Examples Of Disclosure Outside Of Financial Statements

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‘Disclosures outside the financial statement are only used to manage the impressions of gullible shareholders.’ Introduction Recent developments in the sophistication and complexity of disclosures outside the financial statements have heightened the need to understand the purposes and motivation behind them. As a result, researchers have shown an increased interest in the various explanations relating to disclosures made outside the financial statements. This paper will focus on those different perspectives and theories specifically within impression management as well as argue for alternative explanations for disclosures outside the financial statements. Due to practical constraints, this paper will not provide a comprehensive review of all the reasons managers may want to disclose information outside of the financial statements, such as, the effect of a firm’s disclosure policy and reputation on disclosure. This essay has been divided into five parts. The first part is concerned with defining what disclosures outside of the financial statements relate to and defining the term gullible shareholders. The second part introduces the concept of impression management, the four perspectives one could adopt in understanding disclosures and discusses alternative explanations for disclosure which do not constitute to impression management. In the third part, I argue that regulation alongside market incentives may explain why managers disclose. The fourth part is concerned with the relationship between the cost of capital and the level of disclosure. Finally, the conclusion will give a brief summary and critiques the findings. 1. Definitions The term disclosure refers to the act of releasing information relating to a company that may inf... ... middle of paper ... ...nations for disclosures such as incremental information, hubris and retrospective sense-making. Additionally, I provide an argument for disclosure due to regulation. Finally, I discuss the notion that greater disclosure can lead to reduced cost of capital to explain disclosures made outside the financial statements. To conclude, disclosures made outside of the financial statements may relate to managing the impression of gullible shareholders in very small proportion of cases. I personally believe that there are stronger incentives for managers in the long term to engage in honest and timely disclosures such as in an attempt to reduce the cost of capital. Additionally, Kothari indicates that investors will weigh up the credibility of the disclosure, thus, acting as a further disincentive for managers to partake in bias reporting. (Kothari, et al., 2009).

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