CHAPTER 2

REVIEW OF LITERATURE

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 Chapter 2
REVIEW OF LITERATURE

Review of literature plays vital role in research methodology. Through review

of literature, a researcher remove limitations of existing work or may assist to
extend prevailing study. Also, it helps in validating the results of study when
compared with previous results. Many studies have been conducted by
researchers both in India and abroad about corporate disclosure practices
prevalent in different countries. It is but natural that their findings have paved
the way for further studies and research. It is a known fact that education is a
social activity and no research whatsoever can be conducted in isolation. Every
scholar is, therefore, deeply indebted to his predecessors in the field.
Consequently, a number of books and research papers have been studied and
the same have been reviewed briefly here:

N. Dass Gupta (1977) in his published Ph.D. thesis entitled “Financial

Reporting in India” has critically examined the financial reporting practices
prevalent in India. For the purpose of observing and analyzing the trends in the
reporting practices in India, he has studied the annual reports at random. In his
study, he has suggested that the statements of highlights, summarized balance
sheets and profit and loss accounts, narrating statements, statistical records,
diagrams and charts should be included in the annual reports to make them
more informative and to serve the increasing needs of their users. He has
concluded that the present reports are insufficient for modern business
conditions and do not disclose the necessary information required in these days
of complex trading conditions.

D.R. Singh & B.N. Gupta (1977) in their study “Corporate Financial
Disclosure in Indian Companies” have observed that the public sector
companies have been disclosing more information than the private sector
companies in their reports. They have also found that the number of
shareholders, the age of the company and the ownership pattern also influence

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the quality of disclosure and the larger companies disclose more than the
smaller companies. They have suggested that the management of a company
should take more interest in this area. Important information regarding price
level adjustments, methods of depreciation, change in the accounting practices
and broad policies of the management etc. should be reported by the companies
voluntarily. If they fail to do so, the government should take suitable measures
in this respect. They further suggest that the professional auditors can also
influence the quality of disclosures by emphasizing some minimum standard of
disclosure.

D.R. Singh and S.K. Bhargava (1978) in their study “Quality of Disclosure in
the Public Sector Enterprises” have examined the annual reports of 40 public
sector enterprises for the year 1972-73. They have concluded that the quality of
disclosure varies from enterprise to enterprise. However, when a comparison is
made between disclosable information and the actual disclosure of information
by public sector enterprises, their performance is not satisfactory, considering
the importance of public sector enterprises in the national economy and their
influences on different segments of society. They have suggested that the
quality of disclosure of information in the annual reports should be improved.
Better information may improve the transparency and image of the public
sector enterprises. The managements must take proper interest in the quality of
disclosure of information. The government should also prescribe a minimum
standard of disclosure for the enterprises for meeting the growing needs of the
various interested groups.

Jawahar Lal (1985) in his published thesis entitled “Corporate Annual

Reports - Theory and Practice” has examined the disclosure practices of
manufacturing companies in the private sector. Dr. Lal has considered fifty
items for measuring the extent of the quality of disclosure in the annual reports
of 180 companies selected for the study. He has examined mainly the impact of
four company characteristics, namely - asset size, earning margin, nature of
industry and association with a large industrial house - on the quality of

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disclosure. He has concluded that there has been a considerable improvement
in disclosure quality during the period under study. He has discovered that of
the four characteristics, the size of the company has better association with the
extent of disclosure than any of the other three variables.

Subhash Chander (1992) in his study of “Corporate Disclosure Practices”

compared the disclosure practices of public and private sector giants in India
from the year 1980-81 to 1984-85. The study was conducted by taking 50
public sector companies and 50 private sector companies. He analysed 98 items
applicable to public sector companies and private sector companies in his index
of disclosure. Besides this the author examined the influence of company
characteristics such as size, profitability, age and nature of industry on the
disclosure of information in the annual reports of the companies. Timeliness in
corporate disclosure and study of some contemporary issues such as price level
accounting, human resources accounting, social accounting etc. in corporate
disclosure were also analyzed by the author. He used measures of dispersion, t-
test, chi-square test, F-test, U-test, regression analyses and rank correlation for
the analysis of his study.

On the basis of the findings of his study he concluded that ―item wise
disclosure‖ and ―company wise disclosure‖ was significantly better in public
sector giants as compared to private sector giants and considerable
improvements were seen in the disclosure practices of public and private sector
companies over the period of analyses. Company attributes such as size of the
company measured in terms of net tangible assets had a positive and
statistically significant association with the disclosure score in the years 1982-
83 to 1984-85 in case of public sector and in the years 1982-83 to 1984-85 in
case of private sector. Age of the company had a positive and statistically
significant association with the disclosure score in both the sectors in all the
five years of the study.

On timeliness of corporate disclosure he found that public sector companies

take comparatively more time in finalizing their annual accounts as compared

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to private companies and the contemporary issues were reported by very few
companies in both the sectors. The author visualised that the impact of C &
A.G. audit on disclosure practices of public sector companies was the major
reason of better disclosure in public sector companies.

Bhattar (1994) in his published Ph.D. thesis, “Corporate Published

Accounting Information and Investors” made an attempt to examine the
corporate disclosure practices and the information needs of the individual
investors. He prepared a questionnaire for his research topic-corporate
published accounting information-relevance and use and distributed it to 450
individual investors residing in different parts of the country. The author
divided the investors into three categories viz. investors of major cities,
investors of small cities and investors of towns. The findings of the study
revealed that there existed a wide gap between the disclosure of information in
the annual reports of the companies and the information needs of the individual
investors. He concluded that the majority of Indian companies disclosed only
the statutory information in their annual reports and non-statutory information
found very little place in the annual reports of the companies. He also
concluded that the Indian corporate management was less inclined to disclose
the necessary information to the investing public. He suggested that the
company management should be broad based and must emphasize on
incorporation of statutory and non-statutory information in the corporate
reports in a manner which was adequate both substance wise and format wise.
This would certainly enhance the credibility of the company as well as create
confidence among the present and potential shareholders.

D.D. Meena (1995) in his published Ph.D. thesis entitled, “Corporate

Reporting Practices in Public Enterprises” has evaluated the reporting
practices of the state level public enterprises in Madhya Pradesh. He has
revealed that the management of MPSLPE (Madhya Pradesh State Level Public
Enterprises) has been concerned more with the compulsory disclosure
requirements of information than with those aspects of corporate disclosure

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which are not mandatory in nature. He opines that the SLPE's have not been
able to keep pace with the rising public expectations in the sphere of corporate
reporting practices. There are yawning gaps between what they have been
disclosing and what they ought to disclose with regard to the extent of
reporting, the quantum of reporting, various time lags and the readability
aspect. He has made a number of suggestions to the SLPE's, the Bureau of
State Enterprises, Bhopal, the professional bodies & the government of the
state to effect improvements in reporting practices.

Ramsay and Hoad (1997) analyzed the extent to which Australian companies
disclose their corporate governance practices by examining the annual reports
of 268 listed companies. They used content analysis method for the study. They
found that the extent and quality of disclosure are typically better for larger
companies as compared to small companies.

Vasal (1997) in his paper “Interim Reporting - An Emperical Analysis”

analysed 226 interim financial reports and 33 responses from security analysts.
The main objective of the study was to analyse the degree of compliance by the
Indian companies with the reporting requirements under the existing listing
agreements.

On the basis of the findings of his study he concluded that most of the Indian
companies did prepare interim results in time but they did not release such
information for publication within the prescribed time. He suggested that SEBI
should exercise its powers as statutory body and implements the proposal to
hold board meetings at weekends and release interim information before the
first trading day of the next week. He further suggested that the amount of
penalty should increase aggressively for each day by which the release of
interim results was delayed. He finally concluded that the overall scenario was
far from satisfactory and it would need concentrated efforts on the part of law
enactment and law enforcement agencies to develop a voluntary disclosure for
the overall improvement in the financial reporting practices of the country.

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Pooja Kohli (1998) in her Ph.D. thesis “Corporate Disclosure Practices - A
Comprehensive” attempt to compare the current status of disclosure level of
Indian and US companies for the years 1990-91 to 1994-1995. The study was
conducted by taking top 100 Indian and top 100 US companies. The researcher
also examined the influence of certain corporate attributes like size,
profitability, age, nature of industry and auditing firms on the disclosure level
of Indian as well as US companies. The study of timeliness of Indian and US
corporate annual reports was another objective of the study. She prepared a
comprehensive index of disclosure consisting 212 important items of both
mandatory and voluntary nature and score 1 was assigned to items found
disclosed on the annual reports. Simple linear regression and multiple linear
regression analysis were used to study the relationship of corporate disclosure
and timeliness along with other corporate attributes.

A temporal comparison of the disclosure levels of the Indian companies over

the period under study revealed an upward trend in the corporate disclosure
level. The mean disclosure score of Indian companies had improved to 45.57 in
1994-95 from 33.12 in 1990-01. A cross national comparison of the disclosure
level of the Indian and US companies fir the year 1994-95 revealed a wide
divergence in the corporate disclosure level of two companies. The mean
disclosure score of the Indian companies‘ for 1994-95 was 45.57 whereas it
was 76.77 in case of US companies, which meant that Indian companies legged
behind in the matter of disclosure of corporate information. The findings of the
study indicated that the total assets, turnover, profits, age of the company and
auditing firms had a positive and significant impact on the disclosure score. In
the end she suggested that corporate annual reports must provide detailed
futuristic information relating to various future plans and policies of the
organisation in order to make the annual reports more informative and decision
oriented.

Ubha (2001) in his published Ph.D. thesis entitled “Corporate Disclosure

Practices” studied the disclosure practices of top 50 Indian companies and

L
examine the level of concordance among the expectations and the needs of the
investors‘ vis-à-vis the information disclosure in the annual reports of the
selected companies. This study confined to the years 1989-1990 and 1993-
1994. The author took a sample of 50 companies from the list of 500
companies prepared by the Institute of Chartered Accountants of India and
investigated 250 investors for his study. He prepared an index of disclosure of
17 major items of information and studied the disclosure level of such
information in the annual reports of the companies. The investors under study
were having different educational qualifications, investment experience, equity
level and residing in various towns and cities of the country. The data were
analysed by various measures of dispersion, rank correlation and Kendell‘s
coefficient of concordance.

The findings of the study indicated that there existed a wide variation in the
reporting of statutory and non-statutory items of information in the annual
reports of the companies. All the companies under study disclosed the statutory
information like profit and loss account, balance sheet, director‘s report and
auditor‘s report, etc. and a few companies reported non-statutory items like
chairman‘s speech, use of diagrams and ratios, etc. the author concluded that
the annual report which was considered the most important and significant
media of disclosure had been used by very less number of investors while
making their investment decisions and a wide variation existed between the
needs and expectations of the investors and disclosure of the information in the
annual reports of the companies. He suggested that a few pages of relevant
information should be given in the annual reports of the companies in a non-
technical style to meet the information needs of the non-technical investors.

Narasimhan (2001) in his analytical paper “Corporate Disclosure And Agency

Problem- Role of New International Accounting Standards” discussed the
demand and needs of corporate disclosure, benefits from better disclosure and
impact of Accounting Standards 17 to Accounting Standards 23 on various
aspects of corporate disclosure practices in India such as segment reporting,

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related part disclosure, lease accounting earning per share, consolidated
financial statements, accounting for taxes on income and accounting for
investments in associates. Narasimhan concluded that the demand for
information from investors and other stakeholders have increased over the
years mainly on account of increased complexity in the business units operate
and also cross border investment and lending. He stated that the accounting
bodies of the country develop new standards to bring uniformity in
measurement and disclosure and with the addition of seven new Standards
(AS-17 to AS-23) of ICAI, the disclosure status of Indian companies was
expected to improve substantially and might reach close to International
Standards. He suggested that SEBI and ICAI need to address issues like
accounting and reporting of derivative transactions of the companies, mergers
and acquisitions, stock option scheme, etc., in the near future in order to bridge
the gap between Accounting Standards and disclosure practices with the rest of
the world.

Gupta, Nair and Gogula (2003) analyzed the CG reporting practices of 30

selected Indian companies listed in BSE. The CG section of the annual reports
for the years 2001-02 and 2002-03 had been analyzed by using the content
analysis, and least square regression technique was used for data analysis. The
study found “Variations in the Reporting Practices of the Companies, and in
certain cases, Omission of Mandatory Requirements as per Clause 49”.

Kannan (2003) on his analytical paper “Financial Reporting” by Banks:

Areas of improvement‖, stated that the Banks‘ financial statements should not
be confined to the fiction section of the library. He also stated in his paper that
the Banks‘ failure to disclose the true picture of its financial position was the
main factor for the South East Asian Countries recent crises. He felt the need
for a safe and sound financial system and all the bank regulators insist for more
transparency and disclosure based on Internationally Accepted Accounting
Standards. He further said that with the advent of corporate governance as a
mode of product discipline, proper financial reporting and disclosure of various
critical areas was required.

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He suggested in his paper about compliance of international standards of
financial applicable to banks by all the banks operating in India. He conclude hi
paper by saying that better financial reporting would bring for good corporate
governance.

Anna Grandori (2004) in his book entitled “Corporate Governance and Firm
Organization: Micro foundations and Structural Forms” has evaluate the two
major approaches in the field-The so called shareholders and stakeholders
perspectives as well as the theories behind them and the governance solutions
that are usually derived from them. In particular, agency theory and the
associated property right approach have provided some useful core ideas for
conceptualizing corporate governance issue. However, it has been criticized on
various grounds, especially its use as a normative theory of shareholder value
maximization. This book posits some new specific and differentiated
challenges to agency theory on the one hand and to the shareholder value
application of it on the other.

Huq (2004) in her study “Accounting and Financial Reporting Practices in

Certain Bank of Bangladesh” shared major problems involved in the existing
accounting and financial reporting practices of the sample banks of
Bangladesh.

The researcher observed in her study that the existing accounting practices in
banks based on historical cost, going concern, consistency, money
measurement and conservatism were not in conformity with the Islamic
principles. Another important observation with the Islamic principles. Another
important observation was failure of the banks to fulfill significant qualitative
characteristics of financial reporting viz. relevance, understandability,
reliability, faithful presentation and accountability.

The researcher further observed that the presentation of profit and loss account
and the balance sheet lacked the classification of incomes and expenditure by
nature and grouping of assets and liabilities by nature, which was required by

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the International Accounting Standards (IAS) - 30. In addition to this, she
stated that Islamic principles were not adhered to in the matters of foreign trade
and other business practices. In the end, she suggested that accounting and
financial reporting practices of the banks should be fully Islamic and
informative and communicative.

The forgoing review of the existing literature on financial reporting reveals that
the number of empirical studies has been conducted on corporate financial
reporting in India and abroad. Though the researchers have made commendable
efforts to highlight the various aspects of corporate financial reporting.

Collett and Hrasky (2005) analyzed the relationships between voluntary

disclosure of CG information by the companies and their intention to raise
capital in the financial market. A sample of 299 companies listed on Australian
stock exchange had been taken for the year 1994 and Connect-four database
had been used for collection of annual reports of companies. The study found
out that “Only 29 Australian companies made voluntary CG disclosure, and
the degree of disclosures were varied from company to company”. Similarly,
Barako et al. (2006) examined the extent of voluntary disclosure by the
Kenyan companies over and above the mandatory requirements. This study
covered a period of 10 years from 1992 to 2001. The results revealed that “The
audit committee was a significant factor associated with level of voluntary
disclosure, while the proportion of non-executive directors on the board was
negatively associated”.

Bhattacharyya and Rao (2005) examined whether adoption of Clause 49

predicts lower volatility and returns for large Indian firms, they compare a one-
year period after adoption (starting June 1, 2001) to a similar period before
adoption (starting June 1, 1998). The logic is that Clause 49 should improve
disclosure and thus reduce information asymmetry and thereby reduce share
price volatility. The authors find insignificant results for volatility and mixed
results for returns.

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Subramanian (2006) identified in his study that the differences in disclosure
pattern of financial information and governance attributes. A sample of 90
companies from BSE 100 index, NSE Nifty had been taken. The data with
respect to disclosure score had been collected from the annual reports of the
companies for the financial year 2003-04. The study used the Standard &
Poor‘s “Transparency and Disclosure Survey Questionnaire” for collection of
data. The study finally concluded that “There were no differences in disclosure
pattern of public/private sector companies, as far as financial transparency
and information disclosure were concerned”.

Arcot & Bruno (2006) examined the effectiveness of „comply or explain‟ with
respect to corporate governance in the U.K. For the study, they used database
of non financial companies. They made a detailed analysis of both the degree
of compliance with the provisions of corporate governance code of best
practices as well as explanations given in case of noncompliance. The study
revealed an increase in the trend for compliance as well as use of uninformative
explanations in case of non-compliance.

K. C. Gupta (2006) in his study traced out the differences in CG practices of

few local companies of an automobile industry. The data with respect to
governance practices had been collected from the annual report of the
companies for the year 2004-05. The study “did not observe significant
deviations of actual governance practices from Clause 49”.

Kashmir Singh (2005) made a comprehensive attempt to compare the

financial reporting practices of the public and the private sector banking
companies in India for the year 1996-97 to 2001-02. For the purpose of the
study, he has selected 29 public sector banks and 23 private sector banks
assessed best as per the survey conducted by www.infoline.com. He prepared
an index of 31 major items and in relation to these items financial reporting
level of the selected banking companies has been studied. Study reveals that
most of the public sector and private sector banking companies are disclosing
only that information which is statutory in nature. He further said that there

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does not exist a significant difference in the variation of majority of items of
financial ratios in both the sectors. He concluded his study by suggesting that
banking companies should incorporate more voluntary information in their
annual reports and also private sector banks should prepare their annual reports
in bi-languidity to reach to the masses.

Javed & Iqbal (2007) analyzed as to whether difference in the quality of firm-
level corporate governance has an effect on the firm-level performance of the
companies listed in the Karachi Stock Exchange. They used Tobin‘s Q and
total Corporate Governance Index (CGI) for the study. They analyzed 50 firms
for the study. They found that ownership, shareholding & board composition
enhanced firm performance while transparency & disclosure have no
significant effect on firm performance. The literature review reveals that
relatively less attention has been paid to the concept of corporate governance in
India as compared to the rest of the world & this created the need for this study.

Vishnu and Gurprasad (2007) highlight the role of auditors in financial

reporting and role of CEO, CFO and other board members. Also the paper
discussed the trends of reporting in Indian corporate.

Holder Webb et al (2009) examined a sample of 50 US firms & their public

disclosure packages from 2004. They found that smaller firms provided fewer
disclosures pertaining to board selection procedure, oversight of management
& independence as compared to larger firms who provided more disclosures
relating to audit committee matters, board selection procedure, independence
standards & whistle blowing procedure. They also found that boards that were
of lesser independence provided less information relating to management
oversight & independence matters.

Conclusion:
From review of literature various gaps are found in the previous studies i.e.
scope of study. Before this none of the study is done on such a large sample
size and none of the researcher before tried to investigate the facts on BSE500
companies.

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