Financial Reporting Quality in Emerging Economies

Empirical Evidence from Brazil and South Africa

by Gregor Hagemann (Author)
©2017 Thesis XXIX, 332 Pages


Contrary to their increasingly important role in the global economy, little is known so far about the financial reporting practices in emerging economies. This study therefore analyses the financial reporting practices of listed firms in Brazil and South Africa. It also investigates the determinants of financial reporting quality and its effect on information asymmetries. In addition, the author compares the results for the two emerging economies to those for Germany representing a developed economy. The empirical findings have several implications for researchers and lecturers as well as for practitioners, such as preparers and users of financial reports, legislators, standard setters and auditors.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Contents
  • Index of figures
  • Index of tables
  • Index of abbreviations
  • Index of symbols
  • 1 Introduction
  • 1.1 Motivation and research questions
  • 1.2 Scientific positioning of the study
  • 1.3 Outline of the study
  • 2 Conceptual foundation
  • 2.1 Basis of financial reporting quality
  • 2.1.1 Purpose and addressees of financial reporting
  • 2.1.2 Definition of financial reporting quality
  • 2.1.3 Measures of financial reporting quality
  • 2.2 Emerging economies and their accounting environment
  • 2.2.1 Definition of emerging economies
  • 2.2.2 Role of emerging economies in the global economy
  • 2.2.3 Accounting characteristics
  • Introduction
  • Economic policies
  • Culture
  • Historical development and accounting origins
  • Accounting regulation and enforcement
  • Accounting education
  • Financing systems and capital markets
  • 2.3 Financial reporting environment in Brazil, South Africa and Germany
  • 2.3.1 Overview
  • 2.3.2 Brazil
  • 2.3.3 South Africa
  • 2.3.4 Germany
  • 2.3.5 Conclusion
  • 3 Review of prior research
  • 3.1 Overview of research approaches
  • 3.2 Financial reporting practice
  • 3.2.1 Indirect measure studies
  • 3.2.2 Direct measure studies
  • 3.3 Determinants of financial reporting quality
  • 3.4 Capital market consequences of financial reporting quality
  • 3.5 Implications for this study
  • 4 Theory and hypotheses development
  • 4.1 Conceptual framework and theoretical foundation
  • 4.1.1 Introduction
  • 4.1.2 Contingency theory as conceptual basis
  • 4.1.3 Culture approach
  • 4.1.4 Societal effects approach
  • 4.1.5 Institutionalism
  • Introduction
  • New institutional economics
  • Basic assumptions of new institutional economics
  • Agency and signaling theory
  • Financial reporting as solution for agency problems
  • Positive accounting theory and political costs
  • New institutional sociology
  • Basic assumptions of new institutional sociology
  • Legitimacy theory
  • Stakeholder theory
  • 4.1.6 Summary
  • 4.2 Hypotheses development
  • 4.2.1 Introduction
  • 4.2.2 Financial reporting practice
  • 4.2.3 Determinants of financial reporting quality
  • 4.2.4 Capital market consequences
  • 4.2.5 Summary
  • 5 Research design
  • 5.1 The empirical field
  • 5.1.1 Sample selection
  • 5.1.2 Sample description
  • Industry composition
  • Company size
  • 5.1.3 Research objects
  • 5.1.4 Annual report characteristics
  • 5.2 Methodology of financial reporting quality measures
  • 5.2.1 Accruals-based earnings management measure
  • Magnitude of accruals
  • Modified-Jones model
  • 5.2.2 Disclosure index measure
  • Basis of content analysis
  • Reliability and validity of content analyses
  • Self-construction of disclosure index
  • Content categories
  • Mandatory vs. voluntary reporting
  • Weights
  • 5.2.3 Readability measure
  • 5.3 Methods of analysis
  • 5.3.1 Introduction
  • 5.3.2 Analysis of financial reporting practice by descriptive and univariate statistics
  • 5.3.3 Determinants analysis
  • Selection of variables
  • Bivariate correlation and multivariate analysis
  • 5.3.4 Capital market analysis on the basis of information asymmetries
  • Conceptual considerations
  • Information asymmetries models and variables
  • 6 Empirical results
  • 6.1 Financial reporting practice
  • 6.1.1 Accruals-based earnings management
  • Magnitude of accruals
  • Modified-Jones model
  • 6.1.2 Annual reporting practice
  • Size of annual reports
  • Content-related analysis of annual reports
  • Total financial reporting quality
  • Background information
  • Financials
  • Non-financials
  • Sustainability
  • Value based management
  • Forward-looking information
  • Risks and opportunities
  • Interim conclusion
  • 6.1.3 Readability of annual reports
  • 6.1.4 Comparison of financial reporting quality measures
  • 6.1.5 Critical evaluation of the results
  • 6.2 Determinants of financial reporting quality
  • 6.2.1 Correlation analysis of independent variables
  • 6.2.2 Isolated analysis of determinants
  • Introduction
  • Company size
  • Company age
  • Profitability
  • Company valuation
  • Systematic company risk
  • Ownership concentration
  • Industry
  • Customer basis
  • Information environment
  • 6.2.3 Simultaneous analysis of determinants
  • 6.2.4 Sensitivity analyses and robustness tests
  • 6.2.5 Critical evaluation of the results
  • 6.3 Information asymmetries
  • 6.3.1 Introduction
  • 6.3.2 Descriptive statistics and correlation analysis
  • 6.3.3 Results of multivariate regression analysis
  • 6.3.4 Sensitivity analyses and robustness tests
  • 6.3.5 Critical evaluation of the results
  • 6.4 Discussion
  • 7 Conclusions
  • 7.1 Main findings and implications
  • 7.2 Limitations and outlook
  • Appendix
  • Index of laws, standards and regulations
  • References
  • Series index

Index of figures

Figure 1-1:    Research fields of the study

Figure 1-2:    Research strategies according to Grochla (1978)

Figure 1-3:    Outline of the study

Figure 2-1:    Business operations, accounting and reporting

Figure 2-2:    System of IASB’s Conceptual Framework

Figure 2-3:    The financial reporting process.

Figure 2-4:    Indirect and direct measures of FRQ

Figure 2-5:    This study’s FRQ measures

Figure 2-6:    Relative development of GDP with base year 1999

Figure 2-7:    Performance development of stock market indices with base year 1996

Figure 3-1:    Systematization of the FRQ literature

Figure 4-1:    Single case, universalistic and contingency approach.

Figure 4-2:    Impacts on accounting practices

Figure 4-3:    Basic conceptual framework.

Figure 4-4:    Impact of cultural and accounting values on accounting practice.

Figure 4-5:    Institutionalism as theoretical foundation

Figure 4-6:    Basic principal-agent relationship

Figure 4-7:    Main model of agency cost theory

Figure 4-8:    Relation between legitimacy theory and corporate disclosure

Figure 4-9:    Importance of stakeholders

Figure 4-10:  Refined conceptual framework.

Figure 4-11:  Financial and information flows in a capital market economy

Figure 4-12:  Overview of hypotheses and underlying theories.

Figure 5-1:    Industry composition of total sample

Figure 5-2:    Industry composition of sample per country

Figure 5-3:    Overall industry composition of listed companies in Brazil, South Africa and Germany

Figure 5-4:    Distribution of sample companies’ market capitalization per country

Figure 5-5:    Distribution of sample companies’ total assets per country

Figure 5-6:    Distribution of sample companies’ total revenues per country

Figure 5-7:    Distribution of sample companies’ total employees per country ← xvii | XVIII →

Figure 5-8:    Fiscal year ends of sample companies

Figure 5-9:    Levels of data collection.

Figure 5-10:  Analysis techniques of narratives in annual reports

Figure 5-11:  Analyzed time lags of capital market effects

Figure 6-1:    Number of pages in annual reports

Figure 6-2:    Total FRQ boxplot diagram (full disclosure study)

Figure 6-3:    Disclosure of strategy information

Figure 6-4:    Disclosure of qualitative and quantitative information on financials

Figure 6-5:    Disclosure of customer information

Figure 6-6:    FRQ of economic, environmental and social sustainability

Figure 6-7:    Selected disclosures on value based management

Figure 6-8:    Disclosure of forecasts

Figure 6-9:    Accuracy of revenue forecasts

Figure 6-10:  Categories of qualitative risk disclosures

Figure 6-11:  Comparison of this study’s FRQ measures

Figure 6-12:  Test results of financial reporting practice hypotheses

Figure 6-13:  Ownership concentration boxplot diagram

Figure 6-14:  Total FRQ per industry

Figure 6-15:  Sustainability FRQ per industry

Figure 6-16:  Non-financials FRQ per industry

Figure 6-17:  Test results of the determinants hypotheses

Figure 6-18:  Test result of information asymmetries hypothesis

Figure 7-1:    Main results of FRQ measures

Figure 7-2:    Summary of this study’s main results ← xviii | xix →

Index of tables

Table 2-1:    Focus of financial reporting quality definitions

Table 2-2:    BRICS country classifications

Table 2-3:    GDP forecast for BRICS countries vs. Germany

Table 2-4:    Demographic development in BRICS countries vs. Germany

Table 2-5:    BRICS countries’ cultural accounting values according to Gray (1988)

Table 2-6:    IFRS adoption in BRICS countries

Table 2-7:    Tax regimes in BRICS countries

Table 2-8:    Enforcement bodies in BRICS countries

Table 2-9:    Financial reporting regulation in South Africa

Table 2-10:  Example of the suite of reports in South African integrated reports

Table 3-1:    Indirect measure studies of emerging economies

Table 3-2:    Indirect measure studies of developed countries

Table 3-3:    Direct measure studies of emerging economies

Table 3-4:    Direct measure studies of developed countries

Table 3-5:    Determinants studies of emerging economies

Table 3-6:    Determinants studies of developed countries

Table 3-7:    Capital market studies of emerging economies

Table 3-8:    Capital market studies of developed countries

Table 4-1:    Relations between Hofstede’s cultural dimensions and Gray’s accounting values

Table 4-2:    Problems and potential solutions in principal-agent relationships

Table 4-3:    Comparison of new institutional economics and new institutional sociology

Table 5-1:    Sample selection summary

Table 5-2:    Description of sample companies’ market capitalizations

Table 5-3:    Description of sample companies’ total assets

Table 5-4:    Description of sample companies’ total revenues

Table 5-5:    Description of sample companies’ total employees

Table 5-6:    Correlation analysis of different size measures for total sample

Table 5-7:    Correlation analysis of different size measures for Brazilian sample

Table 5-8:    Average number of days between end of financial year and publication of annual report ← XIX | XX →

Table 5-9:    Scoring methodology of disclosure index items

Table 5-10:  Scoring methodology for forecast precision

Table 5-11:  Disclosure index categories

Table 5-12:  Maximum scores of voluntary disclosure indices per country

Table 5-13:  Interpretation of Fog index score

Table 5-14:  Interpretation of Flesch reading ease score

Table 5-15:  Interpretation of correlation coefficients

Table 6-1:    Earnings management (magnitude of accruals)

Table 6-2:    Earnings management (unsigned discretionary accruals)

Table 6-3:    Distribution of number of annual report pages

Table 6-4:    Total FRQ (full disclosure study)

Table 6-5:    Total FRQ (voluntary disclosure study)

Table 6-6:    FRQ of background information (full disclosure study)

Table 6-7:    FRQ of financials (full disclosure study)

Table 6-8:    FRQ of non-financials (full disclosure study)

Table 6-9:    FRQ of sustainability information (full disclosure study)

Table 6-10:  FRQ of value based management (full disclosure study)

Table 6-11:  FRQ of forward-looking information (full disclosure study)

Table 6-12:  FRQ of risks and opportunities (full disclosure study)

Table 6-13:  Summary of full disclosure index (sub) scores

Table 6-14:  Results of readability indicator analysis

Table 6-15:  Overview of language characteristics

Table 6-16:  Readability results (Fog index)

Table 6-17:  Readability results (Flesch reading ease)

Table 6-18:  Correlation analysis of discretionary accruals and disclosure index measure

Table 6-19:  Correlation analysis of readability measures and disclosure index measure

Table 6-20:  Correlation analysis of readability measures and discretionary accruals

Table 6-21:  Correlation analysis of independent variables

Table 6-22:  Correlation analysis of company size and FRQ

Table 6-23:  Correlation analysis of company age and FRQ

Table 6-24:  Correlation analysis of profitability and FRQ ← XX | XXI →

Table 6-25:  Correlation analysis of company valuation and FRQ

Table 6-26:  Correlation analysis of company risk and FRQ

Table 6-27:  Correlation analysis of ownership concentration and FRQ

Table 6-28:  Industry differences of total FRQ

Table 6-29:  Customer basis differences of total FRQ

Table 6-30:  Customer basis differences of non-financials FRQ

Table 6-31:  Customer basis differences of sustainability FRQ

Table 6-32:  Correlation analysis of media coverage and FRQ

Table 6-33:  Correlation analysis of analyst following and FRQ

Table 6-34:  Regression results for determinants of FRQ

Table 6-35:  Regression results for determinants of background, financials, non-financials and sustainability FRQ

Table 6-36:  Regression results for determinants of value based, forward-looking and risk FRQ

Table 6-37:  Regression results for determinants of FRQ in Brazil, South Africa and Germany

Table 6-38:  Descriptive statistics of bid-ask spreads

Table 6-39:  Descriptive statistics of zero-return days fractions


XXIX, 332
ISBN (Hardcover)
Publication date
2016 (December)
Corporate Reporting Disclosure quality Rising powers Earnings management Readability Capital market
Frankfurt am Main, Bern, Bruxelles, New York, Oxford, Warszawa, Wien, 2017. XXIX, 332 pp., 54 b/w ill., 93 b/w tables

Biographical notes

Gregor Hagemann (Author)

Gregor Hagemann studied Business Administration at the University of Münster (Germany) and at the Turku School of Economics (Finland). He worked as a research assistant for the Chair of International Accounting at the University of Münster.


Title: Financial Reporting Quality in Emerging Economies
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