In this chapter we examine the communication of financial and nonfinancial information in an international setting. Much of the discussion addresses disclosure related to financial reporting for external users. We focus on selected topics and do not attempt to discuss every disclosure issue that applies to financial statement users, preparers, and financial professionals.The relative importance of equity markets in national economies is growing and individual investors are becoming more active in those markets. As a result, public disclosure, investor protection, shareholder value, and stock market-driven forms of corporate governance are becoming increasingly important. Although disclosure prac- tices vary from country to country, they are converging. However, important differ- ences among countries will continue to affect many firms, particularly those that are not active in international capital or product markets.Government regulators who seek to maintain or increase the credibility of their national capital markets also influence disclosure practices around the world. Stock exchanges have concluded that their continued growth and success depends on offer- ing a high-quality market with effective investor protection. As a result, oversight by regulators and stock exchanges is increasing and disclosure requirements are becoming more stringent. The trend toward greater investor protection and enhanced disclosure will continue as stock exchanges face growing competition from each other and from less-regulated trading systems.DEVELOPMENT OF DISCLOSUREThe development of disclosure systems closely parallels the development of accounting systems discussed in Chapter 2.1 Disclosure standards and practices are influenced by sources of finance, legal systems, political and economic ties, level of economic development, education level, culture, and other factors.National differences in disclosure are driven largely by differences in corporate governance and finance. In the United States, the United Kingdom, and other Anglo- American countries, equity markets have provided most corporate financing and have become highly developed. In these markets, ownership tends to be spread among many shareholders, and investor protection is emphasized. Institutional investors play a growing role in these countries, demanding financial returns and increased shareholder value. Public disclosure is highly developed in response to companies’ accountability to the public.In many other countries (such as France, Germany, Japan, and numerous emerging- market countries), shareholdings remain highly concentrated and banks (and/or family owners) traditionally have been the primary source of corporate financing. Structures are in place to protect incumbent management. Banks (which sometimes are both creditors and owners) and other insiders (such as corporate members of interlocking shareholder groups) provide discipline. These banks, insiders, and others are closely informed about the company’s financial position and its activities. Public disclosure is less developed in these markets and large differences in the amount of information given to large share- holders and creditors vis-à-vis the public may be permitted.Voluntary DisclosureManagers have better information than external parties about their firm’s current and future performance. Several studies show that managers have incentives to disclose such information voluntarily. The benefits of enhanced disclosure may include lower transaction costs in the trading of the firm’s securities, greater interest in the company by financial analysts and investors, increased share liquidity, and lower cost of capital. One recent report supports the view that companies can achieve capital markets bene- fits by enhancing their voluntary disclosure.2 The report includes guidance on how companies can describe and explain their investment potential to investors.As investors around the world demand more detailed and timely information, voluntary disclosure levels are increasing in both highly developed and emerging-market countries. It is widely recognized, however, that financial reporting can be an imperfect mechanism for communicating with outside investors when managers’ incentives are not perfectly aligned with the interests of all shareholders. In one classic paper, the authors argue that managers’ communication with outside investors is imperfect when(1) managers have superior information about their firm, (2) managers’ incentives are not perfectly aligned with the interests of all the shareholders, and (3) accounting rules and auditing are imperfect.3 The authors state that contracting mechanisms (such as compen- sation linking managers’ rewards to long-term share value) can reduce this conflict.Evidence strongly indicates that corporate managers often have strong incentives to delay the disclosure of bad news, “manage” their financial reports to convey a more
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