The quality and determinants ofvoluntary disclosures in annualreports of Shari’ah compliant

companies in MalaysiaAbdifatah Ahmed Haji

Scicom (MSC) Berhad, Kuala Lumpur, Malaysia, and

Nazli Anum Mohd GhazaliInternational Islamic University Malaysia, Kuala Lumpur, Malaysia

Abstract

Purpose – The aim of this study is to investigate the quality of voluntary disclosure practices byShari’ah compliant companies (ShCCs) in Malaysia. The study also examines factors influencing thequality of voluntary disclosures.

Design/methodology/approach – Using a weighted disclosure analyses approach, a self-constructeddisclosure checklist was developed to measure the quality of corporate voluntary disclosures (CVDs).The study examines the annual reports of a sample of 76 ShCCs selected from various sectors listed onBursa Malaysia in the year 2009.

Findings – The results indicate that the quality of voluntary disclosures by ShCCs is in overall lowconsistent with prior studies that gauged the quality of CVDs in Malaysia. The multivariate regressionanalyses reveal that board size is significant in explaining the quality of CVDs at the 5 percentsignificance levels. Company size and leverage as control variables are also significant at the 1 and10 percent significance levels in determining the quality of CVDs by ShCCs. The reduced regressionmodel further indicates that government ownership is highly significant at the 1 percent significancelevel in explaining the quality of CVD by ShCCs while leverage is significant at the 5 percent levels.

Practical implications – The low level of corporate disclosures by the ShCCs in Malaysia suggeststhat these companies require awareness on matters relating to the concepts of accountability and fulldisclosures in becoming accountable to the community. Hence, the Shari’ah Advisory Council of theSecurities Commission Malaysia should provide awareness on matters relating to accountability andtransparency which could lead to socio economic justice. The commission may also introduce adetailed reporting guideline for the companies to follow.

Originality/value – This study provides useful insights on the disclosure quality of ShCCs inMalaysia which remained largely unexplored. The study also represents the first empirical investigationtoward the association between voluntary disclosures by ShCCs and corporate governance attributesin the Malaysian context.

Keywords Corporate voluntary disclosures, Shari’ah compliant companies, Corporate governance,Government ownership, Annual reports, Malaysia

Paper type Research paper

1. IntroductionThere has been an increasing body of literature on corporate voluntary disclosure(CVD) practices worldwide (Chau and Gray, 2002; Eng and Mak, 2003; Prencipe, 2004;Smith et al., 2005; Boesso and Kumar, 2007; Mohd Ghazali, 2007). The studiesfound that voluntary disclosure is influenced by a number of factors includingownership structure (Chau and Gray, 2002; Eng and Mak, 2003; Mohd Ghazali, 2007),

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HumanomicsVol. 29 No. 1, 2013pp. 24-42q Emerald Group Publishing Limited0828-8666DOI 10.1108/08288661311299303

corporate governance (CG) attributes (Ho and Wong, 2001; Cheng and Courtenay, 2006),company characteristics (Cooke, 1989) as well as cultural values (Haniffa and Cooke,2005). Many others linked voluntary disclosure to country clusters (Smith et al., 2005).Yet others remarked religious beliefs also have an influence in the extent of CVDs(Baydoun and Willet, 2000).

As far as Islam as a religion is concerned, it is considered as a significant force ininfluencing accounting matters (Sulaiman, 2001). More specifically, it is ideallycontended that Islam backs the idea of full disclosure as a tool of social accountabilityand corporate transparency (Baydoun and Willet, 2000; Lewis, 2001). Companies thatoperate within the bounds of Islamic principles are expected to be more transparent inreporting their corporate activities. However, prior evidence indicates that IslamicFinancial Institutions (IFIs) fell short significantly in relations to expectations that theyshould be more transparent (Maali et al., 2006; Haniffa and Hudaib, 2007; Hassan andHarahap, 2010). Similarly, Shari’ah compliant companies (ShCCs) were also found toprovide a low level of voluntary disclosures (Ousama and Fatima, 2010b).

This study examines the quality of CVDs by ShCCs listed on Bursa Malaysia (BM)main market for the year 2009. The core activities of these companies are considered tobe in line with the Shari’ah principles. Prior studies developed voluntary disclosureindices specifically designed for such companies and found low disclosures even forsuch items (Maali et al., 2006; Ousama and Fatima, 2010b). This study, however,develops a voluntary disclosure checklist covering financial, strategic, and corporatesocial responsibility (CSR) items in order to look at whether the ShCCs provideextensive voluntary disclosures in their corporate annual reports. It is expected that thevoluntary disclosures of ShCCs would be high in comparison to prior studies thatexamined non-ShCCs. It is also anticipated such companies would provide extensivevoluntary disclosures as the study examines the disclosure practices following therecent global financial crisis, when the community needed corporate support at themost. Haniffa and Cooke (2005) previously observed that companies dominated byMalay shareholders (mainly Muslims) disclosed more CVDs following the 1997 EastAsian financial crisis. The present study also investigates factors influencing thequality of CVDs by ShCCs such as CG attributes and ownership structure patterns.

The results of the study show that the quality of CVDs is in overall low. However,disclosure level found in the present study is much higher than the findings of priorcomparable studies that examined the disclosure practices of ShCCs (Ousama andFatima, 2010b). The regression results reveal that the quality of CVDs is significantlyexplained by board size and company size. Reduced regression model (i.e. withoutcontrolling the size effect) indicates government and leverage in addition to board sizeare all positive and significant determinants of the quality of the voluntary disclosurepractices of ShCCs. Other variables were found to be insignificant in explaining thequality of CVDs by ShCC in Malaysia.

The contributions of the current study to the existing body of literature are two-fold.First, the relationship between CG attributes and voluntary disclosures by ShCCsremained largely unexplored. Hence, the current study strives to address that paucityin the literature for it examines the association between voluntary disclosures and CGattributes of ShCCs in Malaysia. Second, in departure from most prior studies whichfocused on the extent of disclosures by ShCCs, the present study examines the qualityof CVDs by ShCCs. The detailed scoring approach adopted in this study to measure the

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quality of the disclosures would serve as a benchmark for future research with focus onShari’ah complaint companies’ disclosure practices.

The reminder of the paper is organized as follows. The next section discusses CVDliterature in general and particularly studies that looked at the disclosure practicesfrom an Islamic perspective. Section 3 develops the theoretical framework andhypotheses of the study whilst Section 4 presents the research methodology of thestudy. Section 5 provides research analyses and findings of the study. Finally, Section 6concludes the study.

2. Background and literature reviewCompanies that are classified under the Shari’ah compliant category in Malaysiaincreased rapidly since the inception of this classification in 1999 in the Malaysianenvironment (Ousama and Fatima, 2010b). As of December 2010, 88 percent of thesecurities listed on BM are Shari’ah-compliant and represent around two-thirds ofMalaysia’s market capitalization (BM, 2011). This could be due to a growing religiouscommitment over the last decades which have led to more Muslim nations seeking tomanage their economies in line with the teachings of Islam (Hassan, 1998; Hassan andAbdul latiff, 2009).

ShCCs in Malaysia are approved by the Shari’ah Advisory Council (SAC) of theSecurities Commission (SC) (2010) Malaysia. The SAC and SC work together inclassifying the companies under the Shari’ah compliant category of BM listingcategories. In doing so, the two bodies gather information on the companies from varioussources, such as corporate annual reports, undertake surveys and through inquiriesmade to the respective company’s management (SC, 2010). The SC, however, monitorsthe activities of all companies listed on BM to determine their status from the Shari’ahperspective. Companies are classified as non-Shari’ah compliant if they involve activitiesthat are against the core principles of Shari’ah law such as, riba (interest); gambling andgaming; manufacture or sale of non-halal products; among other numerous activitiesdeemed non-permissible according to Shari’ah law.

Companies that refrain from involving activities such as gambling and alcoholicbusiness matters in order to follow/comply the Islamic Shari’ah principles may well beexpected to also adhere other values inherent to Islamic values such as accountabilityand transparency as Islam requires total commitment of Shari’ah in all aspects of life.Baydoun and Willet (2000) emphasized that full disclosure of information is requiredwhich reflects what ought to be disclosed in order to serve toward the objective of socialaccountability that would ultimately lead to socio-economic justice. The full disclosureconcept implies that ShCCs to disclose all relevant and useful information to theirstakeholders and not just information that is “good news” or aimed to build public image(Maali et al., 2006). Such information would assist the stakeholders of the entity inmaking economic as well as religious decisions (Haniffa and Hudaib, 2002). This wouldalso lead to accountability to Allah (s.w.t) and to the community within which thecompany part of.

Western firm disclosure practices are usually allied to a rational and a morematerialistic rationalism and because of this, little information is disclosed (Baydounand Willet, 2000). Verrecchia (1983) argues that in addition to preparation andcompetitive costs, managers tend to reduce disclosure level (especially when there is“bad news”) because managers hope that the information disclosed will inversely

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damage the company (self-interest). In this line of thinking, Baydoun and Willet (2000)state that Western disclosure practices consider the self-interest of the preparerregardless of the society’s needs. In contrast, Islam takes a broader view and the focusis on Unity of God (tawhid ), the community, and also the environment that demand aform of social accountability as opposed to the personal accountability found inWestern societies (Lewis, 2001). However, a survey undertaken by Sulaiman (2001)surprisingly indicates that the information needs and the information content betweenMuslims and non-Muslims are not significantly different. Prior studies also indicatedthat the level of voluntary disclosures provided by Islamic institutions is nosignificantly different than the information provided by conventional institutions or insome cases, the Islamic entities disclosed poorly compared to conventional institutions(Hassan and Christopher, 2005).

Ousama and Fatima (2010b) examined the voluntary disclosure practices of the top50 ShCCs in Malaysia in the year 2003. The results of the study indicated that the levelof voluntary disclosures provided by the companies was relatively low. As the studyexamined a year that could be considered close to the establishment of the Shari’ahindex in Malaysia, there might be a chance that the companies were not inducedenough to the Islamic values.

The present study examines the voluntary disclosure practices in the year 2009,almost a decade later of the establishment of the Shari’ah index in Malaysia. The year2009 is also a year after the companies had seen the implications of the recent globalfinancial turmoil. It is, thus, anticipated that the ShCCs would provide extensivedisclosures in an endeavor to maintain their corporate image. Haniffa and Cooke (2005)earlier documented the presence of corporate legitimacy in the Malaysian environmentand particularly companies with majority Muslim shareholders[1], whereby thesecompanies increased significantly their social disclosures following the 1997 East Asianfinancial turmoil in an endeavor to avert the possibility of “legitimacy gap”. This gaparises when there is discrepancy between organizational practices and social values(Newson and Deegan, 2002). Hence, the present study expects that the CVDs provided inthe annual reports of ShCCs would increase relative to prior studies that examined thedisclosures of similar firms.

3. Hypotheses development3.1 CG and voluntary disclosureA number of CG variables have been widely associated to corporate disclosure practicesin the empirical disclosure literature. However, no prior study specifically sampledShCCs in examining the influence of CG variables to the voluntary disclosure practices.Building on this, this study examines two variables of CG, namely, independentnon-executive directors (INDs) and board size in relation to corporate disclosures.

Independent non-executive directors and voluntary disclosures. Independentnon-executive directors form portion of the board of directors in moderncorporations. Conventional theoretical views disagree on the percentage of outsidedirectors boards should have. For instance, the agency theory prefers more INDs in theboards because they have the ability to monitor and control the actions of the executivedirectors ( Jensen and Meckling, 1976; Fama and Jensen, 1983; Mak, 1996). Fama andJensen (1983) consider INDs as decision experts and could act as a positive influenceover decisions made by the directors (Pearce and Zahra, 1991). Haniffa and Cooke (2002)

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argue that INDs might be associated with more voluntary disclosures if they “actuallyperform their monitoring role” rather than their “perceived monitoring” role.

ShCCs are expected to host INDs with Shari’ah background imbued with theIslamic values of accountability and full disclosure concepts. Hence, INDs in ShCCswould ideally reflect a more corporate transparency as a tool of accountability.

In Malaysia where there is different religious and cultural values, the outsidedirectors’ independency has been questioned over the years (Mohd Ghazali andWeetman, 2006; Meng, 2009). The selection of INDs in Malaysian listed companies hasfrequently raised questions over whether their appointment is done in “spirit” ratherthan “form” (Meng, 2009).

Several prior studies examined the association between INDs and CVDs ofnon-ShCCs (Adams and Hossain, 1998; Eng and Mak, 2003; Haniffa and Cooke, 2002,2005; Mohd Ghazali and Weetman, 2006; Said et al., 2009; Mohd Ghazali, 2010). Forinstance, Eng and Mak (2003) and Haniffa and Cooke (2005) found significant negativeassociation between INDs and the extent of CVDs. Contrary to these findings, Adamsand Hossain (1998) found significant positive relationship between INDs and CVDs.However, Haniffa and Cooke (2002) and Mohd Ghazali and Weetman (2006) foundinsignificant relation between INDs and the extent of CVDs.

Due to absence of a prior study that specifically examined the association betweenINDs and the quality of CVD of ShCCs coupled with the mixed findings of priorstudies, it is deemed difficult to form an expectation in formulating a hypothesis.Therefore, the following is the hypothesis developed in the null form:

H1. There is no significant relationship between proportion of independentnon-executive directors and the quality of voluntary disclosures by ShCCs.

Board size and voluntary disclosure. Several arguments arise in the literature as towhether larger boards are beneficial in corporate performance and transparency. Forone, larger numbers of directors offer more experience, knowledge and may putforward different ideas to the discussion (Mohd Ghazali, 2010). Large board size mightalso be associated with increased monitoring capacity and could share a variety ofexperiences among the board members. On the other hand, other researchers contendlarger board size is ineffective in coordination; communication and quick decisionmaking due to their non-cohesiveness in decision making (Lipton and Lorsch, 1992;Jensen, 1993; John and Senbet, 1998).

Jensen (1993), one of the earlier advocates of smaller board size, believes thatmaintaining board size small not only improves company performance but also is morelikely to function effectively. To Jensen, boards are oversized when they get beyondseven or eight directors. Mak and Kusnadi (2005) support this rationale empirically andfound that negative relationship exists between board size and firm value in examininga sample of Malaysian and Singaporean firms.

From an Islamic perspective, the board of directors of ShCCs may well be expectedto contain directors with appropriate knowledge not only in managerial aspects butalso in the Islamic teachings of accountability and transparency. This combination ofknowledge could reflect more holistic directors who would in turn strive to encouragethe companies to be more transparent and thus become accountable to the community.

Again no prior study had been conducted to link board size and voluntarydisclosure of ShCCs. However, other studies found inconsistent results as to how board

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size explains the extent of CVDs. Cheng and Courtenay (2006) and Said et al. (2009)found insignificant relationship between board size and the level of voluntarydisclosure in Singapore. However, Mohd Ghazali (2010) documented a significantpositive relationship between board size and the extent of CVDs of Malaysian firms.

The absence of a prior study that examined the association of board size and thedisclosures of ShCCs and the mixed results of prior studies that sampled non-ShCCsmotivates this study. Thus, the following is the hypothesis developed in the null form:

H2. There is no significant relationship between board size and the quality ofvoluntary disclosure.

3.2 Ownership structure and voluntary disclosureOwnership concentration. The main stream literature, rooted from the agency theory,suggests that there is a positive association between outside ownership and agencyproblem (Jensen and Meckling, 1976). In similar terms, Fama and Jensen (1983) arguedthat companies with wider ownership structure deal with greater agent-principalproblems. To address such problems in companies with wider ownership structure,shareholders of such companies demand high levels of information disclosed in thecorporate annual reports. The case might not be so in highly concentrated companieswhere few individuals control the firm who often times obtain the information ininformal channels. Mohd Ghazali and Weetman (2006), however, claim that highlyconcentrated companies may also be forced to provide additional disclosures shouldthere be a conflict of interest between the controlling groups and the minority ones.However, it is generally contended the absence of large outside ownership leads to lowerlevel of CVDs (Depoers, 2000).

From an Islamic standpoint, highly concentrated ShCCs are anticipated to discloserelevant and reliable information to not only their shareholders but also to thestakeholders or the community at large as part of their accountability and responsibility.Hence, whether the company is highly concentrated or publically held appears to notundermine the disclosure level of ShCCs as accountability and full disclosure conceptsare not meant to only companies with wider ownership structure.

A number of previous studies were undertaken to link between ownershipconcentration and CVDs (Hossain et al., 1994; Depoers, 2000; Haniffa and Cooke, 2002;Mohd Ghazali and Weetman, 2006; Ousama and Fatima, 2010a). Highly concentratedShCCs in Malaysia provided less voluntary disclosures as documented by Ousama andFatima (2010a). Similarly, Hossain et al. (1994) reported a significant negative associationbetween ownership concentration and CVDs. Contrary to this finding, Haniffa and Cooke(2002) found a positive relationship between these two variables in the same Malaysiancontext. However, Mohd Ghazali and Weetman (2006) found insignificant correlationbetween the two variables in Malaysia. Consistent with prior studies in Malaysia(Hossain et al., 1994; Haniffa and Cooke, 2002; Mohd Ghazali and Weetman, 2006), thepresent study measures ownership concentration as the ten largest shareholders.

The paucity of prior studies that linked the disclosure level of ShCCs and ownershipconcentration and the mixed findings on the relationship between ownershipconcentration and voluntary disclosure of prior studies motivate this study to furtherinvestigate the association between these two variables. The following null hypothesisis formulated:

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H3. There is no significant relationship between ownership concentration and thequality of voluntary disclosure.

Director ownership. Director ownership refers to the percentage of shares owned byexecutive directors (Eng and Mak, 2003). The conventional literature suggests thatincreased director ownership introduces lower conflict of interest ( Jensen andMeckling, 1976). This argument is based on the notion that owner-managed companiesmay intrinsically tend to maximize corporate performance. On the other hand,companies where director ownership is minimal face greater agency problems, hence,introducing the need to incur monitoring costs. The literature suggests that thesemonitoring costs could be reduced through additional voluntary disclosures.Voluntary disclosure can be a substitute for monitoring costs as outsiders may seewhat is happening inside the firm (Eng and Mak, 2003).

From an Islamic standpoint, owners are only trustees of their belongings and thereis no absolute ownership attached to their wealth. Allah (the almighty) has absoluteownership and the people are only stewards of the wealth. Contrary to the conventionalagency theory thinking that managers would reduce the disclosure in case they ownsubstantial part of the company seems to have little support from the Islamicperspective. Irrespective of the extent of the managers’ ownership, full disclosure as atool of accountability is encouraged in the Islamic values.

A number of prior empirical studies investigated the association between directorownership and voluntary disclosures (Eng and Mak, 2003; Mohd Ghazali andWeetman, 2006). Consistent with the agency theory rationale, Mohd Ghazali andWeetman (2006) found significant negative association between director ownershipand CVDs in Malaysia. However, Eng and Mak (2003) documented significant positiverelationship between director ownership and CVDs in Singapore. None of the priorstudies regressed director ownership against the disclosures of ShCCs.

Hence, the absence of prior empirical study that examined the association betweendisclosures of ShCCs and director ownership makes it difficult to form a sign ofexpectation for the association between these two variables. Hence, the following is thehypothesis developed in the null form:

H4. There is no significant relationship between director ownership and thequality of voluntary disclosure.

Government ownership. Of late, a number of prior studies documented a significantassociation between Government ownership and corporate disclosures (Eng and Mak,2003; Said et al., 2009). The government of Malaysia possesses a significant portion ofcorporate ownership (Claessens et al., 2000; Mohd Ghazali, 2010). The literature offerstwo theoretical arguments in relation to the association between governmentownership and corporate disclosure level. On the one hand, companies wheregovernmental bodies hold substantial portion of their shares may be forced to provideadditional information in the annual reports because the government is accountable tothe public at large (Mohd Ghazali and Weetman, 2006). On the other hand, governmentlinked companies (GLCs) might not be motivated to disclose more as they obtainfinance from the government itself and are, therefore, less in need of external financing,thus, leading lower disclosures.

In the present study, it is expected that ShCCs in which governmental institutionshold ownership may provide additional disclosures for legitimacy purposes as the

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current examines a period of a financial crisis. The governmental bodies may alsoencourage ShCCs to provide more disclosures in order to act as a “role model” for otherMalaysian companies and promote the Malaysian Government’s transparencyinitiatives (i.e. Malaysian Prime Minister’s CSR award).

This expectation is supported by prior empirical studies that documented significantpositive association between government ownership and voluntary disclosures(Mohd Ghazali, 2007; Said et al., 2009). However, Mohd Ghazali and Weetman (2006)found insignificant association between government ownership and CVDs.

As noted above, the present study expects that ShCCs in which the governmentowns large portion of their shares will provide more CVDs. The following is thehypothesis formulated in the null form:

H5. There is no significant relationship between government ownership and thequality of voluntary disclosure.

3.3 Company characteristics (control variables)The present study, in addition to the governance and ownership structure variables,controls three variables namely, company size, profitability and leverage consistentwith prior studies (Camfferman and Cooke, 2002; Prencipe, 2004; Mohd Ghazali andWeetman, 2006; Said et al., 2009; Ousama and Fatima, 2010a). Several prior studiesfound significant positive association between CVDs and firm size (Said et al., 2009).Studies that specifically sampled ShCCs also found significant positive associationbetween firm size and CVDs (Ousama and Fatima, 2010a). However, prior studiesdocumented mixed findings on the association between profitability and CVDs(Camfferman and Cooke, 2002; Haniffa and Cooke, 2005). Same is also true for thecorrelation between leverage and CVDs (Eng and Mak, 2003; Prencipe, 2004).

4. Research method4.1 Sample selection and data sourcesThe sample of this study represents non-financial ShCCs listed on the Main Market,BM for the year 2009, ten years after the Shari’ah index was established. Companieswere selected using systematic stratified random sampling whereby the population isgrouped into non-overlapping subpopulations called strata (Black, 2004). According toBlack (2004), stratified random sampling has the potential for reducing the samplingerror. This sampling procedure also ensures a representative sample from all industrialsectors of the targeted population.

The year 2009 is examined in the current study as it is the most recent year at thestart of this study. As of July 2, 2010, the number of companies listed on the MainMarket of BM was 816 companies. BM classified these companies into nine sectors,namely, plantation, mining, property, consumer products, industrial products,construction, trading/services, technology, and finance. Consistent with prior studiesin the area of voluntary disclosure, companies in the finance sector (38 companies) wereexcluded before the sample was drawn from the other eight sectors with a remainingtotal population of 778 companies (i.e. 816-38 ¼ 778), for they (finance companies) aresubject to different regulations.

Using the stratified random sampling, the initial sample consisted of 100 companiesfrom eight (8) sectors of the BM industrial classification (Table I). After taking intoconsideration some missing data, the final sample of the study consists of

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76 ShCCs listed on BM in the year 2009. Table I below provides summary of the sectors,targeted population, final sample, and percentage of sector representation.The table also shows that the final sample represents at least 8 percent[2] of eachsector and 10 percent of the overall population.

4.2 The voluntary disclosure checklistThe current study uses a self-constructed disclosure checklist in measuring thequality of CVDs provided by the ShCCs. The checklist contains 48 voluntarydisclosures items which fall under three categories namely strategic (12 items),financial (13 items), and CSR (23 items). This classification of the checklist is consistentwith prior CVD studies in Malaysia (Mohd Ghazali and Weetman, 2006). Several stepswere taken in developing the disclosure checklist. First, prior CVD studies werereferred to in constructing the checklist (Hossain et al., 1994; Gray et al., 1995; Hackstonand Milne, 1996; Haniffa and Cooke, 2002; Mohd Ghazali and Weetman, 2006). Second,the annual reports of Malaysian firms especially those that won the “Most OutstandingAnnual Report Award” in the year 2009 were also read to draw some of the items in thecurrent study’s checklist. Finally, BM listing requirements were further referred to inan attempt to ensure that the checklist contains pure voluntary disclosure items.

Scoring the voluntary disclosure checklist. The level of CVDs is measured using theweighted method. This method assigns a weight to the single items in order to allowfor the different relevance of each of them (Prencipe, 2004). A number of prior studiesfollowed this line of thinking and assigned different values (weights) to the disclosurescompanies provide depending on how the information was disclosed (Al-Tuwaijri et al.,2004; Prencipe, 2004; Boesso and Kumar, 2007; Che Haat et al., 2008). These studieshad all assigned higher values to information disclosed quantitatively than qualitativedisclosures.

As advocated by several researchers (Al-Tuwaijri et al., 2004; Smith et al., 2005;Boesso and Kumar, 2007), the current study assigns more weights to informationdisclosed quantitatively than information disclosed qualitatively because “disclosuresmade in quantitative terms are of greater significance and higher weights can beassigned to them” (Boesso and Kumar, 2007, p. 275). Such disclosures can also beverified or audited (Sutantoputra, 2009). Hence, the current study assigns more weightsto information disclosed quantitatively to determine the quality of CVDs of ShCCs.

As shown in Table II below, the current study assigned zero (0) if the items in thechecklist did not appear in the annual reports, one (1) was awarded for qualitativedisclosures, two (2) for quantitative disclosures, and the highest value of three (3) was

Sectors Target population (P) Final sample (S) Percentage (S/P)

Plantation/mining 44 4 9Property 87 8 9Consumer products 133 13 10Industrial products 262 25 10Construction 49 6 12Trading/services 178 18 10Technology 25 2 8Total 778 76 10

Table I.Target population andfinal sample selectionfrom each sector

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assigned if there combination of both qualitative and quantitative disclosures(Al-Tuwaijri et al., 2004). Under this approach, the quality of voluntary disclosure(TCVD) score was computed as the ratio of actual scores (AS) awarded to a companyto the total disclosure score (TS) (i.e. 3 £ 48 ¼ 144). Thus, the quality of CVDs score ofa company would be calculated as follows:

TCVD ¼AS

TS

4.3 Variables measurementThe measurement of the dependent and independent variables of the study is outlinedin Table III.

Not disclosed Qualitatively disclosed Quantitatively disclosed

Qualitatively andquantitatively

disclosed

0 1 2 3

Table II.Design of the disclosure

checklist: four-pointLikert scale

Variable nameVariableacronym

Variabletype Variable operationalization

Theoreticalframework

Datasources

Quality ofCVD

QCVD Dependent A measure of the qualityof CVDs. Total disclosurescore, i.e. “0-3”

Accountabilityconcept/legitimacytheory

Annualreports

IndependentNon-executivedirectors

INDs Independent Proportion of independentnon-executive directors tototal number of directors

Accountabilityconcept/agencytheory

Annualreports

Board Size BSize Independent Number of directors onthe board

Accountabilityconcept/agency theory

Annualreports

OwnershipConcentration

OwnCon Independent Ratio of shares held by theten largest shareholders tototal number of sharesissued by the companies

Accountabilityconcept/agencytheory

Annualreports

DirectorOwnership

DirOwn Independent Proportion of shares heldby executive and non-independent directorsincluding their deemedinterests to total numberof shares issued

Accountabilityconcept/agencytheory

Annualreports

GovernmentOwnership

GovOwn Ratio of shares held bygovernmental bodies inthe top 30 shareholders

Accountabilityconcept/ legitimacytheory

Annualreports

Company Size Size Independent Total assets Accountabilityconcept/agency theory

Annualreports

Profitability Prof Independent ROE (return on equity) Accountabilityconcept/signalingtheory

Annualreports

Leverage Lev Independent Debt ratio Accountabilityconcept/agency theory

Annualreports

Table III.Research variables,operationalization,

measurements, anddata sources

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The regression model of the study contains one (1) dependent variable, five (5) continuousindependent variables, and three (3) control variables. The model is as follows:

QCVD ¼ b0 þ b1INDs þ b2BodSize þ b3OwnCon þ b4DirOwn þ b5GovOwnþ b6Size þ b7Prof þ b8Lev þ 1

5. Research analysis and results5.1 Descriptive statisticsTable IV below shows that the scores in the quality of CVDs of ShCCs range from6.94 percent (ten points out of 144) to 65.97 percent (i.e. 95 points out of 144) with a meanscore of 20 percent and standard deviation of 9.68 percent. The table also shows that thescores in the quality of CVDs are not normally distributed as shown by the skewnessand kurtosis values of 1.777 and 5.791, respectively. The table further indicates thatonly one company (1.3 percent) disclosed more than 50 percent (i.e. 65.97 percent), whilsteight companies (10.5 percent) provided disclosure scores of less than 10 percent of theitems in the index. The results, thus, reveal that the ShCCs listed in Malaysia providevery low quality of CVDs. Prior studies did not examine the quality of disclosure ofShCCs but other studies that sampled companies other than ShCC found low quality ofCVD in the Malaysian environment (Thompson and Zakaria, 2004).

Table V below provides descriptive analysis for the continuous independentvariables of the study. The independent variables are not normally distributed exceptthree variables namely, INDs, ownership concentration, and leverage. As a result,the dependent and independent variables were transformed to normal score beforecorrelation and regression analyses were performed. This approach of transferring thevariables to normal scores had been suggested by Cooke (1998) and was later adoptedby prior empirical studies (Haniffa and Cooke, 2005).

The study also assessed multicollinearity concerns among the independentvariables which exists when two or more of the independent variables are highly[3]correlated (i.e. 0.7 or more) and if two variables are considered to have high correlation,one of the highly correlated variables should be dropped from the regression

Quality of CVDsMinimum (%) 6.94Maximum (%) 65.97Mean (%) 20.00SD 9.68Skewness 1.777Kurtosis 5.791Quality of CVDs Number of companies %70 and above 0 0.060-69.9 1 1.350-59.9 0 0.040-49.9 1 1.330-39.9 8 10.520-29.9 25 3310-19.9 33 43.41-9.9 8 10.5Total 76 100

Table IV.Descriptive statistics onthe dependent variable –quality of CVDs

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model (Black, 2004). The Pearson correlation results indicate that the highestcorrelation coefficient exists between company size (LSize) and government ownership(GovOwn) (r ¼ 0.476) which is well below than the more prudent cut-off point figure of0.7. The variance inflation factor (VIF) and tolerance values were also assessed tocheck on problems of multicollinearity. Multicollinearity is considered a problem if theVIF exceeds ten (Kennedy, 1999). The regression results in Table VII show that thelargest VIF is 1.539. Hence, the correlation and regression results both suggest thatmulticollinearity is not a problem in the present study which means the independentvariables of the study can be included in the same regression model.

5.2 Univariate and multivariate resultsTable VI presents Pearson[4] correlation results for the quality of CVDs by ShCCs.Table VI shows that three variables (board size, government ownership, and companysize) correlate positively and significantly at the 1 percent level with the quality ofCVDs by ShCCs. The correlation results also indicate that in addition to these threevariables, director ownership is significant at the 5 percent but negatively correlateswith the quality of CVDs of ShCCs.

Multivariate analysis. Table VII summarizes the multiple regression analyses in thequality of CVDs of ShCCs. The multiple regression results are presented using normalscores. As shown in Table VII, the multiple regression model is statistically significantat 0.000 with an adjusted R 2 of 49.6 percent. The results also show that two variables,namely, company size and board size are significant at the 1 and 5 percent level,respectively, in explaining the quality of CVDs of ShCCs. In addition, leverage(gearing) is marginally significant at the 10 percent in determining the quality ofdisclosure provided by ShCCs. The results imply that bigger companies and largerboard size are significant determinants of the quality of CVDs of ShCCs. Larger boardsize could offer more expertise and knowledge in the Islamic values such asaccountability and transparency to the company and may have the ability to monitoreffectively, which could in turn lead to higher quality of CVDs. Similarly, larger ShCCsmay tend to act as a role model to other companies in corporate transparency. Theother variables are not statistically significant in explaining the quality of CVDs.

However, a reduced regression model (i.e. without controlling company size)indicates that government ownership and leverage are statistically significant at the1 and 5 percent significant level, respectively, in explaining the quality of CVDs ofShCCs in Malaysia (note: board size remains to be significant). The government’sresponsibility toward the general public coupled with the values of ShCCs may result in

Variables n Minimum Maximum Mean SD Skewness Kurtosis

INDs 76 0.2857 0.7143 0.444659 0.1026925 0.773 20.109Board Size 76 5.0 14.0 7.842 2.1357 1.038 0.685Own. Top 76 0.1842 0.9231 0.620740 0.1717899 20.467 20.309Dir Own 76 0.0000 0.7472 0.298885 0.2170339 20.026 21.056Govern Owner 76 0.0000 0.7546 0.054297 0.1277425 3.930 17.309Firm Size 76 55,418,572 36,757,067,000 1,760,000,000 4,906,000,000 5.594 36.115Profitability 76 21.1432 0.2428 0.019834 0.1821199 23.993 22.332Leverage 76 0.0241 0.8864 0.408685 0.1995386 0.192 20.442

Table V.Descriptive statistics ofcontinuous independent

variables (2009)

Voluntarydisclosures in

annual reports

35

Pea

rson

corr

elat

ion

QC

VD

IND

sB

Siz

eT

opT

enD

irO

wn

Gov

Ow

nL

Siz

eP

rofi

t.G

eari

ng

QC

VD

1.00

0IN

Ds

20.

067

1.00

0B

Siz

e0.4

27

**

20.

373

**

1.00

0T

opT

en0.

036

20.

118

20.

070

1.00

0D

irO

wn

20.2

34

*0.

012

20.

084

0.09

01.

000

Gov

Ow

n0.4

46

**

20.

109

0.21

90.

199

20.

265

*1.

000

LS

ize

0.6

85

**

20.

053

0.36

3*

*0.

016

20.

302

**

0.47

6*

*1.

000

Pro

fit.

0.07

22

0.18

20.

012

0.07

82

0.03

80.

122

0.05

41.

000

Gea

rin

g0.

205

0.04

20.

049

20.

316

**

20.

108

20.

034

0.13

22

0.21

81.

000

Note:

Cor

rela

tion

issi

gn

ifica

nt

at:

* 0.0

5an

d*

* 0.0

1le

vel

s(t

wo-

tail

ed)

Table VI.Correlation analysis –quality of CVD

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36

additional disclosures provided by companies in the Shari’ah index. The significantpositive association between the voluntary disclosures of ShCCs and leverage seems tosuggest that ShCCs would provide more disclosures to be accountable to the variousstakeholders.

6. ConclusionThis study examined the status as well as the determinants of the quality of CVDsprovided by ShCCs in Malaysia. The results of the study indicate that the qualityof voluntary disclosures of ShCCs is in overall low. However, in comparison withprior studies (Ousama and Fatima, 2010b), there is a substantial improvement ofthe disclosures provided by ShCCs in Malaysia. The companies in the Shari’ah indexmay have increased their disclosures in an attempt to avoid the possibility oflegitimacy gap following the recent global financial downturn as ShCCs are expected tobe more transparent, and thus, additional disclosures could have been used as a toolto avoid legitimacy gap. The improved voluntary disclosures of ShCCs could also beattributed to as a general increasing trend of the disclosures in the Malaysian corporateenvironment.

In terms of factors influencing the quality of CVDs of ShCCs, the full multipleregression results indicated that company size and board size are significant inexplaining the quality of CVDs by ShCCs at the 1 and 5 percent significance levels.Leverage was marginally significant at the 10 percent significance level in determiningthe quality of disclosure of ShCCs. Reduced regression model (i.e. without controllingthe size effect) further showed a strong significant association at the 1 percent levelbetween the voluntary disclosures and government ownership whilst leverage showedan improved significance of 5 percent in determining the disclosures of ShCCs.

The significant positive association between board size and the quality ofdisclosures seems to imply that larger board size would offer more expertise andknowledge in both Islamic and managerial fields to the company which could reflect toa more transparent corporate environment. Company size, leverage, and governmentownership had been associated with the voluntary disclosures in the Malaysianenvironment by several prior studies.

Variables Expected sign. b t-value Significance Tolerance VIF

Constant 24.978 0.000INDs Positive/negative 0.078 0.850 0.398 0.800 1.250BSize Positive/negative 0.237 2.450 0.017 * * 0.719 1.390TopTen Positive/negative 0.073 0.808 0.422 0.825 1.212DirOwn Negative 20.011 20.129 0.897 0.868 1.152GovOwn Positive/negative 0.142 1.449 0.152 0.703 1.423LSize Positive 0.506 4.968 0.000 * * * 0.650 1.539Profit. Positive/negative 0.069 0.796 0.429 0.904 1.106Gearing Positive/negative 0.165 1.839 0.070 * 0.836 1.195Adjusted R 2 49.6F-statistic 10.209Significance 0.000

Note: Significant at: *10, * *5 and * * *1 percent levels

Table VII.Multiple regression

results for the qualityof CVDs

Voluntarydisclosures in

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37

The results of the study have several implications. First, the overall low disclosuresprovided by ShCCs appear to indicate that these companies still require awarenesson matters relating to the concepts of accountability and full disclosures. Hence, theShari’ah Advisory Council of the SC Malaysia should provide awareness on mattersrelating to accountability and transparency which could lead to socio economic justice.The companies, as apparent, do not involve prohibited business matters, but,companies should be aware that avoiding “haram business practices” is not the “be all”and “end all” in Islam as the Islamic values also equally encourage accountability andtransparency matters. The commission may also wish to introduce a detailed reportingguideline for ShCCs as a benchmark. Second, the increase in the disclosures incomparison with prior studies give support to prior claims that disclosures are used asa form of corporate legitimacy in avoiding questionable business practices (Haniffaand Cooke, 2005) and as way to avoid legitimacy gap (Newson and Deegan, 2002).Third, the significant positive relation between board size, government ownershipand leverage in the quality of disclosures seems to suggest that these variables aresignificant determinants of voluntary disclosures irrespective of whether the focus isShCCs or non-ShCCs.

The study is not without limitations. First, the examination of the annual reportsinvolves a degree of subjectivity which could reduce the reliability of the results. Futureresearchers may therefore wish to undertake a mixed-method of quantitative andqualitative research approach, where the researchers might be able to complement thequantitative approach with interviews to explain the quantitative findings. Second, thestudy examined only one year which prior studies considered as a limitation (Boessoand Kumar, 2007). Future studies should therefore examine the disclosure practices ofShCCs longitudinally as this would allow comparisons between the years, and hence, theresults would be more meaningful. Finally, this study focused the disclosures providedin the annual reports only. Other information channels such web sites and brochureswere not examined. Hence, future research might attempt to include these otherinformation channels in investigating the voluntary disclosures of ShCCs.

Notes

1. In Malaysia, majority of Malays (the largest ethnic group) are Muslims. Therefore, the MalayMuslims would encourage social welfare programs particularly during financial crisis whichis inline with the Islamic value of benevolence.

2. These percentages are rounded to their nearest numerical value.

3. Refer Gujarati (1995) and Tabachnick and Fidell (2001) for multicollinearity cut-off point.

4. The alternative non-parametric Spearman’s r correlations were also run and there was nosignificant difference between the two correlation results.

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About the authorsAbdifatah Ahmed Haji holds an MSc in Accounting from the International Islamic UniversityMalaysia, Department of Accounting, Kuala Lumpur, Malaysia. His research interests are inthe areas of corporate disclosure, corporate governance, corporate social disclosures andintellectual capital reporting. He published a number of articles in international Journals suchas International Journal of Disclosure and Governance and Journal of Intellectual Capital.Abdifatah Ahmed Haji is the corresponding author and can be contacted at: fitka7@hotmail.com

Nazli Anum Mohd Ghazali is an Associate Professor in the Department of Accounting at theInternational Islamic University Malaysia. Associate Professor Nazli has published widely onrefereed international journals including Journal of International Accounting, Auditing andTaxation, Social Responsibility Journal, Corporate Governance: The International Journal ofBusiness in Society, International Journal of Commerce & Management, International Journal ofBusiness Governance and Ethics, Journal of Intellectual Capital, Managerial Auditing Journalamong others.

(The Appendix follows overleaf.)

Voluntarydisclosures in

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41

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Appendix

No. Category

Strategic information1 Corporate milestone2 Corporate vision statement3 Corporate mission statement4 Significant past year events5 Acquisitions and expansion6 Disposals and cessation7 Reasons for disposal8 Discussion of research and development projects9 Corporate policy on research and development

10 Statement of future prospects11 General discussion of future industry trend12 Assumptions about future forecastsFinancial information

1 Five year corporate financial highlights statement2 Effects of acquisitions on past results3 Effects of disposal on past results4 Overview of economic performance5 Discussion on the economic situation effects on firm financial performance6 Financial implications, risks, and opportunities due to economic situation7 Profitability ratios8 Gearing ratios9 Liquidity ratios

10 Share price information – two years11 Volume of shares traded at year end12 Market capitalization at year end13 Type of shareholdersCSR information

1 Awards received by the company that relate to social, environmental and best practices2 Number of employees3 Breakdown of employees by origin4 Breakdown of employees by gender5 Information on employee redundancy6 Employees’ appreciation7 Employees training8 Amount spent on employees training9 Number of employees trained

10 Discussion of employees’ welfare11 Information on safety of employees12 Information on accidents13 Equal opportunity policy statement14 Reporting on the company’s relationship with trade union and/ or workers15 Reporting on any strikes, industrial actions/activities and the resultant losses in terms of time and

productivity16 Information on safety of products17 Environmental protection programs18 Donations to charity19 Community development (health and education)20 Internship programs for graduating students21 Sports activities22 Employee involvement on community programs (charity)23 Value added statement

Table AI.The voluntarydisclosure checklist

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