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The effects of agency and proprietary costs on corporate financial disclosures
Abstract
The extent of financial disclosures among corporations vary greatly. Some corporations voluntarily provide substantially more information than that which is mandated while others make available only the bare minimum to satisfy the legal or regulatory requirements. Corporate financial disclosures narrow the information gap between the firm and investors/debtholders (present/potential) and assist in reducing the agency costs of the firm. Past studies, however, have not documented results consistent with the agency costs explanations for disclosures. An important factor that affects incentives for financial disclosures is the presence of proprietary costs of disclosure. Research on proprietary costs of disclosure affecting firms' disclosure policies are, however, lacking. This study investigates the role of agency theory and proprietary costs theory in explaining firms' financial disclosure policies. Disclosures examined are grouped into four categories: (1) annual reports, (2) other publications, (3) investor relations, and (4) the overall disclosures of the firm. The proxy for firms' financial disclosures are obtained from the annual reports of the Corporate Information Committee of the Association of Investment Management and Research. Financial disclosures are predicted to be increasing with agency costs and decreasing with proprietary costs of disclosure. The agency costs proxies include managerial ownership, leverage, and ratio of assets in place to growth opportunities. The proprietary costs of disclosure is surrogated by the sum of advertising and research and development expenditures, deflated by net sales. The results of this study provide evidence that are consistent with the agency costs explanations for disclosures. Support for the proprietary costs hypothesis is, however, evident only for the investor relations category. Results for the interaction effects of agency costs and proprietary costs are weak. Only the interaction term between managerial ownership and the proprietary costs variable is supported for the other publications category.
Subject Area
Accounting
Recommended Citation
Low, Pek Lee, "The effects of agency and proprietary costs on corporate financial disclosures" (1996). ETD collection for University of Nebraska-Lincoln. AAI9628240.
https://digitalcommons.unl.edu/dissertations/AAI9628240