None of the method is superior that the other and both methods would yield vital data. However it all depends upon what the emphasis of the researcher is. The deductive approach is more suitable when there is already abundant literature present and hence the theoretical framework and hypotheses can be developed easily. Else it would have been appropriate to use inductive approach if the area of study is relatively new and sufficient literature does not exist, where the data is analyzed and study which frameworks it proposes (Saunders M., 2009).
Extensive number of empirical studies has been done in both the developed and off late in developing countries in order to examine the disclosure practices of the listed firms. Hence there is no shortage of literature on the subject of corporate disclosure and firm characteristics and it is appropriate to develop the hypotheses on the basis of the theoretical frameworks. Also it is observed that the approach of deduction is extensively used by the researchers. Thus deductive approach is used for this empirical study.
The second method to distinguish the two different types of research approach is quantitative and qualitative. Quantitative research puts the emphasis on collection and analysis of data whereas in qualitative research the method of inquiry is used (Bryman , 2007). Quantitative research is concerned with the testing of hypotheses and is similar to deductive method and in qualitative research relevant theory is generated from the data gathered. It is the same as inductive method of research. For the purpose of this study the quantitative strategy is used.
3.3 Research Design
Research design can be defined as the structure of research -- it is the "glue" that holds all the elements in a research project together. It explains the best way to plan the research in order to acquire the data necessary for the research to answer the research questions (Lee and Lings, 1975). According to Saunders et al. the different types of research design include case study, action theory, archival research grounded theory, survey, ethnography and content analysis and the choice of the design depends on the fact that it provides appropriate answers to meet the objectives of the study.
For the purpose of this study the method of content analysis is used. It is defined as the analysis of the printed or visual texts and documents in order to measure in an organized and objective manner. Objectivity guarantees that there is transparency in the method for assigning the data to categories so that analyst's personal biases are ruled out to a great extent (Bryman and Bell, 2007).
As the aim of this study is to determine the level of disclosure by the listed firms the annual reports of the companies were examined as they tend to disclose the information regarding the performance of the company to all the stakeholders and the general shareholders.
3.4 Evolution and development of corporate governance in India
As highlighted in the above section, corporate governance and transparency play an important role in attracting foreign investment and protecting domestic investment in developing countries. One of the ways of ensuring implementation and compliance of corporate governance is through the legal mechanism in a country. This section attempts to trace the history of evolution of corporate governance legislations in India.
The provisions of the table are discussed in detail below.
Two most important laws with regards to corporate governance in India are The Companies Act, 1956 and the Clause 49 introduced by SEBI.
The Companies Act of 1956 - The Companies Act of 1956 laid the foundation of corporate governance legislation in India. According to the Ministry of Corporate Affairs, this is the basic law which governs the creation, continuation, the winding up of companies and also the relationships between the shareholders, the company, the public and the government in India.
Some of the important provisions in the Act with respect to corporate governance include:
Section 217 2A - requires the disclosure of names of employees who were paid more than the prescribed remuneration and also their relationship to the director or any manager of the company wherever applicable.
Section 217 2AA deals with the issue of Directors' Responsibility Statement in the Report of the Board of Directors, in order to make the directors of a company more accountable.The Statement, indicates -
(i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
(iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) that the directors had prepared the annual accounts on a going concern basis
The statement should confirm that company's annual accounts have been prepared in accordance with the applicable accounting standards, the selection and application of accounting policies by Directors is consistent and prudent so as to give a true and fair view of the state of affairs of the company and that proper and sufficient care has been taken by the Directors for the maintenance of adequate accounting records for safeguarding the assets of the company and for preventing and detecting frauds and irregularities.
Sections 297 and 299 that deal with directors' interest in particular contract and possible conflicts thereof. Section 297 deals with requirement of the Board's sanction to be required for certain contracts in which the particular directors are interested. Section 299 deals with the disclosure of interests by director (http://www.scribd.com/doc/15441930/A-Critical-Essay-on-Sections-297-and-299-of-the-Companies-Act-1956). Many other sections in Chapter II of the Act place the duty of disclosure regarding specific topics on the directors.
Section 292A that requires a public company having paid-up capital of not less than five crores of rupees to constitute a committee of the Board knows as "Audit Committee" which reviews with the external auditors the internal control systems, the scope of audit including the observations of the auditors and the half-yearly and annual financial statements before submission to the Board and also ensure compliance of internal control systems. The Audit Committee has authority to investigate into any matter in relation to the items specified in this section. The recommendations of the Audit Committee on any matter relating to financial management are binding on the Board.
Section 309(1) that requires that the remuneration payable both to the executive as well as non-executive directors to be determined by the board and Schedule VI that requires disclosure of Director's remuneration and computation of net profits for that purpose.
Section 192A (Passing of Resolution by Postal Ballot) provides for certain resolutions to be approved and passed by the shareholders through postal ballots.
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SEBI and Clause 49
The Securities and Exchange Board of India (SEBI) was established in 1992 to principally control and supervise trading in stock exchanges, though it has played a vital role in establishing the minimum standards of corporate conduct in the country.
In the aftermath of many stock exchange scandals like that of Harshad Mehta in 1992 etc., measures were undertaken to install a firm CG infrastructure in India. The CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj in 1996 was first such endeavor. This was followed by committees constituted by SEBI - the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later. The following table summarizes the main recommendations of these three committees.
The recommendations by the Birla Committee were implemented by SEBI through the enactment of Clause 49 of the Listing Agreements. They were applied to companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies, on March 31, 2001; to companies with a paid up capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31, 2002; to other listed companies with a paid up capital of over Rs. 3 crore on March 31, 2003. Clause 49 is the most concerted and the most important development in the field of corporate governance in India.
Clause 49 stipulates that there should be a separate section on Corporate Governance and a compliance report, which should be acquired from either the auditors or practicing company secretaries, in the company's Annual Reports. This report should contain information on the following nine topics: board of directors, audit committee, remuneration of directors, shareholders' grievance committee, general body meeting (board procedure), disclosure of related parties, means of communication, general shareholders' information, others including risk management, management discussion and analysis, information and compliance respectively (Hossain, 2008).
3.5 Data Collection and Analysis
This empirical study is based on the examination of the published annual reports of the Indian listed companies. The annual reports of the companies listed on the BSE 100 (Bombay Stock Exchange) index were collected which is the broad based free float index launched on 3rd January 1989. The sample consists of the 90 companies listed on the BSE 100 index.
Bombay Stock Exchange is the oldest stock exchange in Asia and is popularly known as BSE was established as the "The Native Share & Stock Brokers' Association" in 1875. BSE is the largest exchange in the world in terms of the number of companies listed and the 5th most active in terms of the number of transactions. All the transaction takes place on the electronic trading system known as BSE On-line trading system (BOLT). It currently has 4900 companies in all listed on the exchange (http://www.bseindia.com/about/introbse.asp).
The total market capitalization of the firms listed on the BSE is USD 1.28 Trillion as of Feb, 2010. It is the first in India and only the second exchange in the world to obtain ISO 9001:2000 certification. The BSE has a total of 22 indices which includes 12 sectoral indices. The BSE 100 index consists of 100 firms representing 15 major sectors. As on September 3rd, 2010, the firms in the BSE 100 Index make up for 68% of the total market capitalization.
The research is based on the annual reports of the 100 companies the list of the companies along with the sector which they belong is enclosed in the Appendix __. As the disclosure practice do not change considerably and hence the analysis is limited to one financial year (Botosan, 1997). The annual reports were downloaded from the respective company websites and accessed. As all the reports for the fiscal year 2009-10 were not available, the reports analyzed for this study belonged to the financial year 2008-09 i.e. the fiscal year ended on 31 March 2009. The annual reports of the ten companies given in the list could not be found and due to this reason the study is limited to 90 companies of the sample.
The BSE 100 index contributes 68% of the total market capitalization of the Bombay Stock Exchange as on August 30, 2010 (http://www.bseindia.com/mktlive/indiceshighlights.asp). Thus this is a large enough sample to give the broad idea about the disclosure practices in the India.
Some previous studies were carried out using indirect disclosure attributes which were based on analyst's evaluation of disclosure levels. The use of these measures will bias the sample towards firms that analysts follow (Botasan, 1997). Many researchers have therefore constructed the direct disclosure attributes by themselves.
The disclosure index used in this study is adopted largely from the study of done by Hossain and Hammami on the 25 listed firms on the Doha Securities Exchange in Qatar. These 44 items are grouped in 8 categories which contain between 2 to 9 items. The items included in this disclosure index consists of both the ones which are mandatory to be disclosed by listed Indian firms (either by requirements of the Companies Act, or SEBI or the Institute of Chartered Accountants of India as discussed in the literature) as well as items which are disclosed voluntarily by the listed firms . As many as 18 items of the disclosure index are mandatory items are disclosed by almost all companies. The table __ shows the 8 categories of items included in the disclosure index along with the some of their sources.
Table __: Items included in disclosure and their indicative sources
(Source: Hossain.M, Hammami.H.)
Of the total 44 items used by Hossain and Hammami, two attributes which were not considered for this study were basic structure of the organization and the year of listing on the Bombay Stock Exchange as it was found to be absent in almost all the annual reports. Hence the total number of disclosure items included in this study was 42 in all.
In order to determine the disclosure levels in annual reports of the listed firms, different researchers have used different methods. Researchers like Cooke (1989), Eng & Mak (2003), Ahmed and Nicholls (1994), Alam (1989) used dichotomous method and un-weighted index where if an item is disclosed then a score of 1 is awarded or else a score of 0 whereas weighted method of scoring was used by Barret (1977), Singhvi and Desai (1966) and Martson (1986).
The researchers use their subjective judgment to allot weights to the individual attributes. In some studies a combination of both the weighted and un-weighted index was used. There is profuse evidence in the literature to suggest that there is no major difference in using weighted and un- weighted indices (Chow and Wong-Borne, 1987, Hossain 1998).
A disclosure scoring sheet is prepared as the checklist in order to study the disclosure of the firms on the basis of the items selected in the various categories mentioned above. The items were checked for in the company annual reports and if a particular attribute was disclosed by the firms then a score of 1 was awarded and if not found a score of 0 was awarded. Thus a dichotomous approach of scoring is used for this study as used by Wallace et al. (1996), Cooke (1989) and Hossain (2008).
The study also presents a detailed discussion on the current status of the composition of board of directors of the 90 sample companies listed in the BSE 100 index. Similar study is done by Hellenic Observatory of Corporate Governance (HOCG) in Greece on a sample of 292 companies listed on the Athens Stock Exchange (ATHEX) in 2009. It covers the important elements on board of directors and another aspect of corporate governance. This includes the preferred board size, number of executive and non-executive members on the board, board leadership structure, number of foreign personal that sit on the Boards of India companies and the number of female directors.
3.5 Operationalizing and measurement of the dependent and independent variables
Multiple linear regressions analysis is used test the hypotheses developed from the literature. Overall Disclosure Index (ODI) ratio was obtained by calculating the disclosure scores for every company and was then divided by the total number of disclosure attributes viz. 42 for this study. The overall disclosure index (ODI) is the dependent variable in the regression analysis. Correlation is used to determine if a relation exists between the various elements of the board of directors.
The five factors identified by the literature are - age, size, profitability, complexity and asset-in-place, are examined to determine if it has any relationship with the degree of disclosure. They form the independent variables in regression.
Age of the firm
In order to determine the age of the firm, the year of establishment was obtained from the annual reports or the company website. It was then subtracted from the current year i.e. 2010 and thus age of each firm was calculated. This is in line with the study by Hossain et al. which used the number of years since foundation to determine the age of the firms. The study will examine the hypothesis that longer established firms tend to disclose more information.
Firm Size
There are a number of ways to measure the size of the firm such as total assets, total fixed assets, market capitalization, total turnover and paid up capital. Hossain et al. (2009) has used total assets in order to measure the size of the firm in their empirical research on the 25 listed firms of Doha Securities Market (DSM) in Qatar. It is found that overall disclose of the large companies is generally high. The total asset is defined as the sum of fixed assets and current assets less the current liabilities. The log of total assets is used to measure the size of firm as used in the number of prior studies. The study will examine the hypothesis that disclosure is positively associated with the firm size.
Profitability
The profitability of the firm is measured in terms of the return on equity. The return on equity was calculated by dividing the net profit by the total shareholder's equity. The net profit considered for this study is the profit after tax and shareholder's funds is the sum of share capital and reserves and surplus and is obtained from the consolidated balance sheet. Different firms used different denominations to indicate this numbers. For the purpose of uniformity all numbers used in this study were converted to Million Rupees. The study will examine the hypothesis that disclosure is positively associated with profitability.
Complexity
The complexity of each business is determined by the number of subsidiaries the company has. The number of subsidiaries is obtained from the annual reports of the firms. The study will examine the hypothesis that disclosure is positively associated with profitability.
Asset-in-place
Assets in place refer to the assets like securities, real estate, and other property that a company already owns or has 'in place'. Here the assets -in-place of the sample companies is defined as the ratio of fixed assets to total assets of the company. The fixed assets and total assets were obtained from the consolidated balance sheet. All numbers considered are in Million Rupees. The study will examine the hypothesis that there is association between the proportion of assets-in-place and the extent of disclosure.
3.6 Development of the Model
The following is the general form of the regression model developed on the basis of the dependent and independent variables discussed above similar to the one by Hossain and Hammami.
ODI= β0 + β1 X1 + β2 X2 + β3 X3 + β4 X4 + β5 X5 + e
Where, ODI (dependent variable) is the Overall Disclosure Index.
β = Slopes of independent variables
β0 = a constant or the value of ODI when all X values are zero.
X1= Age of the firm.
X2 = Size of the firm
X3 = Profitability.
X4 = Complexity
X5 = Asset in place
e = the error term, normally distributed about a mean of 0
