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Voluntary Disclosure Behaviour of Kuwait Companies


1.1 Introduction

Disclosure of information in corporate annual reports has attracted a number of researchers in both developed and developing countries. The voluntary disclosure information in excess of mandatory disclosure, has been receiving an increasing amount of attention in recent accounting studies. Because of the inadequacy of compulsory information, the demand for voluntary disclosure provides investors with the necessary information to make more informed decisions (Alsaeed, 2006). Voluntary disclosure of decision-useful corporate information is considered to be the first step in solving the alleged problems of traditional financial reporting (Leadbetter, 2000). Its objectives are well defined: closing (or narrowing) the gap between a company’s potential intrinsic market value and its current market value.

Voluntary disclosure, in the context of globalization of the world’s financial markets, has received a great deal of attention in the accounting literature in recent years (Hossain, Berera and Rahman, 1995). This is due to the following reasons: Firstly, additional disclosures may help to attract new shareholders thereby helping to maintain a healthy demand for shares, and a share price that more fully reflects its intrinsic value. It is possible that poor disclosure could lead to an undervalued share making it attractive to a potential predator. Secondly, increased information may assist in reducing informational risk and thereby lower the cost of capital (Spero, 1979). A lower cost of capital should mean that marginal projects become profitable. Thirdly, in order to raise capital on the markets, companies will increase their voluntary disclosure. Consequently, listed companies are more likely to have a higher level of disclosure than unlisted companies and multiple listed companies those raising capital on the international markets will have a higher level of disclosure than domestically listed companies. Fourthly, multiple listed companies often have an interest in foreign capital markets since foreign operations are often financed by foreign capital (Choi and Mueller, 1984). Disclosure levels might be increased to adapt to local customs to meet the requirements of banks and other suppliers of capital; finally, listed and multiple listed companies might increase their social responsibility disclosures to demonstrate that they act responsibly (Watts and Zimmerman, 1979). Companies may have attained their status on the securities markets and be able to attract new funds, not least because they act responsibly.

According to Healy and Palepu (2001) a company’s disclosure decision could be a response to innovation, globalization or changes in business and capital market environments.

Kuwait is the focus of this study for three reasons. First, Kuwait is a small rich country, relatively open economy with crude oil reserves of about 10% of world reserves. Second, over the last decade, the Kuwaiti government has initiated several far-reaching reforms at the Kuwait Stock Exchange to mobilize domestic savings and attract foreign capital investment. These measures include privatization of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies since 2000, tax free. Third, the Kuwait Stock Exchange is becoming an important capital market in the region. It is ranked the second largest market in the Arab world (after Saudi Arabia) in terms of total market capitalization. Its total market capitalization was US$128,951 million as of December 2006 (Arab Monetary Fund 2006). These reasons could motivate investors to diversify their investment portfolios into that market. As a result, investors may be interested in the information disclosure practices of listed companies in Kuwait (Al-Shammari, 2008).

1-2 Problem Statement

Many developing countries strive to mobilize financial resources from domestic as well as international sources with a view to attaining their economic and social development goals. Domestic and international investors utilize financial and non-financial information available on potential investment targets for assessing risk and making critical investment decisions. Thus, the availability of financial and non-financial information in sufficient quantity and of sufficient quality has an important bearing on efforts geared towards mobilizing investment for financing economic and social development.

Adequate reporting and disclosure of financial and non-financial information will reduce asymmetric information problem, hence are likely to improve investor confidence and a lower cost of investment. According to Gray, Meeks and Roberts (1995) 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 (Gray et al., 1995).

Given the faster pace of globalization, the growing interdependence of international financial markets and increased mobility of capital, developing countries need to attach greater importance to corporate transparency and disclosure. Policy makers, legislators and regulators, in recognition of the significant influence that corporate transparency has on decisions of investors, need to strengthen further the various components of corporate disclosure infrastructure so that domestic and international resources are mobilized more efficiently.

Kuwait is one of the developing countries that face difficulties to attract foreign investments. Birgit Ebner at Germany’s Frankfurt Trust, who helps manage a Middle Eastern stock fund, said Kuwait was not an attractive investment compared with others in the region ( One of the main reasons that interpret this matter is the absence of voluntary disclosure as a result of sharp low supply of information by companies.

According to Birgit Ebner, We are underweight in Kuwait because in Kuwait there are many holding firms dominating the market. And on top of it, the transparency is currently lower than in other Gulf States.

In opinion of many analysts in Kuwait, the problem of gulf bank is related to absence of voluntary disclosure. Moreover, Kuwait stock exchange report that issued in (2007) revealed that 156 companies listed in Kuwait stock exchange from among 177 companies listed in Kuwait stock exchange are violating disclosure guidelines ( 2007).

The purpose of this study is to empirically investigate the influence of several firm characteristics on the level of voluntary disclosure of companies listed in Kuwait and whether disclosure level improves over the years given changes in the accounting environment of the country and globalization that have taken placed.

There are many studies have examined the relationship between a company`s characteristics and the level of disclosure in both developed and developing countries such as Canada (Belkaoui and Kahl, 1978); United Kingdom (Firth, 1979, 1980); Nigeria (Wallace, 1987); Sweden (Cooke, 1989); Japan (Cooke, 1992); United States (Imhoff, 1992; and Lang and Lundholm, 1993); Bangladesh (Ahmed and Nicholls, 1994); Switzerland (Raffournier, 1995); Hong Kong (Wallace and Naser, 1995), Egypt (Mahmood, 1999); Jordan (Naser, Alkhatib and Karbhari, 2002); Saudi Arabia (Alsaeed, 2006b) and United Arab Emirates (Aljifri, 2007). However, to my knowledge, little attention has been devoted to the role of voluntary disclosure in the Middle East countries, more specifically Kuwait (see Al-Shammari, 2008).

The aim of this study is to understand what motivate or demonstrate a company’s disclosure by empirically investigate the association between a number of company characteristics and the extent of voluntary disclosure in the annual reports of companies listed in the Kuwait Stock Exchange in 2005, 2006, 2007, and 2008. In addition, the influence of the reporting year on voluntary disclosure will also be examined to assess the progress of disclosure activities in Kuwait. Given that Ashammari’s study only cover the year of 2005, the execution of this study is fully justified.

1.3 Research Questions

In general, this study seeks for explanation on voluntary disclosure behaviour of Kuwait companies. The followings are the research questions:-

1- What is the relationship between the firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and voluntary disclosure level?

2- Does reporting year influences voluntary disclosure?

3- To what extent do the above factors affect the voluntary disclosure?

1.4 Research Objectives

To determine the influences of firm size, debt ratio, ownership dispersion, profitability, audit firm size, industry sector and reporting year on the level of voluntary disclosure of companies listed in Kuwait.

1.5 Significance of the Study

The significance of study can be viewed from contributions given to Accounting academic discipline and to the practitioners and policymakers.

Contribution to Accounting body of knowledge

This study contributes to the literature on corporate financial reporting and disclosure practices in one of the important capital markets in the Middle East in which International Financial Reporting Standards (IFRSs) are mandatory and the government controls the accounting and auditing profession. It also contributes to the corporate governance literature on whether the company characteristics found to be significant in companies operating in developed countries are similar to those a developing country like Kuwait.

This study is important in enhancing our understanding of corporate financial reporting in Kuwait. It explores the determinants that help explain voluntary disclosure in Kuwait.

Contribution to the practitioners and policy makers

Knowledge on firms’ characteristics that influence voluntary disclosure would enable policy makers to target training and monitoring activities to suitable target companies in order to improve disclosure level in the country. This is important because higher disclosure among companies could improve investors’ confidence and help attracting more foreign investment into the country.

The study is also able to show whether the external environment in Kuwait have improved the voluntary disclosure activities.

1.6 Scope and Limitations of the Study

This study investigates the relationship between firm characteristics and voluntary disclosure of non financial companies listed in Kuwait. Financial companies (banks and insurance companies) were eliminated as the characteristics of their financial reports are different from those of non financial firms (Alsaeed, 2006).

A disclosure index was constructed as a yardstick to measure the level of disclosure by the listed firms. The construction of the disclosure index is based on the information that firms supply in their annual financial reports to shareholders. Albeit not as conclusive, financial reports serve as a widely accepted (Knutson, 1992).

The disclosure index does not intend to be comprehensive, nor does it intend to specify what firms ought to disclose. Rather, the index is crafted solely for the purpose of capturing and measuring differences in disclosure practices among firms. The selection of items embedded into the index was entirely guided by Meek, Rober and Gray (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006)

1.7 Organization of the Study

The reminder of this study is organized as follows: Chapter Two discusses the literature review related to the study; Chapter Three consists of research methodology including theoretical framework, hypothesis development and model specification for the study. The measurement, sampling and instrumentations are also discussed in this chapter. Chapter Four presents the empirical findings and results. Finally, Chapter Five provides the discussion, implications and recommendation of the study as well as suggestions for future research.



2.1 Introduction

This Chapter discusses and summarizes the literatures review, which looks at many aspects of voluntary disclosure and the factors which affect the degree of voluntary disclosure in a firm. The discussion is segmented into five sections. The first section presents an overview of disclosure requirements in Kuwait so as to provide foundation knowledge of the issue understudy. Section two discusses the concept and measurement of voluntary disclosure. This is followed by section three which presents the firm-related determinants of voluntary disclosure as found from prior theoretical and empirical literature. These variables include firm size, debt ratio, ownership dispersion, profitability, audit firm size.

2.2 Disclosure Requirement in Kuwait

Mandatory disclosure refers to firms disclose information about their operations because of legal requirements. For the efficiency of markets and the protection of investors, mandatory disclosure of information concerning the firms operating in capital markets has important consequences (Shin, 1998).

2.3 Voluntary disclosure level

More detailed disclosure by the firms beyond the level of information disclosed within the mandatory disclosure process is called voluntary disclosure. Voluntary disclosure means making public the financial and non-financial information regarding the firm’s operations without any legal requirement (Fishman and Hagerty (1997), Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003) and Alsaeed (2006).

Alsaeed has identified a more comprehensive items for voluntary disclosure based on Meek et al. (1995), Botosan (1997), Naser and Nuseibeh (2003). These items are as in Table 2.1

Table 2.1: Voluntary disclosure items in Alsaeed (2006)


Disclosure items


Strategic information


Brief history of company


Information on events affecting future year’s results


Board directors’ names


Top management’s names


Majority shareholders


Information on different types of products


Information statistics for more than two years


Information on dividends policy


Information on future expansion projects


Percentage of foreign and national labor force


Information on training and workers development


Information on social and environmental activities


Statement of corporate goals and objectives


Principle markets


Average compensation per employee


Market share


Information on events affecting current year’s results


Competitive environment


Forecasted profits

Many studies have examined the relationship between a company’s characteristics and voluntary disclosure level. Alsaeed, (2006) argued that firm size, profitability and auditor firm size influence the level of voluntary disclosure. Naser et al., (2002), Jensen and Meckling, (1976); Fama and Jensen, (1983) Donnelly and Mulcahy, (2008), Camfferman and Cooke (2002), studied the association between company’s firm size, debt ratio, owner ship and auditor firm size and the level of disclosure.

2.4 Determinants of Voluntary Disclosure

2.4.1 Firm size

Most of the firm disclosure studies used firm size as a control variable (see for example, Alsaeed (2006); Donnelly and Mulcahy (2008); Brammer and Pavelin (2004); Meek et al, (1995), Mitchell et al, (1995), Mckinnon and Dalimunthe, (1993), Aitken et al. (1997), Bradbury, (1992), Zarzeski (1996), Brennan and Hourigan, (2000), Naser et al.,(2002), Wallace and Naser (1995), Firth, (1979), Eng and Mak (2003) and Hossain et al.(1994).

Many studies found a positive relationship between firm size and disclosure level of companies. For example, Alsaeed (2006) conducted a study to investigate the relationship between firm characteristics of non-financial Saudi firms listed on the Saudi Stock Market in 2003 and voluntary disclosure level by those companies. He found that there was a positive relationship between the firm size and the level of disclosure. Alsaeed (2006) argues that agency costs are higher for larger companies because shareholders are widespread, therefore, additional disclosure might reduce these costs (Watts and Zimmerman, 1983). This finding is consistent with other studies such as Meek et al, (1995), Donnelly and Mulcahy (2008), Foster (1986), Hossain et al, (1995) and Al-Shammari, (2008).

In addition to what Alsaeed (2006) has mentioned above, they argued that large companies might have sufficient resources to afford the cost of producing information or the user of annual reports. Secondly, small companies might suffer from a competitive disadvantage if they provide additional disclosure. Thirdly, large companies might be of interest to different users of annual reports including government agencies.

2.4.2 Debt ratio

There is no consensus among researchers about the relationship between debt ratio and voluntary disclosure. Most of studies found a significant positive relationship between debt ratio and voluntary disclosure such as Naser (1998), Mitchell, Chia and Loh (1995); Hossain et al. (1995), Al-Shammari, (2008) and Bradbury, (1992).

Jensen and Meckling, (1976) found the voluntary disclosure level can reduce the agency costs by facilitating debt ratio supplier’s assessment of the firms to ability to meet its debts ratio. In relation to this, Al-Shimmiri, (2008) argued that the companies with higher debt in their structure of capital are prone to higher agency cost, hence they will be more likely to disclose additional information in order to reduce agency costs and information asymmetry with shareholders.

Alsaeed, (2006) argued that when firms increase their level of leverage, they have to disclose more information in order to reduce asymmetric information between the firm and its creditors. Hence he argued that firms with high leverage will have high level of disclosure.

In addition, Zarzeski (1996) argued that firms with higher debt ratio are more likely to share private information with their creditors. Thus, voluntary disclosures can be expected to increase with leverage. However, Mckinnon and Dalimunthe, (1993), Hossain, Berera and Rahman (1994), Aitken, Hooper and Pickering (1997), Brennan and Hourigan, (2000) and Eng and Mak (2003) studied the relationship between the voluntary disclosure and leverage found no relationship. While Meek et al (1995) mention that there is negative relationship between voluntary disclosure and leverage for US, UK, and European MNCs, Wallace, Naser and Mora (1994).

2.4.3 Profitability

Many studies refer the profitability as the factor that affects voluntary disclosure level such as Singhvi and Desai (1971); Foster (1986), Richard (1992), Meek et al. (1995) and Naser et al. (2002) they argues that when the level of firm’s profitability increase, the firms have to disclose more information that can be an indicator to good management and also have incentives to show to the investors and the public that their profitability has increased. However, Ahmed and Courtis (1999) identified 12 studies that investigated the relationship between profitability and disclosure with mixed results.

Akerlof (1970) argued that larger profitable companies may disclose more information to be distinguished from less profitable companies. Watts and Zimmerman (1986) argued the firms with larger profits are more interested in disclosing detailed information in their annual reports in order to justify their financial performance and to reduce political costs. However Wallace et al. (1994) found no significant relationship between the comprehensiveness of disclosure and the profit margin of listed and unlisted Spanish firms.

Inchausti (1997) elaborated that agency theory suggests that managers of larger profitable companies may wish to disclose more information in order to obtain personal advantages like continuance of their management position and compensation.

Raffournier (1995), Wallace and Naser (1995) and Alsaeed, (2006) observed no significant relationship between the disclosure and the profitability, because none of the performance related variables provides an explanation of the disclosure level.

Ho and Wong (2001), Barako, Hancock and Izan (2006) and Barako (2007) on the other hand found profitability to be positively and significantly related with two of the four disclosure categories, financial and forward looking disclosures, whereas other categories ware negative and significant with the disclosure of general and strategic. This result is similar with that of Eng and Mak (2002) study on Singapore listed companies. For example, companies in the manufacturing sector were found to disclose less of financial information, and instead disclosed more on general and strategic information to explain in detail factors affecting their poor financial performance.

2.4.4 Ownership dispersion

The ownership dispersion represents the percentage of shares owned by outsider after subtracting shares owned by the insider. Many studies found positive relationship between voluntary disclosure level and ownership, as explained by the agency theory which suggests that difference in the proportion of the company’s shares owned by outsider shareholders cause’s differences in the voluntary disclosure level. This is because the companies with more outsider ownership are more likely to disclose more information than companies with less outsider ownership and also the demand for publicly available information is likely to increase (Wallace and Naser 1995).

Gelb (2000) and Barako et al. (2006) found significant relationship between outsider ownership and disclosure level. Leftwich, Watts and Zimmerman (1981), Fama and Jensen (1983), Mckinnon and Dalimunthe, (1993) and Aitken et al. (1997) mentioned the detailed disclosure in annual reports that may allow outsider to monitor their interests more efficiently. Eng and Mak (2003) argued that voluntary disclosure is a substitute for outside monitoring and so is negatively related to managerial ownership. They found evidence consistent with this prediction.

Many studies found negative relationship between voluntary disclosure level and ownership dispersion. Hossain et al. (1994) found evidence on Malaysian listed companies having significant negative association between voluntary disclosure and ownership dispersion. A later study by Haniffa and Cooke (2002) also found similar result.

Naser et al. (2002) examined the affect of ownership on US company’s disclosure and his results indicated that firms with a lower level of managerial ownership are more likely to receive higher ratings for the disclosure provided in their financial reports.

Ho and Wong (2001) found negative relationship between family ownership structure and voluntary disclosure. Chau and Gray (2002) also found negative relationship between family ownership structure and voluntary disclosure of companies listed in Hong Kong and Singapore but found positive associated with outside ownership.

Donnelly and Mulcahy (2008) on the other hand found no evidence that ownership structure is related to disclosure level.

2.4.5 Audit firm size

According to Jensen and Meckling (1976) large audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behavior by managers and are less likely to be associated with clients that disclose lower levels of information in their annual reports.

In terms of size, audit firms can be divided into two; large or small. Large audit firms are identified as being one of these Big Four (or Big Five or Six formerly) international auditing firms, and smaller audit firms are the rest; the firms are more likely to choose a Big Six auditing firm. Such choice of audit firms signals to investors that the contents of the annual reports are audited with high quality (Craswell and Taylor, 1992). Furthermore, the large audit firms are widely spread in the world while small firms are domestically; hence the large audit firms have more capability to disclosure of the information and have higher reputation and power to affect the voluntary disclosure level related to the smaller audit firm (Alsaeed, 2006).

Several studies found that audit firm size have significant relationship with voluntary disclosure level. Firth (1979), Craswell and Taylor (1992), Wallace and Naser, (1995), Ahmed (1995), Raffournier (1995), Inchausti (1997), Mahmood (1999), S.M. Ho and Wong (2001), Camfferman and Cooke (2002), Nasser et al. (2002) and Al-Shammari, (2008) found significant relationship between the voluntary disclosure level and audit firm size. Forker (1992) and Wallace et al. (1994) claim there are positive relationship between voluntary disclosure and audit firm size but not significant, while Hossain et al. (1994), Raffournier (1995), Wallace and Naser (1995), Depoers (2000) and Haniffa and Cooke (2002) they didn’t fine significant association.

2.4.6 Industry sector

According Cook (1989) disclosure level is more likely to vary from one industry to the other due to the likelihood that leading firms operating in a particularindustry could produce a bandwagon effect on the level ofdisclosure adopted by other firms working in the same industry. Cooke (1992) found evidence that Japanese manufacturing firms tend to provide more information than other non-manufacturing firms. Other studies that found significant effect of industry types are Wallace and Naser (1995) and Camfferman and Cooke (2002), while McNally et al.(1982); Wallace (1987): Wallace et al. (1994); Raffournier (1995); Inchausti, (1997); Patton and Zelenka (1997); Naser (1998); Owusu-Ansah (1998), Naser and Alkhatib (2000) and Alsaeed (2006) found insignificant effect.

Table 2.2: Summary of independent variables influence on voluntary disclosure:


Independent variable



Akerlof (1970)


Positive relationship

Singhvi and Desai, (1971)


Positive relationship

Jensen and Meckling, (1976)

Debt ratio and audit firm size

Positive relationship with debt ratio and audit firm size.

Firth, (1979)

Firm size and audit firm size

Positive relationship with debt ratio and audit firm size.

Leftwich, Watts, and Zimmerman (1981)

Ownership dispersion

positive relationship with ownership dispersion

McNally et al.(1982)

Industry sector

Insignificant with industry sector

Fama and Jensen (1983)

Ownership dispersion

positive relationship with ownership dispersion

Watts and Zimmerman (1983).

Firm size

positive relationship with firm size

Foster, (1986)

Firm size, profitability

Significant positive with firm size and found positive with profitability.

Watts and Zimmerman (1986)


positive with profitability

Wallace (1987)

Industry sector

Insignificant with industry sector.

Cook (1989)

Industry sector

Positive with industry sector.

Bradbury (1992)

Firm size and debt ratio.

Significant positive with firm size and debt ratio.

Richard, (1992)


Positive with profitability.

Forker (1992)

Audit firm size

Positive but insignificant with audit firm size.

Craswell and Taylor (1992)

Audit firm size

Positively significant with audit firm size.

Cooke (1992)

Industry sector

positive with industry sector

Mckinnon and Dalimunthe, (1993)

Firm size, debt ratio, ownership dispersion.

Positive with firm size and ownership dispersion and negative with debt ratio.

Hossain et al. (1994)

Firm size, debt ratio, ownership dispersion and audit firm size.

Positive with firm size and ownership dispersion but negatively with debt ratio and audit firm size.

Wallace et al. (1994)

Industry sector

Insignificant with industry sector.

Meek et al, (1995)

Firm size, debt ratio, profitability.

Positive with firm size and profitability whereas significant, negative with debt ratio.

Hossain et al. (1995)

Firm size and Debt ratio

Significant positive with firm size and debt ratio.

Mitchell et al. (1995)

Firm size and Debt ratio.

Significant positive with firm size and debt ratio.

Wallace and Naser (1995)

Firm size, profitability, Ownership dispersion

Positive with firm size, ownership dispersion and

industry sector but-

,audit firm size and industry sector

– Negatively with profitability and audit firm size.

Ahmed (1995)

Firm size and audit firm size

Positive significant with firm size and audit firm size.

Raffournier (1995)

Profitability, audit firm size and industry sector.

No significant with profitability and industry sector, but significant positive with audit firm size

Zarzeski (1996)

Firm size and debt ratio

Positive with firm size and debt ratio

Aitken et al. (1997)

Firm size, Debt ratio and owner ship dispersion

Positive with the firm size and ownership dispersion but negative with debt ratio.

Inchausti (1997)

Profitability, audit firm size and industry sector.

Positive with profitability and significant positive with audit firm size and insignificant with industry sector.

Patton and Zelenka (1997)

Industry sector

Insignificant with industry sector.

Naser (1998)

Debt ratio and industry sector.

Significant positive with debt ratio but insignificant with industry sector.

Owusu-Ansah (1998),

Industry sector

Insignificant with industry sector.

Mahmood (1999)

Audit firm size

Significant with audit firm size.

Brennan and Hourigan, (2000)

Firm size and debt ratio.

Significant positive with firm size and significant negative with debt ratio.

Gelb (2000)

Ownership dispersion

Negatively with Ownership dispersion

Depoers (2000)

Audit firm size

No significant with audit firm size.

Naser and Alkhatib (2000)

industry sector

Insignificant with industry sector.

Ho and Wong (2001)

Profitability, ownership dispersion and audit firm size.

No significant with profitability but negatively with ownership dispersion and positive significant with audit firm size.

Naser et al. (2002).

Firm size, Profitability, ownership dispersion and audit firm size.

Positive significant with firm size and audit firm size but positive with profitability and no significant with ownership dispersion.

Eng and Mak (2002)


No significant with profitability

Chau and Gray (2002)

Ownership dispersion

Positively with outside ownership dispersion.

Camfferman and Cooke (2002)

Profitability, audit firm size and industry sector

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