The Relationship Between Firm Characteristics and Corporate Financial Disclosures in UAE Firms

This paper presents observational observations on the impact of business unique characteristics on corporation financial disclosures in the UAE. In all, 154 businesses, both listed and unlisted, took part in the survey. Multiple regression and descriptive predictive analyses are used to investigate the relationship between the characteristics of companies in the UAE and the extent of the firm's financial disclosure. Eight theories were established to investigate the relationship between many important characteristics such as audit committee, non-executive directors, foreign ownership, market capitalization, valuation, return on equity, listing status, and business type, and the amount of transparency in company annual reports. The findings of this survey indicate that the size of the group, industry type and listing status are observed to be considered related to the extent of disclosure. The outcome of the study offer support for past surveys and is also relevant to members in the UAE who wish to know about company disclosure. The UAE user-bodies should also be interested in the report. Conclusions arrived at in this survey may be of help to regulators and policymaker who wish to enhance company financial disclosures within their nations









Introduction
The standard of information revealed in yearly company reports have witnessed a big deal of attention during the last five decades, particularly in developed nations (Hung, 2015). The association between the quality of disclosure on yearly company reports and the traits of organizations has been deeply analyzed in the literature. Much of the research in this domain has utilized index technique which is founded on creating a common index and comparing it to several descriptive variables such as listing status, profitability, number of shareholders and asset size. The comparison assists in ascertaining cross-sectional differences in the level of disclosure in these companies' yearly statements. It is fundamental to obtain high-quality reporting practices and standards to offer users of financial data the information they need. Inadequacy in such practices and standards lead to lack of trust, reduced transparency, incomparability and inconsistency in the information given which results in higher risks for user-bodies and increased costs of capital. Hung (2015), states that financial reports that are of high quality are fundamental to preserving an adequate system of a market. An extremely liquid capital market needs the presence of complete and transparent information to enable all participants to make sound decisions during allocation of their capital to competing alternatives. The afore-mentioned recognized advantages result from economically developed countries. Nonetheless, providing financial reports is even more important for less developed nations which are looking to create a firm economy by controlling by encouraging local citizen investment, safeguarding the country's economy form a few influential investors, and regulating financial practices.
This survey aims to analyze the association between the level of disclosure on yearly company reports and chosen companies' traits within the United Arab Emirates (UAE).UAE was founded in 1971 (Al-Tahat, 2010).UAE is a new nation that depends majorly on oil for its major source of income. Following its formation, the UAE has embraced an open strategy in its economic development and is counted among the fastest developing nations worldwide on many socioeconomic indicators like GDP per capita. The nation has seen considerable development and growth in diverse aspects of the economy. Nevertheless, the accounting profession in UAE is still undeveloped. The UAE's government has, from 1980, analyzed the prospective advantages of forming a formal securities market which was later formed in 2000.Various bodies and partners in the market securities at UAE such as businessmen, financial analysts, brokers, and investors have indicated their disappointment in the financial disclosure practice in the UAE, citing variations in disclosure as the source of their dissatisfaction (Al-Tahat, 2010).Hence, the research problem is related to company disclosure practices in company yearly reports. This study aims to investigate the firm disclosure in annual statements of selected companies in UAE and to ascertain the factors contributing to the variation in financial disclosure if any.
A few studies on UAE financial reporting have been done in the past by El-Bannany (2013) who tried to investigate factors that affect the overall extent of information revealed by UAE corporates in 2000.His findings were that general compliance of UAE companies was low because none of his selected corporates met the statutory disclosure requirements. El-Bannany (2013) examined the level of disclosure by companies in the public sector listed on the Dubai Financial Market and the Abu Dhabi Securities in 2003 With the use of denominator-controlled disclosure-indices, a comparison was made between the level of company disclosure between two financial markets, sectors and corporates. Findings of this survey showed that remarkable variations were observed between sectors. The profitability debt-equity ratio and the size of a firm were seen to have no considerable relationship with the extent of disclosure. Sadly, the size of the samples in the two surveys was considerably small. Hence their conclusions regarding the extension of the disclosure may lack a basis for generalization. Additionally, the rules governing disclosure were still new when studies were done. Even though the results of this survey focus on UAE, the outcome of this study is pertinent to several nations in the neighborhood with the same socio-economic environments. Conclusions arrive at in this research may be helpful to regulators and policymakers who wish to enhance company financial disclosures within their nations. The results of this survey can also help users of yearly reports and researchers across the globe.
Background
Five bodies in the UAE form the basis for practices and requirement for financial reporting. These are Abu Dhabi Accountability Authority, Dubai International Financial Centre, Emirates Securities and Commodities Authority (SCA), the Central Bank of UAE (CBUAE), and the Ministry of Economy (Peterson & Fabozzi, 2012). The Ministry of Economy published the Companies Law and its amendments requiring companies to keep records of their functions and to avail audited financial reports at the Ministry and other relevant authorities. There is no particular specification for information items, format or standard provided in the law of the company and its amendment regarding the reporting of financial statements. Nevertheless, the law requires the board of directors to compile the firm's activities, profit and loss account and balance sheet during the previous financial period and the proposal for the distribution of the net profit. The CBUAE demands that financial institutions compile their audited financial reports according to the format provided by the CBUAE. After a while, again the CBUAE instructed all financial institutions and banks to use a new format. Beginning 1999, all companies under the CBUAE compile their financial reports according to the format introduced by the state law in 2000.All listed companies are required to avail their analyzed provisional financial reports on a quarterly basis along with their edited annual financial reports. Even though UAE has an accounting body known as Accounts Auditors Association, the body has neither provided national standards nor acquired a role in managing the profession. Therefore, the profession of accounting lacks proper organization, and no particular professional standard has been put in place for UAE auditors and companies to comply. Thus, the regulatory and legal structures for making financial reports within the UAE lack precision and are limited in scope (Peterson & Fabozzi, 2012).
Literature Review
Cerf performed the first empirical study on financial disclosure using the quantifying standard of disclosure while comparing it to some financial and non-financial company variables (Peterson & Fabozzi, 2012).Cerf's survey used a sample of 527 companies in the US dealt over the counter (OTC) and these listed on various exchanges including the New York Stock Exchange (NYSE).An index was designed comprising of 31 objects, each having a score between 1 and 4, based on responses from financial experts. The index was limited to less developed nations particularly to those nations sharing the same socioeconomic backgrounds. Previous research in less developed countries done by applying a common disclosure index indicates that the level of company financial disclosures is a role of financial and non-financial traits of a company. While certain studies discovered that industry type, leverage, listing status and company size were considerably connected to increased levels of disclosure, outcomes for different variables like liquidity, audit size firm, profitability were not conclusive (Loughran, 2012). These outcomes could be associated with variations in political and socioeconomic environments between sampling error, the design of disclosure indices, organizational structure and countries.
A study in Saudi Arabia examined the association between the level of disclosure and certain particular company variables (Loughran, 2012). The findings indicated negative outcomes regarding the company size measured by either assets or capital. The outcome was not clear for other variables such as audit firm size, government ownership government subsidy, and growth. Another study in Jordan incorporating 45 companies revealed that earnings margin, the rate of return, number of shareholders, and company size had no considerable connection with the standard of financial reports (Al-Tahat, 2010). These revelations challenge another survey, which examined the connection between disclosure level of 96 companies on the Amman Stock Exchange listings and seven company variables. Five versions of regression investigation were used to manage the challenge of multicollinearity across the individual variables. The findings showed that among the individual variables, overall dividends were seen to have the greatest effect on disclosure (Hung, 2015). Nonetheless, a positive and remarkable connection was reported with the status of companies as branches of international companies.
An examination was done to ascertain if the level of voluntary disclosure in yearly reports among 167 Malaysian listed companies was related to 31 company traits, categorized into three classes of variables namely firm-specific, cultural and corporate governance variables.65 items of voluntary disclosure were placed on a score sheet having been chosen by studies done earlier. The scoresheet was used in the early reports of the chosen sample. The analysis of regression showed a remarkable relationship between two company governance and the scope of voluntary disclosure as well as one cultural variable (Hung, 2015).
Research Hypotheses
There have been a lot of empirical studies regarding the association between company-specific traits and the level of company disclosure. This study has utilized several theoretical frameworks like cost-benefit theory, capital market, signaling theory, and agency theory. While the traits analyzed may be categorized into several classes, they lack mutual exclusivity. In this survey, the traits of a firm were categorized into four classes namely corporate governance, structure-related, performance-related and market-related, to describe the association between the characteristics of the firm and their disclosure within the UAE. The characteristic was chosen based on the fact that they satisfied the next three prerequisites. One, the characteristic must encircle good theoretical logic to explain the relationship between corporate disclosure and the characteristic; Two, The characteristic has relevance to the socioeconomic background; Three, Availability of adequate information about the characteristic. By these specifications, eight-corporate-specific characteristics were chosen for this study namely; audit committee, the board of director's structure, foreign ownership, firm size, liquidity, profitability, listing status and industry type. A disclosure divergent may also be related to the level of operations in business. Companies with multiple lines of production may disclose more information than single production businesses. Lastly, a dominant company with a high degree of disclosure in a certain industry may cause other companies to imitate the leader in that sector to embrace a similar degree of disclosure. Hence, a positive relationship can be presumed between the type of industry and the level of disclosure: Hypothesis one stets that there is a considerable relationship between industry type and the degree of disclosure. The degree of the disclosure may be determined by the listing status of a company. Therefore Hypothesis II states that Companies on UAE securities market listing provide more information on unlisted companies. Profitability is said to determine the degree of company disclosure. Unprofitable companies shy away from revealing information to conceal their undesirable performance. Hence, the III hypothesis is that companies listed in the security markets of Use with higher equity returns reveal more information than companies with lower equity returns. Lack of capacity by a company to honor its existing obligations may imply a default in paying the principal and interest to creditors and can result in bankruptcy. Companies prefer to provide more information. Hypothesis IV states that Companies listed on the security markets of Use with high liquidity are known to provide more information than companies with low liquidity. A positive relationship is likely to exist between the size of the company and its degree of its disclosure. Hence hypothesis V is that companies listed on the security markets of use with a bigger market capitalization provide more information than companies whose market capitalization is smaller. Empirically speaking, Ownership diffusion is a significant characteristic I determining the degree of company disclosure. Hence in hypothesis VI, it is stated that use companies with a greater fraction of foreign ownership are willing to provide more information than those lacking such ownership. Empirically, there is a good relationship between the measure of individual directors an the extends of company disclosure. Therefore hypothesis VII states that the proportion of external directors is positively related to a company's disclosure. Finally, hypothesis VIII, states that a positive relationship exists between the presence of a committee of audit and the level of company's willingness to disclose information
Methodology
This study focused on Mandatory items since the UAE's practice of making financial reports and disclosure lacks organization while the mechanisms of a free market are not mature. To avoid companies being penalized for failure to disclose an item that is irrelevant, the items provided were determined by the specific SNF limited requirements stated by UAE. The first list of items of information had 405 items, out of which six were linked to the requirements of ESCA. Two measured of control was applied to make sure that an entire, applicable and relevant list of items of information was within the index. Disclosure checklists from three accounting companies were used to Cross-check the list.Second, three senior external auditors from superior companies discuss the list. This discussion aims to improve the list and ascertain if the items are suitable for companies performing in various sectors within the UAE.88 items were removed because they were associated with nine measures that were not relevant with UAE regulators. The last list had a total of 327 subjects of information, and it was again done a pulse wear test on 20 organization s from diverse sector s to make sure that Items that appeared peculiar to every chosen sector were considered. All companies for the joint public stock usually submit their yearly statements with the Ministry. Hence, the Ministry's Company Department was requested to give copies of the yearly reports of all companies at the public stock joint because this was the quickest and best approach to get the required information. The most recent information was obtained. A total of 154 companies including both listed and unlisted were included in the study. The final sample had 140 companies after excluding a total of 44 either due to unavailability of annual reports or inadequate information. The overall disclosure index (TDI) which was the dependable characteristic for every company was the disclosure provided by the company via its yearly report and the TDI information calculated it for these characteristics was received from the yearly reports of the chosen company as well as from yearly guides of companies released by Esca.
One limitation of using the scoring technique of disclosure index was the difficulty in ascertaining if or not an item is relevant to a certain company. To address this challenge the whole annual report of each organization was first to read to note the extent of the practice of disclosure to be sure. Next, the index was applied to every company with the use of the dichotomous method of matching the index to the company's yearly report. Depending on the computed score for every company, the descriptive data was computed to create a judgment regarding the existing extension of disclosure with UAE. In this study, both multiple regression and descriptive statistics were utilized in testing the association between the traits of UAE companies and the scope of the disclosure.
Results
The scope of company disclosure differs between 24% to 70%.The disclosures' total mean value is 56% with a fixed deviation of 10% indicating a low, moderate extent of disclosure among all the companies. Slightly over 50 % of the companies have audit committees that show that good company governance is lacking and that more enforcement is required from the authorities of UAE. Statistical outcomes indicate a remarkable positive association between the banking industry and the level of disclosure as well as variables of listing status. These outcomes defend hypotheses I and II. However hypotheses III to VIII were not supported. The findings indicate that almost 25% of the differences in the level of disclosure between firms can be described by the eight individual variables seen in the model. The outcome indicates that variables of industry type and listing were significantly and positively related to the scope of companies' disclosure at the 1% scale. Additionally, capitalization of the market was notable. However it coefficient was negative at the 5% scale. The model demonstrated that the other variables did not majorly determine differences in the company disclosure.
Discussions and Conclusions
This paper examined the likely effects of eight particular firm variables on the scope of disclosure by firms in UAE. The descriptive investigation indicated that the disclosure's general mean value in UAE IS 56%.The findings suggested a low, moderate scope of the disclosure. The main conclusion can be obtained from the regression investigation which is that market capitalization, company firm, listing status and industry type constitutes the most influential explanatory characteristics when associated with differences in obeying the rules that require mandatory disclosure for UAE companies. Regarding other characteristics, the model indicated that the characteristics did not appear to be the major causes of defense in the scope of the disclosure in the selected firms. The outcome of this survey has broadened the knowledge of how variables of a company assist in explaining the differences in disclosure. The level of disclosure was discovered to be notably related to the company size, industry type, and listing status. A likely implication of this outcome on policymakers is that big companies that are not listed require to be scrutinized more closely by the relevant authorities (Loughran, 2012). The authorities at UAE need to examine the effectiveness of the measurement standards and also to include more efficient enforcement and monitoring techniques. This survey highlights the determinant of the scope disclosure in UAE companies. However, one limitation of this type of study is that the application of the selected index to calculate the scope of the disclosure may lead to constraints invalidation of the findings. Therefore, the extensiveness of company disclosure may have failed to be captured properly. As UAE advances in its economy, more studies will be required to get further knowledge on company disclosure is that market capitalization, company firm, listing status and industry type constitute the most influential explanatory characteristics when associated with differences in obeying the rules that require mandatory disclosure for UAE companies. In regard to other characteristics, the model indicated that these characteristics did not appear to be the major causes of differences in the scope of disclosure in the selected firms. The outcome of this survey has broadened the knowledge of hoe variables of a company assist to explain the differences in disclosure. The level of disclosure was discovered to be notably related to the company size, industry type and listing status. A likely implication of this outcome on policy makers is that big companies that are not listed require to be scrutinized more closely by the relevant authorities (Hung, 2015). The authorities at UAE need to examine the effectiveness of the measure standards and also to include more efficient enforcement and monitoring techniques. This survey highlights the determinant of the scope disclosure in UAE companies. However the limitation of this type of study is that the application of the selected index to calculate the scope of disclosure may lead to constraints in validation of the findings. Therefore, the extensiveness of company disclosure may have failed to be captured properly. As UAE advances in its economy, more studies will be required to get further knowledge on company disclosure.











References
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