership and general
public are not meaningfully associated with the level of financial disclosures. As such, the
corporate governance structure in Bangladesh is not at the acceptable level.
Finally, there is a potential limitation in the present study that needs to be acknowledged.
Board competencies, family ownership, managerial ownership, competencies of audit
committee members and so on have not been included in corporate governance variables as
these disclosures were not available in the corporate annual report. There are also some key
weaknesses in the non-financial disclosure frame work, especially in the disclosure of
ownership and control (WB, 2009).
7. Opportunities for Further Research
Findings of this study warrant further investigation on corporate governance scenario in
Bangladesh. An empirical study can be conducted by applying survey method as the data
required to measure corporate governance is not available in corporate annual reports. In this
context, it is essential to collect data by using governance & transparency index (GTI).

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Acknowledgement
The authors acknowledge the involvements and comments of following well-known
researchers in the field:
Richard Heaney, University of Western Australia, Zahirul Hoque, La Trobe University,
Australia, Kamran Ahmed, La Trobe University, Australia, Asheq Rahman, Massey
University, New Zealand, Omar Al Farooque, University of New England, Australia, Jill
Solomon, King’s College, London, UK

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