Incentives for Non-Disclosure by Corporate Groups

Abstract

A regulatory approved Deed of cross guarantee (the Deed), introduced into Australia in December 1991, exempts nominated companies (the closed group) from having to prepare, have audited, and file financial statements. We examine the characteristics of firms that obtain relief from filing (and therefore disclosure) of separate financial statements of closed group companies by adopting the Deed. The results support the view that the decision to adopt the Deed is a function of the accounting and auditing cost savings. There is also evidence that non-disclosure within corporate groups arises when firms are in a more competitive industry and, in particular, when there is ability to retain non-disclosure at the consolidated level (i.e. where the number of segments is high). Other factors supporting non-disclosure are leverage, the proportion of foreign operations (proxying for Deed complexity). We do not find the decision to adopt the Deed is associated with the proportion of outside directors (a proxy for legal liability), the number of shares outstanding (agency costs of equity). The paper adds to Verrecchia and Weber (2006) by using a unique Australian financial setting.

Keywords: voluntary disclosure, cross-guarantees, group accounts

JEL Classification: M41, M45, M47, M49, G32, G34