Corporate Social Responsibility and Environmental Management Corp. Soc. Responsib. Environ. Mgmt.

14, 274288 (2007) Published online 24 July 2007 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/csr.154

The Determinants and Characteristics of Voluntary Disclosure by Indian Banking Companies

Mohammed Hossain1* and Masrur Reaz2 1 The School of Management, University of Liverpool, Liverpool, UK 2 North South University, Dhaka, Bangladesh
ABSTRACT This study reports the results of an empirical investigation of the extent of voluntary disclosure by 38 listed banking companies in India. It also reports the results of the association between company specic characteristics and voluntary disclosure of the sample companies. The study reveals that Indian banks are disclosing a considerable amount of voluntary information. The ndings also indicate that size and assetsin-place are signicant and other variables such as age, diversication, board composition, multiple exchange listing and complexity of business are insignicant in explaining the level of disclosure. However, this paper has contributed to the academic literature that nancial institutions provide voluntary corporate information including social information as discharging their social responsibility and corporate citizenship. Copyright 2007 John Wiley & Sons, Ltd and ERP Environment.
Received 26 February 2007; revised 20 May 2007; accepted 21 May 2007 Keywords: India; voluntary disclosure; disclosure index; bank

Introduction

NDIA

CURRENTLY

IS

WIDELY

REGARDED

AS

NEW

GROWTH

ENGINE

AND

AN

INDISPENSABLE

participant in global economy. The economy of India is the fourth largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. It is the also second fastest growing major economy in the world, with a GDP growth rate of 7.6% at the end of the rst quarter of 20052006 (World Fact Book, 2006). The Indian nancial system is characterized by a large network of commercial banks, nancial institutions and stock exchanges, and a wide range of nancial instruments (Agarwal, 2000). Basel Committee on Banking Supervision (henceforth Basel) released a document entitled Enhancing Bank Transparency (Basel, 1998), which considers transparency

* Correspondence to: Mohammed Hossain, The School of Management, University of Liverpool, Liverpool L69 7ZH, UK. E-mail: hossain_mohammed@hotmail.com
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to be a key element of an effectively supervised, safe and sound banking system and recommends that banks, in regular nancial reporting and other public disclosures, provide timely information that facilitates market participants assessment of banks. Therefore, adequate public disclosure facilitates a more efcient allocation of capital between banks since it helps the market accurately assess and compare the risk and return prospects of individual banks. Moreover, the recent Asian nancial crisis was not only the result of a loss in investor condence but, more importantly, of a lack of effective corporate governance and transparency in many of Asias nancial markets and individual rms. It is seen that over the last several years most East Asian economies have been actively reviewing and improving their regulatory frameworks, in particular corporate governance, transparency and disclosure, and India is not exceptional in this regard. Within this background, this study investigates the disclosure practices of banking companies in India to see to what extent they disclose voluntary information. In addition, it examines the association between company characteristics and the extent of voluntary disclosure.

The Importance of Disclosure in Economic and Accounting Research

The disclosure-related literature has developed into a distinct branch of economic and accounting research (Frolov, 2004). Following a taxonomy suggested by Verrecchia (2001), it is easy to distinguish three major research problems confronted by the literature: (i) whether information disclosure is economically efcient in general; (ii) effect on information disclosure on the aggregate behaviour of economic agents; (iii) the circumstances surrounding the decision to make private information public. First, research seeks answers to the general question about whether information disclosure is economically efcient in general. Two theorists suggest a twofold explanation for the per se desirability of information disclosure.1 On the one hand, Kunkel (1982) shows that, in an economy including both production and exchange, information disclosure may be preferred because altered production plans lead to more efcient allocation of resources across time and rms. On the other hand, Diamond (1985) also suggests that in a pure exchange setting with costly acquisition of private information the (costless) information disclosure is desirable because it will allow investors to economize on the acquisition of private information and make them better off, despite adverse risk-sharing effects. Second, disclosure-related research focuses on the effect of information disclosure on the aggregate behavior of economic agents, and in particular on the behavior of nancial market aggregates such as stock prices and trading volume. The literature attempts to explain empirically observed phenomena in the association between information disclosure and market responses using plausible assumptions about diversity among market participants.2 Finally, the disclosure literature devotes much attention to the circumstances surrounding the decision to make private information public. It is a standard argument here that managements decision about whether to disclose information or not is based on weighing expected costs and benets of making the information public (Frolov, 2004). The available literature has suggested many ways in which a rm or its management can benet from improved disclosure. For example, direct evidence that rms increase the intensity of their disclosure efforts before offering public debt and equity has been obtained by Lang and Lundholm (1993, 1996), Frankel et al. (1995), Healy et al. (1999) etc. The list of other

Early literature on disclosure suggested that since under the simultaneous assumptions of pure exchange and perfect market competition information disclosure may lead only to wealth redistribution among agents; this leaves no place for disclosure-based (weak) Pareto improvements (Verrecchia, 2001). 2 For an elaboration on this direction of research see, e.g., Verrecchia (2001).
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suggested explanations of voluntary information disclosure includes motives related to institutional factors and signaling to the market.3 The above discussion shows that, while information disclosure is socially desirable (Frolov, 2004; Diamond, 1985), the interplay between its benets and costs may lead to partial or no disclosure, and one thereupon should ask whether the disclosure should be voluntary or mandatory. Indeed, the economic and accounting literature has asserted that, in the view of informational asymmetry, (costless) disclosure of private information brings general gains in economic efciency. However, the size of the gains and the ultimate effect on nancial prices may vary considerably depending on the informativeness of disclosed information and on the ways the information is disseminated and used.

Environments of Financial Reporting in India

The nancial reporting and disclosure of banking companies in India are regulated by the Companies Act 1956 and the Banking Regulation Act 1949, the rules of the Securities and Exchange Board of India (hereafter SEBI) and the guidelines of the Reserve Bank of India (hereafter RBI) as well as the recommendations of the Institute of Chartered Accountants of India (ICAI). The Banking Regulation Act 1949 provides a framework for regulation and supervision of commercial banking activity. Section 29(1) of the Banking Regulation Act 1949 states that at the expiration of each calendar year every banking company shall prepare a balance sheet and prot and loss account, in the forms set out in the Third Schedule Form A and Form B of the Act respectively. Section 30(1) states that the balance sheet and prot and loss account should be prepared in accordance with Section 29 and audited by a person duly qualied under law. Section 31(1) also states that the accounts and balance sheet together with auditors report shall be published in the prescribed manner and three copies thereof shall be furnished as returns to the RBI within three months from the end of period. Section 32 requires that three copies of the accounts and balance sheet together with the auditors report should be sent to the registrar of company affairs. The SEBI monitors and regulates corporate governance of listed companies in India through Clause 49. This clause is incorporated in the listing agreement of stock exchanges with companies and it is compulsory for them to comply with its provisions.4 Under this Clause 49, there shall be a separate section on corporate governance in the annual reports of company, with a detailed compliance report on corporate governance. It contains nine sections dealing with the 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 and others including risk management, management discussion & analysis, information and compliance. It is also noted that the company shall obtain a certicate from either the auditors or practicing company secretaries regarding compliance with conditions of corporate governance as stipulated in this clause and annex the certicate with the directors report, which is sent annually to all the shareholders of the company. The same certicate shall also be sent to the stock exchanges along with the annual report led by the company. The RBI is committed to enhance and improve increasing levels of transparency and disclosure in the annual accounts of banks. In addition to its traditional central banking functions, the RBI has certain
3

As surveyed by Healy and Palepu (2001), the management of rms may also be interested in improved disclosure since it reduces the risk of premature resignation because of poor stock performance (see, e.g., studies by Palepu, 1986, and Morck et al., 1990) and the cost of litigation (Skinner, 1994), increases the value of the managements stock options (Noe, 1999; Aboody and Kasznik, 2000; Miller and Piotroski, 2000) and facilitates more signals to the market about the superior strategic management abilities of the CEOs (Trueman, 1986). 4 All listed companies with paid up capital of Rs 30 million (USD 660 000) or with a net worth of Rs 250 million (USD 5.5 million) must comply with Clause 49. There are mandatory and non-mandatory requirements.
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non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act 1934 and the Banking Regulation Act 1949 have given the RBI wide powers of supervision and control over commercial banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. There are two professional bodies working in India. These are (i) the Institute of Chartered Accountants of India (ICAI) and (ii) the Institute of Cost and Works Accountants of India (ICWAI). Accounting practices being followed in India are as per accounting standards set by the ICAI. It is seen that 28 standards have been adopted in India. According to ICAI, India is materially in conformity with International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA). The ICWAI is the only recognized statutory professional organization and licensing body in India specialising exclusively in cost and management accountancy. Capital markets in India comprise equity, debt, foreign exchange and derivatives markets. India has the number one ranking in terms of listed securities on the exchanges followed by the USA (NSE, 2004). There were 9368 trading members registered with SEBI with 10 100 companies listed as of the end of March 2004 (Annual Report of SEBI, 2004). There are 23 stock exchanges in India. The two major stock exchanges are the Bombay Stock Exchange (now called The Stock Exchange, Mumbai, hereafter BSE) and the National Stock Exchange (NSE). The BSE is the oldest one in Asia, established in 1878. Listed companies must comply with the rules and regulations prescribed by the Securities and Exchange Board of India Act 1992. Indeed, under the Company Act management must explain any deviations from the prescribed accounting standards in the nancial statements. The sanctions for non-compliance with nancial disclosures range from a maximum ne of Rs 2000 (USD 44) to imprisonment of up to six months. If the auditors signed reports do not conform with the law, the maximum penalty is Rs 10 000 (USD 220).

Literature Review and Development of Hypothesis

There is extensive research in developed and developing countries to measure corporate disclosure on nancial and non-nancial companies, for example, the work of Cerf (1961), Singhvi and Desai (1971), Buzby (1974), Kahl and Belkaoui (1981), Marston (1986), Wallace (1987), Cooke (1989a, 1989b, 1991, 1992, 1993), Malone et al. (1993), Hossain et al. (1994), Ahmed and Nicholls (1994), Wallace et al. (1994), Wallace and Naser (1995), Raffournier (1995), Inchausti (1997), Marston and Robson (1997), Patton and Zelenka (1997), Craig and Diga (1998), Hossain (unpublished Ph.D. dissertation, unpublished M.Phil. thesis), Haniffa and Cooke (2002), Chipalkatti (2002), Metha (2003), Akhtaruddin (2005) and Kimber et al. (2005). However, the study by Kahl and Belkaoui (1981) investigated the overall extent of disclosure by 70 banks located in 18 countries. Their results indicated that the extent of disclosure was different among the countries examined, and that there was a positive relationship between size of the bank and the level of disclosure indicated. Hossain (unpublished M.Phil. thesis) empirically investigated the extent of disclosure of 25 banks in Bangladesh and associations of company size, protability and audit rm with disclosure level. A total of 61 items of information, both voluntary and mandatory, were included in the disclosure index; the approach to scoring items was dichotomous. The results showed that size and protability of the banks are statistically signicant in determining their disclosure levels. However, the audit rm variable was not signicant at conventional levels in the model. Chipalkatti (2002) examined the association between the nature and quality of annual report disclosures made by 17 Indian banks and
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market microstructure variables. He constructed a bank transparency score (BTS) consisting of 90 items of information considering the recommendations of the Basel committee and IAS 30. The study showed that there is no signicant association between the level of disclosure and percentage of shares held by the government and the percentage of shares held by foreign shareholders respectively. The results also indicated that larger banks provide more transparent disclosures and there was no signicant difference in the disclosure scores of banks across protability levels, but banks with lower levels of leverage did have signicantly higher disclosure scores. Baumann and Nier (2003) addressed the issues of developing a set of disclosure requirements by Pillar 3 of Basel II that improved market participants ability to assess a banks value using a unique dataset on close to 600 banks in 31 countries over the period of 19932000.5 The dataset contains detailed information about the items banks disclose in their annual accounts. They constructed a composite disclosure index that informs about disclosure at the bank level and then analyzed each of the 17 sub-indices of disclosure that make up the composite index in order to investigate which if any items of banks balance sheet disclosure are most benecial from the point of view of the bank and most useful for nancial markets. Their ndings generally conrm the hypotheses that disclosure decreases stock volatility, increases market values and increases the usefulness of company accounts in predicting valuations. The study of Metha (2003) was based on a questionnaire to nd out the CSR status of 50 NSE companies. The study revealed that approximately 57% of the responding companies had a formally adopted ethics code, while only one-third of the companies had an ethics ofcer or ethics counselor. Moreover, a large proportion of the responding companies are active in the areas of education/training (80%), healthcare (66%), environment (60%), welfare of underprivileged sections (57%) and rural development (23%). Based on the results of prior empirical research, the special characteristics of banking companies and data availability, we developed six hypotheses. A detailed analysis has been made below. Size The size of the bank is a potentially important explanatory variable to establish an association with the extent of disclosure. Most researchers in this area nd a close relationship between these two variables in both developing and developed countries; for example, Singhvi and Desai (1971), Kahl and Belkaoui (1981), Cooke (1989a, 1992), Ahmed and Nicholls (1994), Hossain et al., (1994), Wallace et al. (1994), Craig and Diga (1998) and Hossain (unpublished Ph.D. dissertation, unpublished M.Phil. thesis) found a positive relationship between company size and the extent of disclosure. A number of reasons have been advanced in the literature in an attempt to justify this relationship on a priori grounds. For example, Singhvi and Desai (1971, p. 131) offered three justications for why the extent of nancial disclosure is different for rms of different sizes. First, the cost of accumulating certain information is greater for small rms than large rms. Second, larger rms have a greater need for disclosure because their securities are typically distributed via a more diverse network of exchanges, and third, management of a smaller corporation is likely to believe more strongly than the management of a larger corporation that the full disclosure of information could endanger its competitive position. Thus, the following hypothesis is established.

H1: Banks with different values of total assets disclose varying amounts of nancial information.

These are Australia, Australia, Argentina, Belgium, Brazil, Canada, Chile, Finland, France, Germany, Hong Kong, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, the Netherlands, Norway, Poland, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the UK and the US. Corp. Soc. Responsib. Environ. Mgmt. 14, 274288 (2007) DOI: 10.1002/csr

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Determinants and Characteristics of Voluntary Disclosure by Indian Banking Companies Age

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The extent of a companys disclosure may be inuenced by its age, i.e. stage of development and growth (Owusu-Ansah, 1998; Akhtaruddin, 2005). Owusu-Ansah (1998, p. 605) pointed out three factors that may contribute to this phenomenon. First, younger companies may suffer competition; second, the cost and the ease of gathering, processing and disseminating the required information may be a contributory factor, and nally, younger companies may lack a track record on which to rely for public disclosure. Kakani et al. (2001) pointed out that newer and smaller rms, as a result, take market in spite of disadvantages like lack of capital, brand names and corporation reputation with older rms. However, it is not possible to reach a conclusion that long-established banks can disclose more information or be more compliant than newly established banks. This leads to the following hypothesis:

H2: Long-established banks may disclose more information than newly established banks.
Multiple Listing Listing on a stock market in home and abroad in order to credibly commit to a better legal regime is but one of several different motivations for making a foreign (single) or dual listing, and nancial motivations are by far the most important reasons among them (Licht, 2001). The major benets of listing on a foreign exchange as noted by Saudagaran (1988) and Biddle and Saudagaran (1991) are nancial, marketing and public relations, political, and employee relations. It is recognized that there is an incentive for the company if it lists on multiple stock exchanges and/or foreign stock exchanges. Thus the hypothesis is the following.

H3: There is a positive association between listing with multiple stock exchanges and the extent of voluntary disclosure of information.
Complexity of Business Haniffa and Cooke (2002) argued that structural complexity has a signicant inuence in the extent of disclosure. The structural complexity requires a rm to have an effective management information system for monitoring purposes (Courtis, 1978; Cooke, 1989a) and the availability of such a system helps to reduce the cost of information per unit, thereby providing the expectation of higher disclosure. Here, structural complexity is dened as the actual number of subsidiaries, as evident in Indian banks. In this respect, the following is hypothesized.

H4: Banks with subsidiaries may disclose more than banks without any subsidiaries.
Board Composition Board composition is dened as the proportion of outside directors to the total number of directors, thereby making a distinction between executive and non-executive directors. The premise of agency theory is that boards are needed to monitor and control the actions of directors due to their opportunistic behavior (Berle and Means, 1932; Jensen and Meckling, 1976). Mangel and Singh (1993) believe that outside directors have more opportunity for control and face a more complex web of incentives, stemming directly from their responsibilities as directors and augmented by their equity position. Others who also see the role of non-executive directors as monitors/controllers of managements performance
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and actions include Fama and Jensen (1983), Brickley and James (1987), Weisbach (1988) and Pearce and Zahra (1992). Additionally, outside directors may be considered to be decision experts (Fama and Jensen, 1983), may reduce managerial consumption of perquisites (Brickley and James, 1987), will not be intimidated by the CEO (Weisbach, 1988) and act as a positive inuence over the directors deliberations and decisions (Pearce and Zahra, 1992). Thus the following is hypothesized.

H5: There is a positive association between the proportion of non-executive directors on the board and the extent of voluntary disclosure of information.
Assets-in-Place Hossain (unpublished Ph.D. dissertation) and Hossain and Mitra (2004) found that assets-in-place systematically inuence the level of disclosure. Butler et al. (2002) argued that rms with a higher percentage of tangible assets have lower agency costs because it is more difcult for managers to misappropriate well dened assets-in-place than to extract value from uncertain growth opportunities. Therefore, since these rms have lower agency costs, they can reduce their reliance on disclosures. An increase in the rms xed assets results in lower in agency costs and consequently lower disclosure (Myers, 1977). Therefore, the following hypothesis has been established.

H6: There is a negative association between proportion of assets-in-place and the extent of disclosure of information.

Method
Selection of Sample The study covers all 38 banks that are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Among these banks, 18 are public sector and 20 are private sector banks. It is noted that India has a total of 58 banks, of which 27 are public sector and the rest private sector banks. The study considers the annual reports for 200203. The annual report has been collected through a service provider, Sansco services (www.sansco.net), in pdf format. We have checked the annual reports through hard copy of some of the banks, which were collected by corresponding directly with head ofce of the respective banks. Gray et al. (1995) state that the annual report is the only document produced regularly to comply with regulatory requirements, and more importantly is central to the organizations construction of its own external image. Hence, this study only considers the voluntary information disclosed in annual reports. Scoring of the Disclosure Index We examined each of the annual reports following the recommendation of Cooke (1992, 1993) that the entire annual report should be read well before any decision is made. A total of 65 items of voluntary information have been identied in nine sections (see Table 1). We constructed a disclosure index of each of the banks (Table 2). A dichotomous approach to scoring the items was adopted, in which an item scores one if disclosed and zero if not disclosed. This procedure is conventionally termed the unweighted approach, and it was adopted for the study as other researchers have used it successfully (see Wallace, 1987; Cooke, 1991, 1992; Karim, unpublished Ph.D. thesis; Hossain et al., 1994; Ahmed
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A 1 2 3 4 5 6 B 7 8 C 9

Background about the bank/general corporate information (06): Brief narrative history of the bank Basic organization structure/chart/description of corporate structure General description of business activities Date of establishment Ofcial address/registered address/address for correspondence Web address of the bank/email address Corporate strategy (02): Managements objectives and strategies/corporate vision/motto/statement of corporate goals or objectives Future strategy information on future expansion (capital expenditures)/general development of business Corporate governance (11): Detail about the chairman (other than name/title)/ background of the chairman/academic/professional/ business experience Details about directors (other than name/title)/ background of the directors/academic/professional/ business experience Number of shares held by directors List of senior managers (not on the board of directors)/ senior management structure Background of senior managers Details of CEOs contact address Are the independent directors well dened? Nature of chairman of the board of directors Directors engagement/directorship of other companies Picture of all directors/board of directors Picture of chairperson only Financial performance (12): Brief discussion and analysis of a banks nancial position Qualitative forecast of earnings Return on equity Net interest margin Cost-to-income ratio Earning per share Risk-weighted assets Debt-to-equity ratio Total liquid assets to assets ratio Total liquid assets to deposit ratio Loan to deposit ratio Dividend per share

E 32 33 34 35 36 37 38 39 40 41 42 43 F 44 45 G 46 47 48 49 50 51 52 53 H 54 55 56 57 I 58 59 60 61 62 63 64 65

Risk management(12): Information on risk management committee Information on assetsliability management committee Information on risk management structure Information on credit risk management structure Quantitative information on gross loan positions Amount and details of problem loans and other assets or details by internal risk ratings Disclosure of credit rating system/process Ageing schedule of past due loans and advances (NPA) General descriptions of market risk segments Disclosures on value-at-risk (VAR) for interest rate exposure Maturity of foreign currency assets and liabilities Maturity information about deposits and other liabilities Accounting policy review (02): Discussion on accounting policy Disclosure of accounting standards uses for its accounts Key non-nancial statistics (08): Age of key employee Details of branch location Number of branch No. of branch expansion during the current year Information on branch computerizations Information on ATM Location of ATM and their address List of top ve shareholders of the bank Corporate social disclosure (04): Sponsoring public health, sporting or recreational projects Information on donations to charitable organizations Supporting national pride/government.-sponsored campaigns Information on social banking activities/banking for the society Others (08): Chairmans/MDs report On-line banking facilities Information on credit card business Information on international banking facilities Information on welfare of employees Information on ISO 9001: 2000 certication Graphical presentation of performance indicators Performance at a glance 3 year

10

11 12 13 14 15 16 17 18 19 D 20 21 22 23 24 25 26 27 28 29 30 31

Table 1. Disclosure index (voluntary items of information)

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Public sector banks

Voluntary disclosure score (65) 35.00 43.00 40.00 40.00 42.00 55.00 26.00 32.00 52.00 41.00 40.00 47.00 36.00 41.00 35.00 27.00 32.00 32.00

Private sector banks

Voluntary disclosure score (65) 52.00 30.00 33.00 31.00 46.00 31.00 20.00 27.00 21.00 39.00 20.00 22.00 20.00 37.00 27.00 41.00 32.00 32.00 29.00 33.00

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Dena Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Syndicate Bank Union Bank of India Vijaya Bank State Bank of India State Bank of Bikaner & Jaipur State Bank of Indore State Bank of Mysore State Bank of Travancore

19. Bank of Rajasthan Ltd. 20. City Union Bank Ltd. 21. Dhanalakshmi Bank Ltd. 22. Federal Bank Ltd. 23. ING Vysya Bank Ltd. 24. Jammu & Kashmir Bank Ltd. 25. Karnataka Bank Ltd. 26. Karur Vysya Bank Ltd. 27. Lakshmi Vilas Bank Ltd. 28. South Indian Bank Ltd. 29. United Western Bank Ltd. 30. Bank of Punjab Ltd. 31. Centurion Bank Ltd. 32. Global Trust Bank Ltd. 33. HDFC Bank Ltd. 34. ICICI Bank Ltd. 35. IDBI Bank Ltd. 36. Induslnd Bank Ltd. 37. Kotak Mahindra Bank Ltd. 38. UTI Bank Ltd.

Table 2. Disclosure score

and Nicholls, 1994; Hossain, unpublished Ph.D. dissertation, unpublished M.Phil. thesis). Thus, the unweighted disclosure method measures the corporate disclosure (CD) score of a banking company as additive (suggested by Cooke, 1992) as follows: CD = dj = 1 if them j is disclosed = 0 if item j is not disclosed n = number of items. The Selection of Voluntary Items The study focuses on voluntary disclosure of nancial companies, which is almost absent. Some studies focused on the social reporting of nancial companies including Islamic banks (Harahap, 2003; Maali et al., 2006). However, the international nancial institutions such as the IMF and the World Bank have also given importance to the transparency and disclosure of nancial companies. Other organizations such as the US FSAB, the US Federal Reserve System and Standard and Poor also published guidelines regarding disclosing voluntary items. Table 3 is a list of chosen voluntary items and their sources are mentioned as examples. Having considered the above factors, a total of 65 items under nine categories of voluntary information were identied as relevant and could be expected to be disclosed in the annual reports of banking institutions in India.
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n
j =1

dj

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Titles 1 2 3 4 5 6 7 8 9 Background about the bank Corporate strategies Corporate governance Financial performance Risk management Accounting policy review Key non-nancial statistics Corporate social disclosure Others Grand total 06 02 11 12 12 02 04 08 08 65

Sources cited as example Kahl and Belkaoui (1981); Ahmed and Nicholls (1994); Singhvi (1968) Craig and Diga, 1998 Haniffa and Cooke, 2002; Basel, 1998 Cooke, 1991, 1992; Basel, 1998 Basel, 1998; Chipalkatti, 2002 Basel, 1998; Hossain et al., 1995 McGrath, 2003; Hossain et al., 1995 Inchausti, 2000; Hossain, unpublished M.Phil. thesis Hossain, unpublished M.Phil. thesis; Kahl and Belkaoui, 1981

Table 3. The selection of voluntary items in the disclosure index

Hypotheses

Predicted signs + + + + +

Proxies

Size Age Multiple listing Complexity of business Board composition Assets-in-place

Logarithm of total assets Age of the banks in years Actual number of listing stock exchange Actual number of subsidiaries Ratio of non-executive independent directors to total number of directors on the board Book value of net xed assets to book value of total assets

Table 4. Proxies and predicted signs for explanatory variables

Model Development The following ordinary least square (OLS) regression model is to be tted to the data in order to assess the effect of each variable on the disclosure level: Y = 0 + 1 X 1 + 2 X 2 + 3 X 3 + 4 X 4 + 5 X 5 + 6 X 6 + e where Y = total disclosure score received for each bank 0 = the intercept e = the error term. Table 4 reports the proxies used for independent variables and the predicted direction of the relation with disclosure extent for each hypothesis.

Univariate Analysis
Level of Disclosure Table 5 reports the descriptive statistics of the disclosure scores (dependent variables). On average, banks publish 35% of voluntary items of information. The highest and lowest overall disclosure scores are 55 and 20, and the mean value is 34.71 with standard deviation 9.02. However, on average, public
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Mean Voluntary disclosure score Voluntary disclosure score of public banks Voluntary disclosure score of private banks Table 5. Descriptive statistics of disclosure scores 34.71 38.66 31.15

Std dev. 9.02 7.761 8.75

Range 2055 2655 2052

No. of banks 38 18 20

sector banks disclose more voluntary information (38.66) than private sector banks (31.15). The score of voluntary disclosure is presented in Table 2. It is documented that Corporation Bank (a public sector bank) is ranked rst (55), followed by a private sector bank, the Bank of Rajasthan Ltd. (52). However, the lowest score (20) is also obtained by some private sector banks, i.e. Karnataka Bank Ltd., United Western Bank Ltd. and Centurion Bank Ltd.

Multivariate Analysis
We performed an ordinary least square (OLS) regression model for all variables; the results are presented in Table 6. The multiple regression model is signicant (p < 0.005). The adjusted coefcient of determination (R squared) indicates that 25% of the variation in the dependent variable is explained by variations in the independent variables. The coefcients representing assets (log of assets) and assetsin-place are statistically signicant at 1 and 6% respectively, while the coefcients for age, multiplying stock exchange listing, board member and complexity of business are not statistically signicant.

Discussion of Regression Results

The adjusted R square of 0.256 compares favorably with similar studies using disclosure indices. Lower adjusted R square statistics were reported by Wallace (1988) at 0.07, Malone et al. (1993) at 0.29, Singhvi (1968) at 0.42, Ahmed (1996) at 33.2% and Hossain (unpublished M.Phil. thesis) at 0.10. Size by assets is statistically related to the level of information disclosed by the sample of banks in their annual reports. It is signicant at a 1% level. The variable assets size (log of assets) was signicantly positive and in line with the results from previous research as mentioned. The age variable is not signicant. A similar result was found by Akhtaruddin (2005). This implies that the level of disclosure is not affected by the age of the bank or the number of years it has been in business. The multiple listing variable is not signicant. This indicates that the level of disclosure does not depend on the number of stock exchange listings. Probably Indian banks are more compliant with the mandatory information rather than voluntary information (Hossain and Peter, 2006). Complexity of business is also not signicant. Therefore, it is proved that if the bank has subsidiaries at home and abroad, it is unlikely that the bank will disclose more information than those with no subsidiaries. Board composition is not signicant because independent directors can not provide any pressure to provide voluntary information. Moreover, the banks nancial information also plays a vital role in day to day economic activities. The bank follows the mandatory instruction strictly and independent directors also keep pressure on it. The hypothesis for assets-in-place, as predicted, is signicant at 6%.
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Determinants and Characteristics of Voluntary Disclosure by Indian Banking Companies

Regression results Coefcient of multiple regression Coefcient of determination (R) Adjusted R2 Standard error Analysis of variance Sum of squares Regression Residual Variables in the equation Unstandardized coefcients B (Constant) ASSETS AGE EXCHANGE SUBSIDIA BOARD ASINPLAC 5.883 3.315 0.014 1.272 0.340 6.943 7.279 Std error 12.626 1.023 0.047 1.269 0.350 8.605 3.773 0.466 3.240 0.287 1.002 0.970 0.807 1.929 0.645 0.003 0.776 0.324 0.340 0.426 0.063 Standardized coefcients Beta t Sig. 1135.181 1880.635 df 6 31 Mean square 189.197 60.666 F 3.119 0.614 0.376 0.256 7.778

285

0.566 0.054 0.178 0.185 0.145 0.358

Table 6. Regression Output of the Model

Conclusion and Limitations

The nature and focus of the present research is quite interesting and different from other studies. First, this study is focused on nancial institutions and especially banking institutions. Second, there has been little study in the banking institutions on voluntary disclosure and also the developing country perspective; nally, the outcome of the study will provide the status of the level of voluntary information of the nancial institutions, which act as corporate citizens in the world. In order to maintain high quality disclosure and transparency as well as build up investors and depositors condence, it is imperative to comply with the rules and regulations of the regulatory authorities and also to provide voluntary information. India, in this case, has achieved a considerable amount of voluntary disclosure. However, some voluntary information such as corporate social disclosure, corporate governance and risk related voluntary information has been disclosed in the annual reports in the Indian banks to an acceptable level. The study has given an idea at least of how the developing countries in general, especially India, and the banking sector in particular, perform nancial reporting practices. Ideally, increased transparency through the disclosure of timely and accurate information should enable a bank to access capital markets more efciently. More broadly, market discipline based on this information should contribute to the efcient allocation of capital and provide incentives for banks to operate efciently and to manage and control their risk exposures prudently. The limitation of the research is a single year and a single country and one specic sector. In order to understand the nature of variations of overall disclosure, it is
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necessary to undertake a study taking 5 or 10 years data. Moreover, as this study represents the Indian banking sectors disclosure practices, the conclusions drawn on the ndings would not be more realistic ignoring other nancial institutions such as insurance and non-banking sectors.

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