Economic Consequences of Key Performance Indicators' Disclosure Quality

Abstract

Starting from 2006, UK listed companies are required to analyse their performance by using Key Performance Indicators (KPIs) in specific sections of their annual reports and the UK Accounting Standard Board (ASB) provides companies with guidelines for the best practice regarding KPI disclosure. Motivated by the possible effects of the KPI disclosure quality, we examine their potential economic consequences for a sample of UK listed firms for the period 2006 to 2010. Our sample consists of 448 firm-year observations. We first develop a measure for the quality of the KPI disclosure based on the ASB's guidelines. We then test the economic consequences of financial and nonfinancial KPIs disclosure quality both separately and combined into one variable. Our findings, after conducting various sensitivity tests, suggest that only the disclosure quality of financial KPIs matters. We find a significantly negative (weakly positive) relationship between disclosure quality of financial KPIs and the implied cost of capital (firm value). These results inform regulatory bodies as well as the academic literature about the potential economic consequences of this type of disclosure.

The impact of environmental, social, and governance disclosure on firm value: The role of CEO power

“…Since ESG information is a subset of non-financial reporting and does not follow a standardised format as financial information does, ESG disclosure tends to vary significantly (Elzahar, Hussainey, Mazzi & Tsalavoutas, 2015). Along these lines, earlier empirical research documents that ESG disclosure differs across companies and countries (e.g., Reverte, 2009; due to the information content and format being up to management discretion.…”

The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance

“…The empirical literature examining the link between corporate disclosure and firm performance offers mixed results. On one hand, several studies find a positive association between these two variables (e.g., Waddock and Graves 1997;Baek, Kang and Park 2004;Chi 2009;Cheung, Jiang and Tan 2010;Sheu et al 2010;Jiao 2011;Elzahar et al 2015;Plumlee et al. 2015).…”

“…Extensive literature examines the association between corporate disclosures and firm performance. On one hand, some studies conclude that disclosure improves firm performance (e.g., Plumlee, Brown, Hayes and Marshall 2015;Elzahar, Hussainey, Mazzi and Tsalavoutas 2015). On the other hand, other studies find no association between disclosure and performance (e.g., Hassan, Romilly, Giorgioni and Power 2009;Hassanien and Hussainey 2015).…”

Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector

“…According to the United Nations Sustainable Stock Exchange, all listed firms are expected to disclose their impact from environmental, social and governance (ESG) practice by 2030 at the latest (Sustainable Stock Exchanges, 2015). Since ESG information is non-financial disclosure and does not pursue a standard format like the financial disclosure, ESG disclosure tends to vary significantly (Elzahar et al , 2015).…”