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Governance and Forward-Looking Disclosures

This study examines how corporate governance impacts voluntary forward-looking statement disclosures in annual reports of UK companies. It finds that better governance, as measured by director ownership, board size/composition and separation of CEO/chair roles, leads to more forward-looking disclosures. The study also finds these governance-driven disclosures contain value-relevant information that helps investors anticipate future earnings.

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83 views24 pages

Governance and Forward-Looking Disclosures

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Sahirr Sahir

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J. Account.

Public Policy xxx (2013) xxx–xxx

Contents lists available at SciVerse ScienceDirect

J. Account. Public Policy

journal homepage: www.elsevier.com/locate/jaccpubpol

Voluntary forward-looking statements driven by

corporate governance and their value relevance
Mingzhu Wang a, Khaled Hussainey b,c,⇑
a
Department of Management, King’s College, London SE1 9NH, UK
b
School of Management, Plymouth Business School, Plymouth University, Plymouth PL4 8AA, UK
c
Department of Accounting and Auditing, Faculty of Commerce, Ain Shams University, Cairo, Egypt

a b s t r a c t

This paper examines the impact of corporate governance on the

level of voluntary disclosures of forward-looking statements in
the narrative sections of annual reports. It also examines whether
the forward-looking statements that are driven by governance are
informative about future earnings. This analysis is drawn from a
large-scale sample of UK FTSE All-Share companies for financial
years ending within the period January 1996–December 2007.
We find that corporate governance influences companies’ decisions
to voluntarily disclose these statements. The main drivers are
directors’ ownership, board size, board composition, and the dual-
ity of the CEO’s role. These results suggest that better corporate
governance improves reporting practice. We further find that the
forward-looking statements of well governed firms improve the
stock market’s ability to anticipate future earnings. Our findings
have important implications for policy makers and regulators
because they confirm that the effectiveness of corporate gover-
nance in the practice of disclosure is a function of certain charac-
teristics and that the voluntary forward-looking statements of
well governed firms contain value relevant information for
investors.
Ó 2013 Elsevier Inc. All rights reserved.

1. Introduction

In 1993, the Accounting Standard Board (ASB) of the United Kingdom (UK) introduced a major
innovation in the ﬁnancial reporting of public ﬁrms: the voluntary Operating and Financial Review

⇑ Corresponding author. Address: Department of Accounting and Auditing, Faculty of Commerce, Ain Shams University, Cairo,
Egypt.
E-mail addresses: mingzhu.wang@kcl.ac.uk (M. Wang), khaled.hussainey@plymouth.ac.uk (K. Hussainey).

0278-4254/$ - see front matter Ó 2013 Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.jaccpubpol.2013.02.009

(OFR). The OFR enables companies to provide a formalized, structured, and narrative explanation of
their financial performance. The OFR had been voluntary for all firms listed on the Financial Times
Stock Exchange (FTSE) before April 1, 2005.1 Although the OFR was made mandatory for public firms
in the UK after April 1, 2005, the Chancellor of the Exchequer announced on November 28, 2005 that
the OFR would no longer be a mandatory requirement for UK companies. The UK government claimed
this change to be a recalibration of policy rather than a fundamental change (Williams and Conley,
2007).2 It was actually a major shift in emphasis in relation to the importance of providing forward-look-
ing information in annual reports. In 2006, the ASB published a new financial reporting statement that
recommended rather than required the adoption of a revised voluntary OFR that was far more extensive
than the previous mandatory version. The ASB pinpointed that OFR statements should be ‘‘addressed to
members, setting out their analysis of the business, with a forward-looking orientation in order to assist
members to assess the strategies adopted by the entity and the potential for those strategies to succeed’’
(ASB, 2005: summary, b). In addition, the OFR should ‘‘focus on matters that are relevant to the interest
of members’’ (ASB, 2006: principle 6). The ASB considers information relevant ‘‘if it is capable of making a
difference in the decisions made by users’’ (FASB, 2010: 17). It is stated that financial information should
be capable of making a difference in decisions ‘‘if it has predictive value, confirmatory value or both’’
(FASB, 2010: 17). FASB (2010b: 17) states that information would have a predictive value ‘‘if it can be
used as an input to processes employed by users to predict future outcomes’’.
The UK, therefore, provides a unique country context in which to analyze the linkage between the
voluntary disclosure of forward-looking statements and corporate governance. The UK and the United
States (US) share a similarity in diverse corporate ownership structures and generally high quality cor-
porate governance. Forward-looking statements in the UK, however, are very different in nature from
corporate voluntary disclosures in the US as they are not immediately verifiable or auditable. Further-
more, forward-looking statements in the UK allow for a fuller and more powerful approach to analysis
because of their unique nature of these statements. The statements are qualitative in nature and usu-
ally dominated by good news (Athanasakou and Hussainey, 2012). In addition, prior research shows a
substantial variation between UK firms’ forward-looking reporting practices (Hussainey et al., 2003).
In this paper, we aim to answer the important questions of whether corporate governance affects
firms’ decisions to voluntarily disclose forward-looking statements in the narratives of their annual
reports and, if so, whether the forward-looking statements that are driven by governance contain va-
lue-relevant information for investors.
The research on the determinants and the value relevance of voluntary forward-looking statements
is sparse, mainly because of the difficulty in disclosure measurement. In the US context, where quan-
titative earnings forecasts are available, researchers investigate the association between voluntary
earnings forecasts and corporate governance for large samples of companies over long periods (i.e.
Hirst et al., 2008; Karamanou and Vafeas, 2005). In this paper, we use the computerized content
analysis approach developed by Hussainey et al. (2003) to measure the voluntary disclosure of for-
ward-looking statements. In comparison with the research on voluntary forward-looking statements
(Hussainey et al., 2003; Hussainey and Al-Najjar, 2011), we extend the sample size and the period of
analysis to cover the majority of UK non-financial firms that publish voluntary OFR statements. Our
resultant sample is comparable in size to those used in the US studies based on quantitative earnings
forecasts. We believe that increasing the number of firm-year observations should allow more robust
identification of the corporate governance determinants of voluntary forward-looking statements and,
hence, result in more generalizable findings.
Our paper provides three contributions to the literature in terms of the determinants and the value
relevance of forward-looking statements. First, our paper examines the impact of a comprehensive set
of corporate governance variables on the level of voluntary forward-looking statements. The studies
on the determinants of forward-looking statements use limited proxies for corporate governance
(see Hussainey and Al-Najjar, 2011). We hand collect a comprehensive set of corporate governance

1
The FTSE Group is an independent organisation that is jointly owned by the London Stock Exchange (LSE) and the Financial
Times and that specializes in creating and managing indices of shares.
2
The wording of the objectives of the 2005 OFR Reporting Standard and the 2006 OFR reporting Statement were almost identical
apart from the latter being more persuasive relative to the former that had a clear mandatory requirement.

variables for our large-scale sample of UK firms and find that the main drivers of voluntary forward-
looking statements are director ownership and board characteristics (size, composition, and CEO dual-
ity). Our results also show that institutional investors as external monitors have little impact on the
level of voluntary forward-looking statements in the UK. Karamanou and Vafeas (2005) test the effects
of audit committee characteristics on the quality of US earnings forecasts and find that audit commit-
tee expertise is important to the firm in deciding whether or not to issue a forecast. We extend their
study by analyzing the effects of audit committee characteristics (size, independence, and financial
expertise) on the level of voluntary forward-looking disclosures in the UK. The results show that only
the audit committee size has a negative impact and that neither the independence nor the financial
expertise of the audit committee’s members has an impact on the level of voluntary disclosures.
Second, we investigate whether voluntary forward-looking disclosures that are driven by gover-
nance reduce information asymmetry and enhance the stock market’s ability to anticipate future earn-
ings. Economic theory predicts that voluntary disclosures reduce information asymmetry (Diamond
and Verrecchia, 1991; Leuz and Verrecchia, 2000). Empirical literature shows that voluntary for-
ward-looking statements enhance investors’ ability to anticipate future earnings (Hussainey et al.,
2003; Schleicher et al., 2007; Hussainey and Walker, 2009). Unlike these studies, we modify Collins
et al.’s (1994) returns-future earnings model to examine the impact of governance-driven forward-
looking statements on the stock market’s ability to anticipate future earnings. Our results show that
the forward-looking statements of well governed firms improve the stock market’s ability to antici-
pate future earnings.
Third, we contribute to the body of knowledge on methodological developments in both the mea-
surement of voluntary forward-looking statements and the estimation method in empirical tests. Core
(2001) calls for more methodological development to improve existing proxies for corporate disclo-
sure. Researchers have attempted to contribute to the disclosure literature by using computer soft-
ware packages to automatically create disclosure scores for large samples of firms.3Hussainey et al.
(2003) are among the first to use computerized content analysis to measure levels of voluntary for-
ward-looking statements for large samples of UK companies. Like Hussainey et al. (2003), we use a
QSR software package (NUD IST 6 ) to calculate the number of forward-looking statements in annual
report narratives (i.e., OFR). In addition, apart from the Ordinary Least Square (OLS) estimation method
commonly used in disclosure studies, we also use the random-effect panel regression method to examine
the voluntary forward-looking statements that are driven by corporate governance and their value rel-
evance. The panel regression method removes the combined firm-year effects on the dependent variable
(i.e., the voluntary disclosure score measured as the number of forward-looking statements) and hence
yields more accurate examinations of the determinants and value relevant of voluntary forward-looking
statements. Furthermore, the analyses of the impact thresholds (Larcker and Rusticus, 2010) for the cor-
porate governance mechanisms show that their identified characteristics are indeed significant drivers of
voluntary forward-looking statements, which are not subject to an endogeneity problem.
Our results are likely to be of interest to a wide range of stakeholders. For example, investors, finan-
cial analysts, lenders, and auditors may find it helpful to consider the findings of this research when
dealing with firms with different characteristics (e.g., high or low quality corporate governance, high
or low profitability, or large or small sizes of firm). In particular, our results confirm that certain board
and audit committee attributes are associated with the level of forward-looking statements. These are
of interest to policy makers in regulating the effective monitoring of financial reporting on public firms
by corporate boards and audit committees. If corporate governance has a positive impact on the vol-
untary disclosure of forward-looking information, policy makers could encourage public firms to
implement sound corporate governance practices (Karamanou and Vafeas, 2005) in order to enhance
the information content of financial reporting. The lack of evidence on audit committee independence
and financial expertise, however, casts some doubt on the UK government’s efforts to ensure more
independent directors and financial experts on audit committees.
The remainder of the paper proceeds as follows. Section 2 reviews the literature and develops the
research hypotheses. Section 3 describes our measure of voluntary forward-looking statements.

3
See Li (2010) for an extensive review of the literature on the use of computer-based textual analysis for measuring corporate
disclosures.

Section 4 presents the sample, the data and the research design. Section 5 presents the empirical ﬁnd-
ings and Section 6 presents our conclusion.

2. The literature and hypotheses

In this section, we review the three strands of the literature that are relevant to our study and we
formulate our research hypotheses. The ﬁrst strand relates to the association between corporate gov-
ernance and voluntary disclosures. The second focuses on the effect of ﬁrms’ characteristics on corpo-
rate voluntary disclosures. The third relates to the value relevance of forward-looking statements.

2.1. Voluntary disclosures and corporate governance

A sizeable body of the literature argues that the wave of accounting scandals can be attributed to
the poor quality of corporate governance in overseeing the practice of financial reporting (Agrawal and
Chadha, 2005). In response to these scandals, regulators implement new rules to improve the quality
of corporate governance and these regulatory changes lead implicitly to an improvement in reporting
practice (Byard et al., 2006). The empirical research shows that good corporate governance reduces the
information asymmetry between managers and owners (Kanagaretnam et al., 2007) and improves the
levels of corporate disclosure (Lang and Lundholm, 1993). In addition, the literature shows that better
governance is associated with the possibility that managers could issue more earnings forecasts vol-
untarily (Karamanou and Vafeas, 2005). In this study we test the association between corporate gov-
ernance and forward-looking statements. Specifically, we examine the impact of institutional
ownership, director ownership, board size, board composition and CEO duality on forward-looking
statements.
Financial markets consider institutional investors to be the main suppliers of funds. Such investors
often undertake an active role in monitoring management performance (Jensen and Meckling, 1976).
Firms with a high concentration of institutional ownership are highly motivated to disclose informa-
tion voluntarily in order to maintain investor confidence (El-Gazzar, 1998). Thus, prior research ex-
pects institutional ownership to have a positive relationship with voluntary disclosure (Mitchell
et al., 1995). In support of this view, Karamanou and Vafeas (2005) find that US firms are more likely
to issue management earnings forecasts when institutional investors own a greater proportion of the
firm’s stock. The need for corporate disclosure, however, can decrease as the level of institutional own-
ership rises (Schadewitz and Blevins, 1998). Institutional investors, particularly those with block
shareholdings, can gather information via one-on-one meetings with company management (Barker,
1998; Holland, 1998; Marston, 2008) in order to obtain detailed forward-looking information. Compa-
nies with large block owners are also less reliant on smaller investors and face lower demand for vol-
untary public corporate disclosure. Similarly, some empirical studies find a negative association
between institutional ownership and voluntary disclosures (Schadewitz and Blevins, 1998; Celik
et al., 2006).
When a large number of institutional shareholders exist, disseminating forward-looking informa-
tion to all institutional investors through direct meetings can be costly for a company. The voluntary
disclosure of forward-looking statements in the narratives of annual report can be more efficient when
more institutional investors invest in companies. This leads to our first hypothesis:

H1. A positive association exists between institutional ownership and forward-looking statements in
the narratives of UK annual reports.

Director ownership is also referred to in the literature as managerial or insider ownership. Manage-
ment entrenchment theory and agency theory predict contradictory associations between director
ownership and voluntary disclosures. According to management entrenchment theory, concentrated
managerial ownership can be counterproductive to the ﬁrm’s long-term value because managers
are more likely to maximize their private controlling beneﬁts by reducing the level of voluntary dis-
closures (Morck et al., 1988). Thus, one should expect a negative association between director owner-
ship and voluntary disclosures. However, based on agency theory, one should expect a positive
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx 5

association between director ownership and voluntary disclosure because the extent of managerial
ownership could serve to align the management’s interests with those of other shareholders (Jensen
and Meckling, 1976). Companies with a high degree of director ownership have less information
asymmetry between management and shareholders and, therefore, can provide more forward-looking
information in the narrative sections of their annual reports.
The empirical evidence suggests that management entrenchment theory is more inﬂuential than
agency theory with regard to the relationship between director ownership and voluntary disclosure.
Director ownership has a negative impact on voluntary forward-looking disclosures (Hussainey and
Al-Najjar, 2011), intellectual capital disclosures (Li et al., 2008) and overall voluntary disclosures
(Eng and Mak, 2003; Nagar et al., 2003; Gelb, 2000; Ruland et al., 1990). When board members hold
a substantial portion of shares, these holdings create a power base that induces management to create
conditions conducive to managerial entrenchment (Shivdasani, 1993). Consistent with Hussainey and
Al-Najjar’s (2011) empirical evidence, we expect that greater director ownership in a ﬁrm leads to
fewer forward-looking statements in the annual report narratives. This leads to our second hypothesis:

H2. A negative association exists between director ownership and forward-looking statements in the
narratives of UK annual reports.

Board size represents the total number of executive and non-executive directors on the board of
directors at the date of the annual meeting in each fiscal year. The literature finds that boards with
a large number of directors are more likely to be ineffective and hence less likely to be involved in
decision-making processes that include the decision on whether or not to increase the level of volun-
tary disclosure (Herman, 1981; Goodstein et al., 1994). Communication and coordination-related
problems might exist in large boards and hence the effectiveness of these boards may be lower than
that of small boards. Jensen (1993) and Yermack (1996) argue that small boards are more effective at
monitoring firms’ managers. No empirical evidence in the literature, however, exists that supports this
negative association between board size and voluntary disclosure (Cheng and Courtenay, 2006).
On the other hand, the corporate governance literature shows that larger boards are more effective
than smaller ones (i.e., Klein, 2002). In disclosures studies, researchers find a positive association be-
tween board size and voluntary disclosures (i.e., Barako et al., 2006).
The literature shows no statistically significant association between earnings forecasts and board
size either in the US context (Karamanou and Vafeas, 2005) or in the French context (Lakhal, 2005).
We expect, however, to see a positive association between forward-looking statements and board size
for two reasons. First, large boards can have a greater diversity of expertise that includes financial
reporting expertise and, hence, more forward-looking statements can be expected. Second, larger
boards are less likely to be dominated by insiders and can be more willing to disclose more informa-
tion on forward-looking statements to outside investors in order to signal their future performance.
This leads to our third hypothesis:

H3. A positive association exists between board size and forward-looking statements in the narratives
of UK annual reports.

Board composition (independence) is measured as the ratio of the number of non-executive direc-
tors to the total number of directors. The literature shows that board independence reduces informa-
tion asymmetry (Kanagaretnam et al., 2007) and leads to an increase in the levels of corporate
disclosure (Lang and Lundholm, 1993). A sizeable body of the literature examines the association be-
tween board composition and voluntary disclosures; however, the results are mixed. A large number
of studies find a positive association between the two variables.4 An inverse relation between the two
variables, however, exists in several countries such as Singapore (Eng and Mak, 2003), Kenya (Barako
et al., 2006) and Malaysia (Haniffa and Cooke, 2005). Other studies find no significant association be-
tween the two variables (Ho and Wong, 2001; Haniffa and Cooke, 2002; Mangena and Pike, 2005; Boesso
and Kumar, 2007; Hoitash et al., 2009).
4
These include Chen and Jaggi (2000), Cheng and Courtenay (2006), Abraham and Cox (2007), Boesso and Kumar (2007), Lim
et al. (2007), Li et al. (2008) and Donnelly and Mulcahy (2008).

The literature shows that US firms are more likely to make earnings forecasts when their boards are
more independent of management influence (Karamanou and Vafeas, 2005). The findings for other
contexts, however, are mixed. For example, Lakhal (2005) shows no association between board com-
position and earnings forecast disclosures in France, while Hussainey and Al-Najjar (2011) find that
the sign and the significance of the association between the two variables in the UK context depends
on the regression model used.
We believe that board composition is an interesting variable to consider because it reflects the role
of non-executive directors. As implied by resource dependence theory (Pfeffer, 1972; Pfeffer and
Salancik, 1978), non-executive directors with their expertise, prestige and contacts, provide firms with
links to the external environment. According to agency theory, non-executive directors can play a vital
role in monitoring managers’ performance and limiting their opportunism (Fama, 1980; Fama and
Jensen, 1983). Such outside directors, who are less aligned with the firm’s managers, can be more in-
clined to encourage the management to disclose more forward-looking information to outsiders such
as investors and financial analysts. Greater voluntary disclosures, therefore, may be expected if
non-executive directors indeed carry out their perceived monitoring role. Moreover, if non-executive
directors dominate the board, they may have the power to force the management to disclose more
forward-looking information to outside investors. Thus, a higher percentage of non-executive direc-
tors on a board is more likely to result in lower information asymmetry (Kanagaretnam et al.,
2007) and hence a higher level of corporate disclosures (Lang and Lundholm, 1993). This leads to
our fourth hypothesis:

H4. A positive association exists between board composition and forward-looking statements in the
narratives of UK annual reports.

CEO duality (henceforth, in this paper, termed role duality) exists when, at the same time, the same
person doubles as the chair of the board of directors and the CEO of the company. According to agency
theory, the main disadvantage of role duality is that it can lead to one person having dominance over
the board that can reduce the effective control of the board of directors (Jensen and Meckling, 1976;
Fama and Jensen, 1983; Donaldson and Davis, 1991; Whittington, 1993). Personal dominance over the
board can also enable the CEO to engage in opportunistic behavior. Boards that have the CEO serving
as the chairperson are generally expected to exhibit weaker monitoring capabilities.
On the other hand, role duality may have some benefits. Brickley et al. (1997) summarize these
benefits in the following three points: the CEO is able to act rapidly, the chairperson is expected to
be in a good position to make relevant and timely decisions because of his or her better knowledge
of the firm and role duality can lead to a strong leadership style. We argue, however, that the above
benefits do not necessarily lead to higher levels of forward-looking disclosures.
Although some studies (i.e. Cheng and Courtenay, 2006) report no association between role duality
and voluntary disclosure, Forker (1992), Haniffa and Cooke (2002) find a negative relation between the
two variables. Lakhal (2005) examines the association between management’s earnings forecast dis-
closures and role duality and finds a negative association. Similarly, we expect a negative association
between role duality and forward-looking statements. This leads to our fifth hypothesis:

H5. A negative association exists between role duality and forward-looking statements in the
narratives of UK annual reports.

2.2. Voluntary disclosure and ﬁrm characteristics

The research also finds that a set of firm-specific variables affects corporate voluntary disclosures.
In their meta-analysis of 23 disclosure studies, Ahmed and Courtis (1999) find that firm size, listing
status, audit size, and leverage are the key factors affecting corporate disclosure. In this study, we
use firm size and leverage as control variables. We exclude audit size from the analysis because, when
the analysis was undertaken, the information was unavailable for a large number of firms. Although
the literature finds a relationship between the listing status and the disclosure levels in the US (Firth,
1979), we exclude this variable from our analysis because our sample consists of UK-listed non-finan-
cial companies.
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx 7

Firm size is a determinant of corporate disclosure that has been investigated extensively. Signaling
theory suggests a positive association between corporate disclosure and firm size by proposing that
large firms tend to attract financial analysts and are subjected by them and their investors to greater
demands for value relevant information (Schipper, 1991). In addition, large firms are more likely to be
able to afford the cost of producing information for the users of annual reports while small firms are
more likely to suffer from competitive disadvantage if they increase the level of voluntary disclosures
(Firth, 1979). Empirical studies consistently find a positive association between the level of disclosure
and firm size (see, e.g., Adams and Hossain, 1998; Debreceny et al., 2002; Eng and Mak, 2003; Gul and
Leung, 2004; Haniffa and Cooke, 2005; Kelton and Yang, 2008; Wallace and Naser, 1995; Xiao et al.,
2004). However, strangely, Hoitash et al. (2009) report a negative association. The literature also
shows mixed results on the relation between firm size and management earnings forecasts. Lakhal
(2005) and O’Sullivan et al. (2008) find a positive association, while Karamanou and Vafeas (2005) find
no association between the two variables. Based on these mixed results, the relationship between firm
size and the voluntary disclosure of forward-looking statements is an empirical issue that still requires
investigation. Consequently, this paper adds firm size to the analysis as a control variable.
Consistent with signaling theory, we expect leverage to be positively associated with the level of
corporate disclosures. Jensen and Meckling (1976), for example, argue that highly leveraged firms
have higher monitoring costs. One possible response that enables highly leveraged firms to reduce
these costs is to report more forward-looking information in their annual report narratives to convey
value relevant information to satisfy their creditors’ needs. Empirical studies on the determinants of
corporate disclosures offer mixed results. Barako et al. (2006), for example, find that high leverage ra-
tios lead to higher risk. Therefore, highly leveraged companies are expected to increase their level of
disclosure to reduce financing costs and the required risk premiums at the required rates of return. Gul
and Leung (2004), Eng and Mak (2003) and Xiao et al. (2004), however, find evidence that lower lever-
age has a relationship with greater disclosures. Other empirical studies find no statistical association
between leverage ratios and levels of corporate disclosures (Ho and Wong, 2001; Abraham and Cox,
2007; Celik et al., 2006). Although Lakhal (2005) finds no association between leverage ratios and
earnings forecast disclosures, O’Sullivan et al. (2008) find a positive association between the two vari-
ables. Based on these mixed results, the relationship between leverage ratios and the voluntary disclo-
sure of forward-looking information is an empirical issue that remains to be addressed in this paper.
We also consider dividend policy as one of the main drivers of forward-looking disclosures. The
association between dividend policy and forward-looking information has received much attention
in recent years. For example, Hussainey and Walker (2009) find that forward-looking information
and dividend propensity are substitute forms of communicating value relevant information for inves-
tors. Their results are consistent with signaling theory but not with pecking order theory (Deshmukh,
2005). Signaling theory suggests that firms with higher levels of asymmetric information (i.e., lower
levels of forward-looking information) are more likely to pay higher dividends to signal their future
prospects to current and potential investors. Pecking order theory, however, suggests that firms with
higher levels of information asymmetry are more likely to suffer from under-investment and, to con-
trol for this, are more likely to lower their dividends. Deshmukh (2003, 2005) and Li and Zhao (2008)
find that dividend payments are lower in US firms that are subject to more information asymmetry.
Similarly, Basiddiq and Hussainey (2012) find that UK firms with lower information asymmetry (mea-
sured by the number of analysts following) pay higher dividends. This finding suggests that firms with
higher levels of disclosure pay more dividends. In addition, Hussainey and Al-Najjar (2011) find a po-
sitive association between dividends and forward-looking information in the narratives of UK annual
reports. We, therefore, expect a positive association between dividends and the voluntary disclosure
of forward-looking statements.
Profitability is one of the main determinants of corporate disclosure (see Ahmed and Courtis, 1999,
for a comprehensive review). Research on the association between profitability and disclosures offers,
however, mixed results. In particular, Signaling theory suggests that profitable firms have an incentive
to disclose more information in order to signal their favorable results to stock market participants. We,
therefore, anticipate that profitable firms are more likely to disclose future-oriented information in
their annual report narratives. Some empirical studies support this positive association (Haniffa and
Cooke, 2005; Li et al., 2008). Celik et al. (2006), Hoitash et al. (2009), and Wallace and Naser (1995)
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
8 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

find a negative association between disclosure and profitability while Mangena and Pike (2005) and
Barako et al. (2006) find no association between the two variables. Research on forward-looking dis-
closures find mixed results. Lakhal (2005) and O’Sullivan et al. (2008), for example, find no association
between profitability and forward-looking disclosures. Hussainey and Al-Najjar (2011) find a negative
association between profitability and forward-looking statements, but the significance of this relation-
ship depends mainly on the regression model used. Given these mixed findings, this paper empirically
analyzes the relationship between profitability and the voluntary forward-looking disclosures.

2.3. Value relevance of voluntary forward-looking statements

The literature shows a considerable interest in examining the value relevance of quantitative man-
agement earnings forecasts in the US context. Kim and Shi (2011), for example, find that these fore-
casts are associated with the company’s cost of equity capital. The value relevance of voluntary
forward-looking statements, however, is under-researched. Schleicher and Walker’s (1999) work is
the first empirical investigation on the relevance of forward-looking disclosures to investors. They
use manual content analysis to identify forward-looking statements in OFRs and find their inclusion
is a useful means of anticipating future earnings. Hussainey et al. (2003) use a content analysis soft-
ware package to identify forward-looking statements in annual report narratives. They use the re-
turns-future earnings coefficient model of Collins et al. (1994) with a research design closer to
those used by Gelb and Zarowin (2002) and Lundholm and Myers (2002). They find that the levels
of forward-looking statements in the annual report narratives improve share price anticipation of fu-
ture earnings. In addition, the literature shows that the impact of forward-looking disclosures on share
price anticipation of future earnings is significant for unprofitable firms but insignificant for profitable
firms (Schleicher et al., 2007); and is significant for high-growth firms but insignificant for low-growth
firms (Hussainey and Walker, 2009).
The above-mentioned research on the value relevant of forward-looking statements, however, does
not consider the impact of corporate governance. Unlike these studies, we focus our investigation on
the impact of the forward-looking statements that are driven by governance on the share price antic-
ipation of future earnings. We also expand the UK evidence by examining the value relevance of for-
ward-looking statements for financial years ending on or before October 2007.5 Signaling theory
suggests that managers disclose value relevant information to meet investors’ demands for information.
Following Lundholm and Myers (2002), we expect that, if the forward-looking information disclosed in
firms’ annual report narratives is relevant to investors, it should be reflected in current stock returns. We
expect that the forward-looking disclosures by firms with better quality of corporate governance are
more likely to contain value relevant information for investors for better forecasting future earnings.
In other words forward-looking statements of better governed firms should be more informative about
future earnings. This leads to our sixth hypothesis:

H6. Holding the number of forward-looking statements constant, forward-looking statements of

better governed ﬁrms are more informative about future earnings.

3. Measuring the levels of forward-looking statements

We use the computer-based content analysis procedure developed by Hussainey et al. (2003) to
identify the number of forward-looking statements in annual report narratives. Following Hussainey
et al. (2003), we use the following list of 35 forward-looking keywords developed by Hussainey et al.
(2003): accelerate, anticipate, await, coming (financial) year(s), coming months, confidence (or confi-
dent), convince, (current) financial year, envisage, estimate, eventual, expect, forecast, forthcoming,
hope, intend (or intention), likely (or unlikely), look forward (or look ahead), next, novel, optimistic,
outlook, planned (or planning), predict, prospect, remain, renew, scope for (or scope to), shall, shortly,
5
Due to the mandatory nature of the Business Review section of the annual report in the UK for financial years starting on or
after October 2007 and its close overlap with the OFR statements, we firmly believe that disclosures stipulated under OFRs for
financial years starting on or after October 2007 are mandatory under the Business Review regulations.

should, soon, will, well placed (or well positioned), and year(s) ahead. We also take the future year
numbers into account in the list of forward-looking keywords.
Following Hussainey et al. (2003), we generate the disclosure score for the sample following a
three-stage procedure. In the first stage, we search the narrative sections of the annual reports (i.e.,
OFR statements) for forward-looking information, because these sections are more likely to contain
this type of information. In the second stage, we identify the information that is relevant to the stock
market in terms of assessing the firm’s future earnings. For the purpose of this paper, we use the fol-
lowing list of twelve earnings-related keywords from Hussainey et al. (2003): benefit, breakeven, bud-
get, contribution, earnings, EPS (Earnings per Share), loss, margin, profit, profitability, return, and
trading. Finally, we use the NUD IST version 6 software, developed by QSR International, to identify
the number of sentences that contain at least one forward-looking keyword and at least one earnings-
related keyword.
Hussainey et al. (2003) use Pearson’s and Spearman’s correlation analyses to assess the strength
and direction of the relation between the manual content analysis and the computer content analysis.
They find a strong positive Pearson’s correlation (0.96, significant at the 0.001 level) between the num-
ber of forward-looking statements, identified by the manual content analysis and the number identi-
fied by NUD IST. In addition, they find a strong positive Spearman’s rank correlation (0.95, significant
at the 0.001 level) between the two types of analyses. These findings suggest that the disclosure scores
created by the computer software are reliable.

4. Research design and sample

4.1. Regression models

Apart from using a multivariate OLS regression, we also use a panel regression procedure to con-
sider the random effects within or between ﬁrms on the dependent variable, the disclosure scores.
The panel regression technique also allows us to undertake a more accurate examination of the asso-
ciations between corporate governance and the voluntary disclosure of forward-looking statements. In
order to investigate such associations and test our research hypotheses, we develop the following
models and estimate them using both OLS and panel regressions with random effects.

DSi;t ¼ a0 þ a1 IOi;t þ a2 DOi;t þ a3 BSi;t þ a4 BC i;t þ a5 Dualityi;t þ a6 DY i;t þ a7 FSi;t þ a8 ROAi;t

þ a9 LEV i;t þ ei;t ð1Þ

DSi;t ¼ b0 þ b1 IOi;t þ b2 DOi;t þ b3 BSi;t þ b4 BC i;t þ b5 Dualityi;t þ b6 DY i;t þ b7 FSi;t þ b8 ROAi;t

X
8
þ b9 LEV i;t þ b9þn INDn þ ei;t ð2Þ
n¼1

where DS is the disclosure score (the number of forward-looking statements); BS (board size) is the
total number of directors on the board; BC (board composition) is the percentage of non-executive
directors, that is, the number of non-executive directors divided by the board size; Duality is a dummy
variable for role duality (one for the duality and zero for the separation); DO (director ownership) is
the aggregate percentage of the shares owned by directors; IO (institutional ownership) is the aggre-
gate value of the shares owned by all institutional investors holding at least 3% of the shares in the
firm; DY (dividend) is the dividend yield; FS (firm size) is the natural logarithm of the market capital-
ization; ROA (profitability) is the return on assets and LEV is the leverage ratio (total debt/total assets).
In the above models, two explanatory variables (IO and DO) capture the ownership structure while
three explanatory variables (BS, BC, and Duality) capture the board characteristics. The aggregate insti-
tutional ownership (IO) shows the ownership concentration for institutional investors who are ex-
pected to be effective external monitors of managerial discretion in financial reporting. If our first
hypothesis holds, we expect that the coefficients a1 and b1 should be positive. The independent var-
iable DO measures the executive directors’ aggregate shareholdings. We expect that the higher the
percentage held by executive directors, the more likely that the entrenchment effect protects the
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
10 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

management from the external monitoring. As a consequence, we expect the coefficients a2 and b2 to
be negative. The BS (board size) is the total number of directors sitting on a board. The larger the
board, the greater the difficulty for the management to dominate the board and in order to constrain
the moral hazard of the firm’s management, the more likely it is that the board encourages greater
voluntary disclosure of forward-looking information in the annual reports. We, therefore, expect
the coefficients a3 and b3 to be positive. The BC (board composition) measures the proportion of
non-executive directors on the board. A series of corporate governance best-practice guides, starting
with Cadbury Committee (1992), highlight the important role played by non-executive directors. Gi-
ven the effectiveness of non-executive directors, we expect the disclosure score to be positively asso-
ciated with BC and, therefore, we expect the coefficients a4 and b4 to be positive. The dummy variable
Duality reflects whether or not the chairperson also has the role of corporate CEO. Under duality, the
firm’s management has greater power over the board’s decision-making process and, therefore, the
firm might be less likely to voluntarily disclose a large amount of forward-looking information in
its annual reports. Therefore, we expect the coefficients a5 and b5 to be negative. Other control vari-
ables are proxies for the remaining characteristics of the firm.
Furthermore, regression model (2) adds industry dummy variables (IND) that are used to account
for the possibility that the voluntary disclosure of forward-looking information may be influenced by
the general practice within specific industries. The industry dummies are created using the FTSE
Industry Classification Benchmark (ICB) that groups the stocks listed on the LSE into nine industry sec-
tors: Basic Materials, Consumer Goods, Consumer Services, Health Care, Industrials, Oil & Gas, Tech-
nology, Telecommunications, and Utilities. We construct nine corresponding dummy variables
(IND1–9) taking the value one if the company is a member of that sector and zero otherwise. We choose
the Industrials sector (IND5) as the reference sector for the regression analyses. We are only able to
estimate the panel regression for random effects rather than fixed effects because the industry dummy
variables do not change over the years for the same individual sample firm.
In order to measure the value relevance of the forward-looking statements, we use Collins et al.’s
(1994) returns-future earnings model as follows:
Ri;t ¼ h0 þ h1 X i;t þ h2 X i;tþ1;tþ3 þ h3 Ri;tþ1;tþ3 þ h4 EP i;t1 þ h5 AGi;t þ et ð3Þ
where the current return (Ri,t) is defined as the buy-and-hold returns from 8 months before the cur-
rent financial year-end t to 4 months after the current financial year-end t, the future returns (Ri,t+1,-
t+3) are the buy-and-hold returns from 8 months before the financial year-end t + 1 to 4 months after
the financial year-end t + 3, the Xi,t is the current earnings growth measured by the annual change in
actual EPS for year t scaled by the EPS for year t 1, the Xi,t+1,t+3 is the future earnings growth mea-
sured by the sum of the earnings growth from year t + 1 to year t + 3, the EPt1 is the earnings yield
measured by the reported actual EPS for the year t 1 divided by the share price at the beginning
of the year t, and the asset growth (AGt) is the growth rate of the total book value of assets for year t.
In order to test Hypothesis 6, we introduce the governance-driven forward-looking statements
(GovDS) of Collins et al.’s (1994) returns-future earnings model. The variable GovDS is estimated as
the fitted values of our regression model (2). The fitted values indicate the component of the voluntary
disclosure of forward-looking statements that are driven by corporate governance factors.6 We link the
earnings growth variables (Xi,t and Xi,t+1,t+3) in model (3) with the variable GovDS that yields the following
equation:

Ri;t ¼ h0 þ h1 X i;t þ h2 X i;tþ1;tþ3 þ h3 Ri;tþ1;tþ3 þ h4 EP i;t1 þ h5 AGi;t þ h6 Gov DSi;t þ h7 Gov DSi;t
X i;t þ h8 Gov DSi;t X i;tþ1;tþ3 þ ut ð4Þ

As defined, the variable GovDS is the fitted value from regression model (2) generated by using the
estimated coefficients of the corporate governance factors. So, given the same level of voluntary dis-
closure, the forward-looking statement of better governed firms should be more informative about fu-
ture earnings if Hypothesis 6 holds. As a result, the current stock returns partially anticipate the
6
Our research design of using fitted values in the second stage of regression analyses is closely related to the one used in Bowen
et al. (2008) and discussed in Guay (2008). We also, however, add the residuals from the regression model (2) as the forward
looking statements that are not driven by governance in the returns-future earnings model.

realized future earnings. If this is the case, then the coefficients of the linked near-term and long-term
future earnings, GovDS Xi,t, and GovDS Xi,t+1,t+3, should be positive in the modified regression (4) for
the returns-future earnings. In other words, forward-looking statements of better governed firms dis-
close more value-relevant information about future earnings.

4.2. Sample selection and data collection

We focus our investigation on the FTSE All-Share non-financial UK companies for the financial
years ending within the period January 1996–December 2007. Following prior research, we exclude
financial firms from our analysis. Our sample period starts in 1996 as a large cross-section of annual
reports became available in text file format on the Dialog database in that year. We end our analysis in
2007 since the Business Review section of the annual report, which overlaps closely with the OFR
statements, became mandatory in the UK after that year.7
We collect annual reports from Dialog and Northcote databases. The annual reports for companies
for financial years ending within the period January 1996 and December 2002 are collected from the
Dialog database provided by Thomson Financial. Thomson Financial, however, discontinued support of
the Dialog database in mid-2004 which implies a full coverage extends only to the financial year end-
ing in 2002. We, therefore, use the Northcote database (http://www.northcote.co.uk) to collect annual
reports for companies for financial years ending within the period January 2003–December 2007. We
then convert these reports into text format. We finally use the NUD IST 6 software to calculate the
number of forward-looking statements in each annual report.
The total number of annual reports available from Dialog and Northcote for non-financial firms
over the period of 1996–2007 is 10,258. Only 7977 of these firm-year observations have Datastream
codes. We delete firms that changed their financial year-end during the time period (1489 firm-years)
and those with missing corporate governance or accounting data. These deletions leave a final sample
of 5489 usable firm-year observations. We use this sample to test the impact of corporate governance
mechanisms on the level of forward-looking disclosures. Table 1 illustrates the sample selection pro-
cess and the yearly breakdown of observations. The sample is further reduced because of the unavail-
ability of stock return data. We use a sample of 4579 firm-year observations, therefore, to examine the
value relevance of the forward-looking statements that are driven by corporate governance.
The numbers and identities of the incumbent directors and CEOs are hand-collected from the Com-
pany REFS CDs for each company-year in order to calculate the board’s composition and size and to
create the dummy variable for role duality. Director ownership data are also hand-collected from
the Company REFS CDs. We collect the aggregate institutional ownership (IO) at the firm level from
Thomson Financial. Financial and accounting data for the share return, the market capitalization,
the dividend yield, the earnings, the total assets, and the total debts are collected from Datastream.

4.3. Descriptive analysis

Table 2 provides the descriptive statistics. The highest disclosure score of the sampled firms is 45
while the lowest is zero. This range indicates that significant variation exists between UK companies
in terms of their decisions to disclose voluntarily forward-looking information. The sample firms have
an average disclosure score of 5.62. Institutional investors own an average of 51% of the firms’ shares.
On average, directors hold 7% of the outstanding shares; and there are 8.39 directors in each firm, 51%
of whom are non-executive directors. The largest board has 26 directors and the smallest only three.
On average, firms pay dividends of 4%. The mean market capitalization of the firms in the sample is
£2.55 billion with a maximum of £155.85 billion and a minimum of £18 million. The average return
on assets is 6.82 with a maximum of 45.63 and a minimum of 41.32. An average firm has 14.49
pence of total debt per pound of total assets.
7
As part of the directors’ reports, UK-quoted companies were required to follow the enhanced business review reporting
requirements set out in section 417 of the Companies Act 2006 for all years beginning on or after October 1, 2007. For more detail,
see http://www.frc.org.uk/asb/technical/operating.cfm.

Table 1
Sample selection and yearly observations.

No. of
observations
Panel A: Sample selection process
All firm years for annual reports of non-financial firms in Dialog and Northcotea for 10,258
1996–2007
Less: firms without Datastream codes 2281
Less: firms that change their financial year-ends 1489
Less: firm years without sufficient data on Company CD Refs for board 743
characteristics
Less: firm years without sufficient data on Thomson Financial for institutional 256
ownership data and firm characteristics
Sample firm years 5489
Panel B: Yearly observations
1996 324
1997 403
1998 492
1999 555
2000 536
2001 597
2002 463
2003 303
2004 479
2005 461
2006 528
2007 348
a
Northcote Database (http://www.northcote.co.uk).

Table 2
Descriptive statistics.

Mean Median St. dev. Min Max

DS (disclosure score) 5.62 5.00 4.34 0.00 45.00
IO (institutional ownership) 0.51 0.49 0.18 0.00 1.00
DO (director ownership) 0.07 0.01 0.13 0.00 0.82
BS (board size) 8.39 8.00 2.54 3.00 26.00
BC (board composition) 0.51 0.50 0.14 0.00 1.00
Duality (role duality dummy) 0.30 0.00 0.46 0.00 1.00
DY (dividend yield) 0.04 0.03 0.03 0.00 0.33
FS (market capitalization) 1821.75 250.50 1042.20 1.80 15585.20
ROA (return on assets) 6.82 7.04 10.49 41.32 45.63
LEV (leverage ratio) 14.49 9.53 16.81 0.00 100.00
Industry dummies
IND1 (basic materials) 0.13 0.00 0.34 0.00 1.00
IND2 (consumer goods) 0.12 0.00 0.33 0.00 1.00
IND3 (consumer services) 0.16 0.00 0.37 0.00 1.00
IND4 (health care) 0.06 0.00 0.23 0.00 1.00
IND5 (industrials) 0.27 0.00 0.45 0.00 1.00
IND6 (oil and gas) 0.02 0.00 0.15 0.00 1.00
IND7 (technology) 0.09 0.00 0.28 0.00 1.00
IND8 (telecommunications) 0.08 0.00 0.26 0.00 1.00
IND9 (utilities) 0.03 0.00 0.17 0.00 1.00

Notes: DS – voluntary disclosure score; IO – aggregate institutional ownership; DO – aggregate directors’ ownership; BS – board
size (total number of directors on board); BC – board composition (percentage of non-executive directors on board); Duality –
dummy variable for the duality of board chairperson and CEO (1 for separation and 0 for duality); FS – market value measure as
year-end market capitalization of ﬁrms; DY – dividend yield; ROA – return on asset; and LEV – leverage ratio (total debt/total
asset).

Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
j.jaccpubpol.2013.02.009
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-

Table 3
Pearson correlations.

DS IO DO BS BC Duality DY FS ROA LEV IND1 IND2 IND3 IND4 IND5 IND6 IND7 IND8
IO 0.08a 1.00

M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

DO 0.15a 0.20a 1.00
BS 0.26a 0.16a 0.14 a 1.00
BC 0.09a 0.20a 0.19a 0.05a 1.00
Duality 0.00a 0.19 0.00a 0.08 a 0.12a 1.00
DY 0.10a 0.00a 0.10a 0.06a 0.09a 0.14 1.00
FS 0.33a 0.26a 0.25a 0.59a 0.20a 0.12a 0.18a 1.00
ROA 0.01b 0.17a 0.09a 0.06a 0.18a 0.27a 0.21a 0.07a 1.00
LEV 0.12a 0.10a 0.06a 0.07a 0.04 0.39c 0.07a 0.10a 0.15a 1.00
IND1 0.02 0.01c 0.01 0.03b 0.05 a 0.05c 0.16a 0.05 a 0.05a 0.01c 1.00
IND2 0.04b 0.03 0.00 0.01 0.01 0.02 0.00a 0.04c 0.03 0.14a 0.16a 1.00
IND3 0.01 0.01 0.06a 0.01 0.08a 0.00a 0.12a 0.03c 0.04b 0.10a 0.18a 0.17a 1.00
IND4 0.05a 0.03 0.01 0.04 0.10a 0.04a 0.23a 0.02b 0.28a 0.09a 0.10a 0.09a 0.10a 1.00
IND5 0.00 0.01 0.08a 0.11a 0.06a 0.03b 0.10a 0.09a 0.10a 0.02 0.27a 0.25a 0.28a 0.15a 1.00
IND6 0.03c 0.02 0.01c 0.07a 0.04a 0.01 0.10a 0.05a 0.01 0.01 0.07a 0.06a 0.07a 0.04a 0.11a 1.00
IND7 0.11a 0.05a 0.08a 0.12a 0.03c 0.00a 0.21 a 0.07a 0.04c 0.07a 0.12a 0.12a 0.13a 0.07a 0.20a 0.05a 1.00
IND8 0.05a 0.02c 0.01b 0.18a 0.06a 0.00 0.16 a 0.17a 0.03b 0.10a 0.12a 0.11a 0.12a 0.07a 0.19a 0.05a 0.09a 1.00
IND9 0.07a 0.08a 0.09a 0.09a 0.07a 0.00 0.12 a 0.17a 0.01 0.07a 0.07a 0.07a 0.08a 0.04a 0.11a 0.03a 0.05c 0.05a

DS – voluntary disclosure score. IO – aggregate institutional ownership; DO – aggregate directors’ ownership; BS – board size (total number of directors on board); BC – board composition
(percentage of non-executive directors on board); duality – dummy variable for the duality of board chairperson and CEO (1 for separation and 0 for duality); DY – dividend yield; FS – firm
size measure as natural logarithm of market value; ROA – return on asset; and LEV – leverage ratio (total debt/total asset).
a
Significance level at the 1% for two-tailed t-tests.
b
Significance level at the 5% for two-tailed t-tests.
c
Significance level at the 10% for two-tailed t-tests.

13
14 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

Market capitalization (MV) is skewed by a few extremely large firms with the mean much higher
than the median. Thus, we use the formula FS = Ln(1 + MV) to calculate the natural logarithm of the
market capitalization to reduce this skewness so that the mean and median statistics are approxi-
mately equal. Similarly, we measure the variable BS (board size) as the natural logarithm of the total
number of directors in order to minimize the effects of skewness and outliers. We also use a Shapiro
and Wilk’s (1965) test to check the normality of the dependent variable (disclosure score) and the
explanatory variables.8 The results are all close to one, which indicates normal distributions.
Table 3 presents the Pearson correlation analyses. Only the correlation coefficient between board
size (BS) and firm size (FS) is relatively high. However, no concerns about the multicollinearity prob-
lem exist because the correlation is still less than 0.70. Our measure of forward-looking disclosures is
statistically correlated with corporate governance and firm characteristics variables except for the role
duality and the industry dummy variables.

5. Empirical results

5.1. Determinants of earnings forecast disclosure

Table 4 reports the random effects results from the OLS and panel regressions in models (1) and (2).
Although we believe the panel regression provides more accurate estimations of the models, the OLS
estimates are also reported to allow comparison with the empirical evidence presented in other stud-
ies. Overall, models (1) and (2) are significant at the 1% level.
The results for the corporate governance mechanisms are generally consistent between the two
estimation methods. The results for the control variables such as firm size and leverage ratio are more
significant under the OLS. This significance is because such characteristics tended to be persistent over
years for individual sample firms. While panel regressions remove these fixed effects, the OLS pools
them and hence results in more significant coefficients.
The coefficients for the aggregated institutional ownership are positive but insignificant. These
coefficients, therefore, reject Hypothesis 1. Institutional investors, who typically hold around 60% of
the shares in our sample of firms, appear not to be associated with the level of voluntary disclosure
regarding future earnings. As powerful investors, they might have other more efficient means of com-
municating with the firm’s management; for example, one-to-one meetings (Barker, 1998; Holland,
1998; Marston, 2008).
Table 4 shows that a negative association exists between forward-looking statements and execu-
tive directors’ ownership. The coefficient is statistically significant in both models and both estimation
methods (significance levels between 1% and 10%). This finding suggests that managers might be
motivated to maximize their control over private benefits by reducing the level of voluntary disclo-
sure. The finding, therefore, supports Hypothesis 2. This result can also indicate that internal share-
holders are more likely to have advance access to forward-looking information, hence reducing the
firm management’s incentive to disclose such information voluntarily in annual reports.
The regression results show that our disclosure measure has a positive association with board size
(significant at the 1% level) and the percentage of non-executive directors sitting on the board (signif-
icant at the 10% level). These findings are consistent with the predictions of Hypotheses 3 and 4 that
suggest firms with larger boards and higher proportions of non-executive directors are more likely to
disclose information related to future earnings. This result might be because greater financial report-
ing expertise exists on such boards.
The negative coefficients reported for the duality dummy variable also support Hypothesis 5.
Although the significance level of 10% is lower than the other board characteristics, it is consistent
in both regression models. For our sample firms, the lower significance level may be the result of
the lack of variation in this variable. A closer investigation on the dispersion of the duality dummy var-
iable shows that only 10% of our sample firms have role duality.
8
The Shapiro and Wilk (1965) test is the ratio of the best estimator of the variance to the usual corrected sum-of-squares
estimator of the variance.

Table 4
Board characteristics and voluntary forward-looking statements in annual reports narratives.

Explanatory variables Pooled OLS Random-effect panel Pooled OLS Random-effect panel
model (1) regression model (1) model (2) regression model (2)
Constant 0.97** 0.05 0.69 0.15
IO (institutional 0.07 0.05 0.24 0.15
ownership)
DO (directors’ ownership) 1.20*** 1.44** 1.20** 1.42**
BS (board size) 0.12*** 0.12*** 0.12*** 0.12***
BC (board composition) 0.65* 0.74* 0.91* 0.90*
Duality (board 0.32* 0.30* 0.31* 0.28*
chairperson’s role
duality)
DY (dividend yield) 24.66*** 20.47*** 21.47*** 18.51***
FS (ﬁrm size) 0.77*** 0.62*** 0.76*** 0.61***
ROA (return on asset) 0.02*** 0.02** 0.02*** 0.02***
LEV (leverage) 0.02*** 0.03*** 0.02*** 0.02***
Industry dummies
IND1 (basic materials) 0.07 0.20
IND2 (consumer goods) 0.01 0.07
IND3 (consumer 0.01 0.03
services)
IND4 (health care) 0.69** 0.62
IND5 (industrials) Reference Reference sector
sector
IND6 (oil and gas) 1.26*** 1.01
IND7 (technology) 0.85*** 0.99**
IND8 0.03 0.03
(telecommunications)
IND9 (utilities) 0.58** 0.48
No. of observations 5489 5489 5489 5489
Wald v 285.04 299.99b
a a
F-test 81.07 44.66
Adjusted R2 (%) 14.96 14.97 15.34 15.45

Dependent variable is DS – voluntary disclosure score.

*
Significance at the 10% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.
**
Significance at the 5% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.
***
Significance at the 1% level for the two-tailed t-test for the OLS, and the z-test for the panel regressions.
a
Significance at the 1% level for F-test.
b
Significance at the 1% level for Wald v2 test.

The results for all controlled firms’ characteristics, that is, dividend yield, firm size, profitability,
and leverage ratio, are significant. Table 4 shows that firms that pay high dividends are more likely
to report more forward-looking statements in the annual report narratives. The regressions for models
(1) and (2) show consistently significant positive coefficients for the variable DY; in all cases, these are
statistically significant at the 1% level. This finding is consistent with previous UK research (e.g.,
Hussainey and Al-Najjar, 2011; Basiddiq and Hussainey, 2012) and suggests that firms with higher
levels of forward-looking statements pay more dividends. Both the OLS and the random effects meth-
ods show a significantly negative association between the level of forward-looking statements and the
firm’s operating performance (significance level 1%). This finding suggests that forward-looking state-
ments are more likely to be used by unprofitable than profitable firms. Furthermore, according to Ta-
ble 4, the disclosure scores have a positive relationship to the firm size and the leverage ratio
(significance levels 1%) that suggests large and highly geared firms are more likely to disclose for-
ward-looking information.
In the random-effect panel regression model, the level of voluntary disclosure is significantly lower
only for Technology sector (IND6). The level of voluntary disclosure is significantly lower for Technol-
ogy, Health Care, Oil & Gas and Utilities sectors when the model estimates use the pooled OLS method.
These estimates indicate that the observed negative associations between the dependent variable (DS)
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
16 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

and the Health Care, Oil & Gas, and Utilities industries are likely to be caused by ﬁxed effects over time.
In addition, as the constant becomes insigniﬁcant in model (2), the inclusion of industry dummy vari-
ables appears to capture some effects that are unexplained by the board characteristics and the other
explanatory variables.

5.1.1. Endogeneity
The positive associations between corporate governance and the level of forward-looking informa-
tion may be driven by unmodeled or imperfectly measured factors that affect both governance and
disclosure. For example, a firm operating in a riskier environment can have higher governance and
produce more forward-looking statements to help outsiders determine the appropriateness of man-
agement’s decisions. If this is the case, then ignoring the firm’s risk in the analysis biases the OLS esti-
mate of the effect of the governance upwards. The upward bias favors the hypothesis that an improved
governance leads to more forward-looking statements. The absence of a consensus in the finance lit-
erature on which risk factors are the best proxies for the information environment make the identifi-
cation of acceptable control variables or instruments difficult, however. In addition, the choice of
appropriate instruments, while never easy, is challenging in our context because we add multiple
endogenous variables as measures of corporate governance, that is, institutional ownership, executive
director ownership, board size, board composition and role duality. Larcker and Rusticus (2010) sug-
gest an alternative approach that involves assessing how large the endogeneity problem has to be to
change the OLS results and, in particular, how large it has to be to make the coefficient statistically
insignificant. Since the estimated OLS coefficients for the corporate governance measures are statisti-
cally significant, we examine the potential impact of unobserved or unmodeled variables using the ap-
proach described by Frank (2000). He derives the minimum correlations necessary to turn statistically
significant results into borderline insignificant results. These correlations are based on the concept
that for an unobserved variable to affect the results, it has to be correlated with both the independent
variable and the dependent variable (controlling for the other variables). The impact threshold for an
unmodeled variable is defined as the lowest product of the partial correlation between the dependent
variable and the unmodeled variable and the partial correlation between the endogenous independent
variable and the unmodeled variable that makes the coefficient statistically insignificant. If the impact
threshold is high (low), then the OLS results are robust (not robust) to concerns about the omitted var-
iable. For each of the endogenous independent variables (DO, BS, BC, and Duality), we calculate an im-
pact statistic that indicates the minimum impact of a confounding variable that is needed to render
the coefficient statistically insignificant.
Without some benchmark, difficulty exists in determining whether or not an impact threshold is
small enough to conclude that the significant associations between the voluntary disclosure scores
and corporate governance measures (DO, BS, BC, and Duality) are fragile. While, by definition, we do
not have access to the unobserved and unmodeled variable, we do have other control variables: div-
idend yield, firm size, profitability, and leverage ratio. We observe all these to be significant determi-
nants of voluntary disclosure scores. We are able, therefore, to calculate the impact of the inclusion of
each control variable on the coefficient of the endogenous independent variable. Similarly, the impact
of each control variable is the product of the partial correlation between the endogenous independent
variable and the control variable and the correlation between the dependent variable and the control
variable (taking out partially the effects of the other control variables). Table 5 reports the results of
this analysis.
The threshold value for executive director ownership is 0.14 which suggests the correlations be-
tween this and the dependent variable and between pffiffiffiffiffiffiffiffiffiffi the dependent variable and the unobserved and
unmodeled variable need to be about 0:374ð¼ 0:14Þ for the OLS result to be overturned. Because the
relationship is negative, one of these two correlations is expected to be negative. Firm size has the
largest impact, 0.10. The threshold value for board composition (BC) is 0.05 suggesting each of the
pffiffiffiffiffiffiffiffiffiffi
relevant correlations requires to be about 0:283ð¼ 0:08Þ for the OLS result to be overturned. The var-
iable with the largest impact on the coefficient of board composition is, again, firm size with a value of
0.05. The threshold value for role duality is 0.05. This value implies that,p for the OLS result to be over-
ffiffiffiffiffiffiffiffiffiffi
turned in this case, the relevant correlations have to be about 0:224ð¼ 0:05Þ. Since the dependent
variable is related negatively to duality, one of these two correlations would have been expected to
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx 17

Table 5
Impact of unmodeled variables.

Explanatory variables Pooled OLS Impact Impact on Impact on Impact on Impact on

model (1) thresholds X1 X2 X3 X4
Constant 0.97
Endogenous variables
Institutional ownership 0.07
X1 – directors’ ownership 1.20 0.14
X2 – board size 0.12 0.22
X3 – board composition 0.65 0.08
X4 – board chairperson’s role 0.32 0.05
duality
Control variables
Dividend yield 24.66 0.03 0.01 0.00 0.00
Firm size 0.77 0.10 0.20 0.05 0.02
Return on asset 0.02 0.01 0.01 0.01 0.00
Leverage 0.02 0.00 0.01 0.00 0.00

Notes: The number of firm-year observations (n) is 5489. For each of the endogenous independent variables, an impact statistic
is calculated (ITCV) indicating the minimum impact of an unobserved and unmodeled variable that is needed to render the
coefficient statistically insignificant. The ITCV is defined as the product of the correlation between the endogenous independent
variables (X1–X4) and the unmodeled variable and the correlation between the dependent variable (forward-looking disclosure)
and the control variables partialling out the effect of the other control variables). The sign of the impact measure indicates how
the inclusion of the control variable affects the coefficient for the endogenous independent variables (X1–X4) respectively. The
impact results also help in assessing the likelihood that such an unmodeled variable exists. The sign of the impact score
indicates how the inclusion of each control variable affects the coefficient of each endogenous independent variable. A positive
impact score indicates that inclusion of the control variables makes the coefficient on the endogenous independent variable
more positive or less negative. A negative impact score has the opposite effect.

be negative; otherwise, the unmodeled variable would have strengthened rather than weakened our
findings on role duality. Once again, firm size is the variable with the largest impact on the coefficient
of duality with a value of 0.02. To overturn these threshold values, therefore, we need an unmodeled
variable with a stronger impact than firm size. The threshold value for board size (BS) is 0.22 that sug-
gests the correlations between the dependent variable (DS) and the endogenous independent variable
pffiffiffiffiffiffiffiffiffiffi
(BS) and between DS and the unobserved and unmodeled variable need to be about 0:469ð¼ 0:22Þ for
the OLS result to be overturned. The variable with the largest impact on the coefficient of board size is
firm size measured by market capitalization with a value of 0.20 that suggests we require an unmod-
eled variable with a stronger impact than firm size to overturn the results for board size. In other
words, the unmodeled variable has to be more highly correlated than firm size with both the depen-
dent variable and board size.
Since, however, we have a comprehensive set of control variables, which are all associated with the
dependent variable at the 1% significance level, we can confidently rule out the suspected endogeneity
problem related to the independent variables of executive director ownership, board size, board com-
position, and role duality in our findings.

5.1.2. Missing values

In order to examine the extent to which excluding firms with missing data biases our sample, we
also use multiple-imputation estimates for models (1) and (2). Table 6 reports the results that show
the overall model is significant at the 1% level. All of the coefficients for corporate governance indica-
tors, except that related to aggregate institutional ownership, are statistically significant. These are
consistent with those reported in Table 4.

5.1.3. Audit committee characteristics

Although, for the reasons mentioned earlier, we are unable to test the relationship between the vol-
untary disclosure of forward-looking statements and the quality of external auditors, we control for
the audit committee characteristics in the regression models. The extended regression models can
be expressed as follows:
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
18 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

Table 6
Multi-imputation estimation to treat for missing data.

Explanatory variables Pooled OLS Robust regression Pooled OLS Robust regression
model (1) model (1) model (2) model (2)
Constant 0.87 0.05 0.55 0.42
IO (institutional ownership) 0.23 0.35 0.44 0.59
DO (directors’ ownership) 1.31 1.51 1.35 1.64
BS (board size) 0.12 0.09 0.12 0.09
BC (board composition) 0.71 0.67 0.98 0.96
Duality (board chairperson’s 0.37 0.26 0.36 0.24
role duality)
DY (dividend yield) 24.49 21.54 21.10 18.42
FS (ﬁrm size) 0.75 0.59 0.73 0.57
ROA (return on asset) 0.01 0.01 0.01 0.01
LEV (leverage) 0.02 0.01 0.02 0.01
Industry dummies
IND1 (basic materials) 0.07 0.03
IND2 (consumer goods) 0.01 0.03
IND3 (consumer services) 0.03 0.06
IND4 (health care) 0.63 0.96
IND5 (industrials) Reference sector Reference sector
IND6 (oil and gas) 1.26 1.31
IND7 (technology) 0.91 0.78
IND8 (telecommunications) 0.12 0.08
IND9 (utilities) 0.73 1.22
No. of observations 6488 6488 6488 6488
F-test 58.61a 48.48a 33.19a 28.08a

Notes: Dependent variable is DS – voluntary disclosure score.

0 1
IOi;t 0 1
B DO C 0 1 FSi;t
B i;t C ASi;t B C
B C B DY i;t C
DSi;t ¼ a00 þ a0l B C þ a0 B AC i;t CA þ a0m B C þ ei;t
B BSi;t C a@
@ ROAi;t A
ð5Þ
B BC C FExpi;t
@ i;t A
LEV i;t
Dualityi;t
0 1
IOi;t 0 1
B DO C 0 1 FSi;t
B i;t C ASi;t B C X 8
B C 0 B DY i;t C
0 0B
DSi;t ¼ b0 þ bl B BSi;t C þ b0 B
@ AC C
A þ b B C þ b0 INDn þ ei;t ð6Þ
C a i;t m
@ ROAi;t A n¼1 12þn
B BC C FExpi;t
@ i;t A
LEV i;t
Dualityi;t

where

b0 b0 b0 b0 b0
a0l ¼ ð a01 a02 a03 a04 a05 Þ; b0l ¼ ð 1 2 3 4 5 Þ; a0a ¼ ð a06 a07 a08 Þ;
b0a ¼ ð b06 b07 b08 Þ; a0m ¼ ð a09 a010 a011 a012 Þ; and b0m ¼ ð b09 b010 b011 b012 Þ

In the above regression models, we use three variables to capture the audit committee characteristics
in addition to the corporate governance measures and other firm characteristics. These comprise the
size of the audit committee (AS) calculated as the total number of audit committee members, the pro-
portion of non-executive directors on the audit committee (AC) and the proportion of audit committee
members who have relevant financial experience (FExp).
For the sample firms in the period of 2003–2007, we hand-collect the data on audit committee
characteristics from BoardEx. The sub-sample period for the tests on audit committee characteristics
starts in 2003 since the Combined Code introduced in June 2003 sets out the main responsibilities for
audit committees. These include raising concerns about financial reporting, monitoring and reviewing
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx 19

internal audits, and appointing external auditors (Financial Reporting Council, FRC, 2003). The Com-
bined Code states: ‘‘The board should establish an audit committee of at least three, or in the case
of smaller companies two, independent non-executive directors. The board should satisfy itself that
at least one member of the audit committee has recent and relevant ﬁnancial experience’’ (FRC,
2003: 16). The Code also requires companies listed on the LSE to comply, or explain in their annual
reports their non-compliance with the Code’s recommendations for audit committees. Since the
implementation of the Combined Code, the regulatory changes might have changed the characteristics
and functions of the audit committees of the UK-listed companies; and, therefore, we restrict the sam-
ple period to 2003–2007 for this aspect of the analysis.
Table 7 reports the regression results for the above models (5) and (6). Of the three explanatory
variables relating to audit committee characteristics, only the audit committee size in the random ef-
fects regression models has a negative association with the voluntary disclosure level. The results for
the corporate governance measures and other ﬁrm characteristics are generally consistent with those

Table 7
Audit committee characteristics and voluntary forward-looking statements in annual reports narratives.

Explanatory variables Pooled OLS Random-effect panel Pooled OLS Random-effect panel
model (5) regression model (5) model (6) regression model (6)
Constant 0.75** 3.22*** 0.53 3.38***
IO (institutional 0.51 0.74** 0.55 0.78**
ownership)
DO (director ownership) 1.89** 1.29** 1.79** 1.19**
BS (board size) 0.10** 0.17** 0.11*** 0.17***
BC (board composition) 1.56* 1.77** 1.55* 1.79***
Duality (board 0.37* 0.42* 0.32* 0.40*
chairperson’s role
duality)
AS (audit committee size) 0.03 0.12*** 0.01 0.12***
AC (audit committee 0.46 0.14 0.43 0.17
composition)
FExp (members with 0.82 0.16 0.69 0.14
ﬁnancial experience)
*** *** ***
DY (dividend yield) 21.04 18.21 19.58 17.70***
FS (ﬁrm size) 0.79*** 0.26*** 0.76*** 0.22***
ROA (return on asset) 0.01 0.03*** 0.01 0.03***
LEV (leverage) 0.04*** 0.04*** 0.04*** 0.04***
Industry dummies
IND1 (basic materials) 0.30 0.24
IND2 (consumer goods) 0.27 0.29
IND3 (consumer services) 0.38 0.14
IND4 (health care) 0.13 0.32
IND5 (industrials) Reference Reference sector
sector
IND6 (oil and gas) 1.19* 0.31
IND7 (technology) 1.85*** 1.87*
IND8 0.24 0.92
(telecommunications)
IND9 (utilities) 0.19 0.41
No. of observations 1508 1508 1508 1508
Wald v2 412.11b 421.47b
F-test 18.87a 12.83a
Adjusted R2 (%) 11.94 11.17 11.37 11.29

Dependent variable is DS – voluntary disclosure score;

*
Significance at the 10% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.
**
Significance at the 5% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.
***
Significance at the 1% level for the two-tailed t-test for the OLS and the z-test for the panel regressions.
a
Significance at 1% level for the F-test.
b
Significance at 1% level for the Wald v2 test.

reported in Tables 4 and 6. The only exception is that, in the random effects regression models, aggre-
gate institutional ownership becomes positively associated with the voluntary disclosure of forward-
looking statements. This association indicates that, with the existence of an audit committee on
boards, institutional investors may have some impact on the voluntary disclosure of forward-looking
information.

5.2. The value relevance of forward-looking statements

Table 8 contains the regression results for the tests on the value relevance of forward-looking state-
ments. The ﬁrst column reports the panel regression for model (4) in which we include the
Table 8
The value relevance of governance-driven forward-looking statements.

Explanatory variables Expected sign Random-effect panel regression

Model (4)
Constant 0.19 0.05 0.20
Xt + 0.32*** 0.15*** 0.27**
Xt+1,t+3 + 0.27*** 0.09*** 0.26***
Rt+1,t+3 0.14*** 0.12*** 0.14***
EPt1 + 0.51 0.56 0.47
AG 0.00 0.00 0.00
GovDS 0.57* 0.61**
GovDS Xt + 0.03 0.02
GovDS Xt+1,t+3 + 0.03** 0.03**
Non-GovDS ? 0.08 0.12
Non-GovDS Xt ? 0.02* 0.02*
Non-GovDS Xt+1,t+3 ? 0.00 0.00
Industry dummies
IND1 (basic materials) 0.08 0.03 0.08
IND2 (consumer goods) 0.20** 0.15 0.20*
IND3 (consumer services) 0.01 0.01 0.02
IND4 (health care) 0.03 0.01 0.05
IND5 (industrials) Reference sector Reference sector Reference sector
IND6 (oil and gas) 0.23 0.28 0.23
IND7 (technology) 0.47*** 0.56*** 0.47***
IND8 (telecommunications) 0.25* 0.17 0.26
IND9 (utilities) 0.09 0.01 0.12
No. of observations 4579 4579 4579
Wald v2 161.39b 141.56 b
167.36b
Adjusted R2 (%) 8.30 7.26 8.55

Dependent variable: Ri,t – share returns from 8 months before the current financial year-end t to 4 months after the current
financial year-end t.
Explanatory variables: Xt – current earnings growth measured as the annual change in I/B/E/S reported actual EPS for year t
scaled by the I/B/E/S reported actual EPS for year t 1.
Xt+1,t+3 – future earnings growth measured as the sum of the earnings growths from year t + 1 to year t + 3.
Rt+1,t+3 – the buy-and-hold returns from 8 months before the financial year-end t + 1 to 4 months after the financial year-end
t + 3.
EPt1 – defined as I/B/E/S reported actual earnings per share for year t 1 divided over beginning of year share price.
AGt – Asset growth measured as the growth rate of the total book value of assets for the year t.
GovDS – governance-driven voluntary disclosure score for forward-looking statements generated as the fitted values of dis-
closure score (DS) from regression model (2).
GovDS Xt – the interaction term of GovDS and current earnings growth in year t.
GovDS Xt+1,t+3 – the interaction term of GovDS and future earnings growth in from year t + 1 to year t + 3.
Non-GovDS – voluntary disclosure score for forward-looking statements unrelated to corporate governance which is generated
as the residuals of regression model (2).
Non-GovDS Xt – the interaction term of Non-GovDS and current earnings growth in year t.
Non-GovDS Xt+1,t+3 – the interaction term of Non-GovDS and future earnings growth in from year t + 1 to year t + 3.
*
Significance at the 10% level for the two-tailed t-test.
**
Significance at the 5% level for the two-tailed t-test.
***
Significance at the 1% level for the two-tailed t-test.
b
Significance at the 1% level for the Wald v2 test.

governance-driven forward-looking statements and the interactive terms with future earnings
growths. In the second column we instead analyze the effects of the forward-looking statements that
are not driven by governance and in the last column we consider the impact of both governance-dri-
ven and non-governance-driven forward-looking statements on share price anticipation of earnings.
As evidenced by Lev (1989), Collins et al. (1994), and Hussainey and Walker (2009), the coefficients
of current earnings growth (Xt), future earnings growth (Xt+1,t+3) and prior earnings yield (EPt1) are all
positive at the 1% significance level. The coefficient of the future stock returns (Rt+1,t+3) is significantly
negative as expected. The coefficient of AGt is also negative but statistically insignificant. The coeffi-
cient of GovDS is negative at the 10% significance level in model (4) indicating the governance-driven
forward-looking statements reduce information risk and hence lower equity cost (i.e., share return).
The coefficients of interest are GovDS Xt+1,t+3. In support of Hypothesis 6, the coefficient Gov-
DS Xt+1,t+3 is positive at the 5% significance level. Our findings suggest that the governance-driven
voluntary disclosures of forward-looking statements enhance the share price anticipation of future
earnings. These findings, therefore, support Hypothesis 6.
In the second column of Table 8, we analyze the effects of Non-GovDS, that is, the voluntary disclo-
sure of forward-looking statements that are not driven by corporate governance. The results show that
these statements have no significant impact on the share return-earnings association because the
coefficient Non-GovDS Xt+1,t+3 is insignificant. Forward-looking statements that are not driven by
corporate governance appear to reduce the share price anticipation of future earnings given that
the coefficient Non-GovDS Xt is significant at the 10% level. The last column in Table 8 reports the
regression results for model (4) including GovDS, Non-GovDS and their interaction terms for the
current and future earnings growths. The coefficient of the interaction term GovDS Xt+1,t+3 remains
significant at the 5% level, although the value of the coefficient is around 0.03 indicating that the
forward-looking statements that are driven by corporate governance have somewhat of a positive
impact on the share price anticipation of future earnings.

6. Conclusion

In this paper, we examine the associations between corporate governance mechanisms and volun-
tary forward-looking statements. We further examine whether voluntary forward-looking statements
that are driven by governance are informative about future earnings, by using a large sample of listed
firms in the unique setting of the regulatory environment in the UK. To the best of our knowledge, this
is the first paper to examine the impact of a comprehensive set of corporate governance factors on for-
ward-looking statements which focuses on a large sample of UK firms. We use a computerized content
analysis to measure disclosure, and we hand-collect corporate governance information for a sample of
5489 firm-year observations.
We find, in the UK context, that board size and board composition (the proportion of non-executive
directors) are related positively to the level of voluntary earnings disclosures. Director ownership and
role duality have a negative relationship to the level of voluntary forward-looking statements. Fur-
thermore, the size of the audit committee has a substitute relationship with the volume of voluntary
forward-looking statements. Firms’ characteristics such as dividend propensity, firm size, profitability,
leverage and industry type affect the volume of forward-looking statements disclosed in the narratives
of annual reports. Furthermore, we find that the voluntary disclosure of forward-looking statements
related to corporate governance helps investors to better anticipate future earnings. The forward-look-
ing statements unrelated to corporate governance, however, have no impact on the share price antic-
ipation of future earnings.
Nevertheless, this paper contributes to the literature by offering new empirical evidence that effec-
tive corporate governance mechanisms are correlated significantly with the levels of forward-looking
statements in the narrative sections of annual reports. The US studies that focus on managements’
earnings forecasts report no evidence on the effect of board size. No study has explicitly tested the ef-
fect of role duality or the impact of director ownership on the voluntary disclosure of forward-looking
information. In the narratives of UK annual reports, the level of forward-looking statements is higher
in firms with larger boards and more non-executive directors but lower in firms with higher director
Please cite this article in press as: Wang, M., Hussainey, K. Voluntary forward-looking statements driven by cor-
porate governance and their value relevance. J. Account. Public Policy (2013), http://dx.doi.org/10.1016/
j.jaccpubpol.2013.02.009
22 M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

ownership and role duality. These findings provide an empirical rationale for the current debate on the
potential benefits of improving the quality of corporate governance in the UK. UK corporate gover-
nance guidance encourages the use of non-executive directors and the separation of the CEO and
the chairperson. The insignificant evidence on the independence and the financial expertise of audit
committee members, however, shows that, although recommended in the UK corporate governance
code, these audit committee characteristics are ineffective in improving narrative reporting in the UK.
Finally, our findings indicate that institutional setting at the national level should be considered in
further research on forward-looking statements. The set of effective corporate governance mecha-
nisms, associated with less information asymmetry between management and shareholders, appears
to vary even between Anglo-Saxon countries. For example, in the US, institutional ownership is asso-
ciated with greater forecast occurrence and precision (Karamanou and Vafeas, 2005) but this has no
significant relationship with the level of voluntary forward-looking statements in the UK.
We are aware that our empirical findings, despite their robustness, are subject to limitations
regarding our measure of the disclosure scores. For example, our measure of the disclosure scores
is not able to consider the quality of the information in forward-looking statements. Users of corporate
narrative reporting may be more interested not only in disclosure quantity but also in disclosure qual-
ity. Further research could benefit from developing a quantitative measure for the disclosure quality of
narrative reporting which is considerably difficult for studies with large-scale samples.

Acknowledgements

We would like to thank the anonymous referee for insightful comments on the previous versions of
this paper, Ian Fraser, Colin Clubb, Richard Laughlin, the editor of JAPP (Martin P. Loeb) for their helpful
comments. The paper has also beneﬁted from comments by participants at the 2012 Journal of
Accounting and Public Policy Conference (LSE). Dr. Khaled Hussainey gratefully acknowledges the ﬁnan-
cial support from the British Academy (Grant Reference No: SG091190).

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Governance and Forward-Looking Disclosures

Uploaded by

Governance and Forward-Looking Disclosures

Uploaded by

J. Account.

Public Policy xxx (2013) xxx–xxx

Contents lists available at SciVerse ScienceDirect

J. Account. Public Policy

Voluntary forward-looking statements driven by

This paper examines the impact of corporate governance on the

2. The literature and hypotheses

2.1. Voluntary disclosures and corporate governance

2.2. Voluntary disclosure and ﬁrm characteristics

2.3. Value relevance of voluntary forward-looking statements

H6. Holding the number of forward-looking statements constant, forward-looking statements of

3. Measuring the levels of forward-looking statements

4. Research design and sample

4.1. Regression models

DSi;t ¼ a0 þ a1 IOi;t þ a2 DOi;t þ a3 BSi;t þ a4 BC i;t þ a5 Dualityi;t þ a6 DY i;t þ a7 FSi;t þ a8 ROAi;t

DSi;t ¼ b0 þ b1 IOi;t þ b2 DOi;t þ b3 BSi;t þ b4 BC i;t þ b5 Dualityi;t þ b6 DY i;t þ b7 FSi;t þ b8 ROAi;t

4.2. Sample selection and data collection

4.3. Descriptive analysis

Mean Median St. dev. Min Max

M. Wang, K. Hussainey / J. Account. Public Policy xxx (2013) xxx–xxx

5.1. Determinants of earnings forecast disclosure

Dependent variable is DS – voluntary disclosure score.

Explanatory variables Pooled OLS Impact Impact on Impact on Impact on Impact on

5.1.2. Missing values

5.1.3. Audit committee characteristics

Notes: Dependent variable is DS – voluntary disclosure score.

Dependent variable is DS – voluntary disclosure score;

5.2. The value relevance of forward-looking statements

Explanatory variables Expected sign Random-effect panel regression

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