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The inuence of the introduction of accounting disclosure regulation

on mandatory disclosure compliance: Evidence from Jordan

Mahmoud Al-Akra a, Ian A. Eddie b, Muhammad Jahangir Ali c,*

a New England School of Business, Economics and Public Policy, University of New England, Armidale, NSW 2351, Australiab Graduate College of Management, Southern Cross University, Tweed Gold Coast Campus, Brett Street, Tweed Heads 2485, Australiac School of Accounting, La Trobe University, Victoria 3086, Australia

a r t i c l e i n f o

Article history:

Received 4 April 2008

Received in revised form 9 March 2010

Accepted 10 March 2010

Keywords:

Accounting in Jordan

Disclosure regulation

Governance reforms

Mandatory disclosure

Privatisation

a b s t r a c t

This paper examines the inuence of accounting disclosure regulation, governance reforms

and ownership changes, resulting from privatisation, on mandatory disclosure compliance

of a sample of 80 non-nancial, listed Jordanian companies for the years 1996 and 2004.

Employing two checklists based on the International Financial Reporting Standards (IFRS)

extant in the years 1996 and 2004, we nd that disclosure compliance with the IFRS is

signicantly higher in 2004 than that in 1996. Our multiple regression results indicate that

disclosure regulation reforms produced the most signicant inuence on mandatory

disclosure compliance. Further, governance reforms through the mandate of audit

committees emerged as a signicant determinant of compliance with mandatory disclo-

sure requirements.

2010 Elsevier Ltd. All rights reserved.

1. Introduction

We examine the inuence of accounting disclosure regulation, governance reforms and ownership changes, resulting from

privatisation, on mandatory disclosure compliance of Jordanian listed companies. Privatisation is dened as the deliberate

sale by a government of state-owned enterprises (SOEs) or assets to private economic agents(Megginson & Netter 2001, p.

321). It is argued that the effectiveness of privatisation in achieving its objectives is largely dependent on the efciency of

accounting systems and audit methodologies (Enthoven, 1998). However, the outdated accounting systems of developing

countries undermine the achievement of the objectives of privatisation. Hence, most privatising governments have under-

taken capital market reforms to attract, and gain the condence of, investors (Megginson & Netter, 2001; Shehadi, 2002).

The adoption of high quality standards is vital to attract foreign investors and mobilise domestic savings. Improving

disclosure practices to more internationally acceptable and comparable accounting standards is very important for countries

undertaking privatisation programs. Therefore, privatising governments revamp their accounting policies and enact newaccounting regulations that would enable the enforcement of International Financial Reporting Standards (IFRS).

Nevertheless, global disclosure standards are optimal only if compliance is monitored and enforced by efcient institu-

tions (Healy & Palepu, 2001).Walker (1987)contends that the use of regulation as an enforcement mechanism to monitor

compliance and impose punishments in cases of non-compliance would improve the implementation of accounting stan-

dards and enhance compliance levels. Companies do not comply with mandatory requirements unless stringent regulation is

in place. A regulation is dened as stringent if it allows only one outcome, has an adequate enforcement mechanism, and

sanctions for non-compliance(Owusu-Ansah & Yeoh, 2005, p. 92).

* Corresponding author. Tel.: 61 03 9479 5177; fax: 61 03 9479 2356.

E-mail addresses: [email protected](M. Al-Akra), [email protected](I.A. Eddie),[email protected](M.J. Ali).

Contents lists available atScienceDirect

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2010 Elsevier Ltd. All rights reserved.doi:10.1016/j.bar.2010.04.001

The British Accounting Review 42 (2010) 170186
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Moreover, privatisation causes major shifts in ownership from the state to private owners, signi cantly altering the

ownership structure ofrms and dramatically increasing the number of shareholders in privatising countries ( Boutchkova &

Megginson, 2000).Eng and Mak (2003)argue that ownership structure determines the level of monitoring and, thereby, the

level of disclosure. For example, foreign investors monitor management closely and require high standards of information

disclosure (Dyck, 2001).

In 1997, Jordan launched an ambitious privatisation program. To ensure the success of the privatisation process, Jordan

enacted the 1997 Company Law, the 1997 Temporary Securities Law and the 2002 Securities Law ( ASE, 2007). These laws

reformed the Jordanian corporate governance framework, and introduced IFRS and enforcement mechanisms. Privatisation

also led to a decline in Jordanian government ownership from 1% prior to privatisation to less than 6% of the total shares of

public listed companies following privatisation.

Prior to the enactment of these laws, accounting practice of Jordanian companies satised only the formalities of outdated

law requirements, with no set form or content for nancial statements. In addition, there was no legally established

accounting and auditing standard setting body. The process of regulating accounting practice was purely governmental (the

Ministry of Industry and Trade) with a very minor role for the private sector via the Jordanian Association of Certied Public

Accountants (JACPA). In 1989, the JACPA recommended that Jordanian rms adopt IFRS effective from January 1990.

The 1997 Company Law and the 2002 Securities Law were essentially enacted to enhance the enforceability of IFRS. There

was a change from a state where the use of the IFRS was voluntary to one where the use of IFRS was statutorily required and

non-compliance was illegal. Further, these laws introduced the Jordanian governance framework which focused on

strengthening legal investor protection and emphasised the board of directors responsibilities in ensuring compliance with

mandatory requirements.

The aim of this paper is empirically to investigate the impact of privatisation, through the resulting disclosure regulation,

governance reforms and ownership changes, on mandatory disclosure compliance with IFRS of Jordanian listed companies.

The paper also examines the impact of key company attributes on mandatory disclosure compliance.

As discussed earlier, privatisation results in major changes in the ownership structure ofrms. Further, evidence from

privatisation research suggests that privatisation prompts countries, particularly developing ones, to signicantly change

their governance systems and revamp their disclosure regulation (Megginson & Netter 2001). Limited disclosure research (see

Dahawy, Merino & Conover, 2002; Abd-Elsalam & Weetman, 2003; Abd-Elsalam & Weetman, 2007; Dahawy & Conover, 2007)

provides some evidence on the role of privatisation in improving disclosure practice, through examining the impact of the

adoption of IFRS on mandatory disclosure compliance. However, these studies do not examine the impact of other changes

that result from privatisation, particularly governance reforms and ownership changes. Therefore, our study contributes to

the disclosure literature in four important ways. First, we extend previous studies by investigating the impact of privatisation

through evaluation of the joint inuence of disclosure regulation, governance reforms and ownership changes on mandatory

disclosure compliance of Jordanian listed companies. This is possible because privatisation provides the experimental

environment to examine the inuence of all these variables that do not occur normally. Second, the study aims to ascertain

the effectiveness of the use of accounting regulation to enhance mandatory disclosure compliance. Third, there are trends in

corporate governance codes that are spreading to countries around the world, yet very little research has examined the

degree of compliance with these codes and the impact of such compliance on disclosure practices. Finally, a number of

countries in the Middle Eastern region (for example, Bahrain, Egypt, Kuwait, Qatar, Saudi Arabia, Tunisia and the United Arab

Emirates) have used regulation to enforce compliance with accounting standards. Hence, a study of the inuence of regu-

latory reforms on corporate disclosure in the Middle Eastern region, and specically Jordan, provides insights into the factors

driving disclosure practices in these countries.

We use a sample based on annual reports for the years 1996 and 2004 of 80 non-nancial, listed Jordanian companies.

Utilising two checklists for the years 1996 and 2004, we develop a disclosure index (MDI) based on IFRS extant in each year.

We incorporate panel data estimation techniques to account for the dynamic effects of the factors under study. We use

univariate testing and cross-sectional regression models, and conclude that accounting regulatory reforms in Jordan have

positively inuenced mandatory disclosure compliance of Jordanian listed companies through the mandate of audit

committees and disclosure regulation reforms.

The remainder of this paper is structured as follows. The next section offers an overview of the Jordanian regulatory

reforms. Section3discusses the newly developed governance rules in Jordan in comparison with the OECD governance code.

Section4 outlines our hypotheses and Section5 presents the methodology for testing our hypotheses. Section6 describes the

empirical results. A conclusion follows.

2. Recent reforms of accounting regulation

2.1. The 1997 Company Law

Therst Company Law (Law No. 12) enacted in Jordan in 1964, was loosely stated and very limited in scope (Solas, 1994;

Abu-Nassar & Rutherford, 1996). The 1997 Company Law No. 22 was enacted requiring public companies to prepare their

accounts in accordance with the International Accounting and Auditing Standards. It also laid down the governance policy

framework focusing, in particular, on mandating the appointment of at least three non-executive directors on the board,

M. Al-Akra et al. / The British Accounting Review 42 (2010) 170186 171


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mandating the formation of audit committees and stating that the size of the board should be comprised of a minimum of

three and a maximum of 13 directors (seeTable 1).

2.2. The 1997 Temporary Securities Law

Prior to 1997, listed companies were required to adhere to the requirements of Amman Financial Market (AFM) law. 1

However, AFM did not issue any requirements on the form and content of companies accounts (Rawashdeh, 2003). The

enactment of the Temporary Securities Law No. 23 of the year 1997 was aimed at restructuring and regulating the Jordanian

capital market in conformity with International Accounting Standards in order to secure transparency and safe trading in

securities (ASE, 2007). The Law led to the establishment of three new institutions to replace the AFM, namely: the JordanSecurities Commission (JSC), the Amman Stock Exchange (ASE) and the Securities Depository Centre (SDC).2

2.3. The 2002 Securities Law

The enactment of the 2002 Securities Law provided for stringent enforcement of rules through articles strengthening the

powersof the JSC, the ASE and the SDC (ASE, 2007). According to these articles, the JSC has the power to imposenes, suspend

trading or delist non-complying issuers (see Table 1).3 Further, the 2002 Securities Law required all entities to fully comply

Table 1

Recent accounting regulatory reforms and responsible government agencies.

Law/recommendation Private/governmental

agency

Major aims of the

law/recommendation

Recommendation 1989 JACPA (Private) All Jordanian companies are encouraged voluntarily to

adopt IFRS effective from January 1990.

Company Law 1997 Ministry of

Industry and Trade

(The Company

Controller)

All public shareholding accounts kept in accordance

with the International Accounting and Auditing Standards. All annual reports must be audited by an external auditor.

Listed companies are required to appoint three non-executive

directors and to form audit committees comprising three

non-executive directors.

Boards have a minimum of three and a maximum of thirteen directors.

The Company Controller has the authority to dissolve

a companys board or revoke its registration in cases of non-compliance.

Temporary Securities

Law 1997

Prime Ministry Setting up three new institutions to replace AFM, namely: Jordan

Securities Commission (JSC), Amman Stock Exchange (ASE) and

the Securities Depository Centre (SDC).

The separation of the supervisory and legislative role

from the executive role of the capital market. Supervisory and

legislative role entrusted to JSC. Executive role left to the

private sector, ASE and SDC.

Securities Law 2 002 Jordan Securities

Commission The JSC staff are responsible for reviewing the quality of

disclosure of the annual reports; however their review is

not comprehensive.

JSC can impose nes, suspend trading or delist issuers,

has strong investigative powers.

Strengthened the powers of JSC, ASE and SDC.

Listed companies must comply with the International Financial

Reporting Standards in the preparation of their nancial statements.

The audit committee responsibilities identied including the

nomination of external auditors, ensuring that they full the

requirements of JSC, ensuring their independence, monitoring

corporate compliance with the Securities Law requirements

(which is compliance with IFRS), examining the periodic

nancial reports, and reviewing the internal control procedures.

1 Article 17 of Amman Financial Market (AFM) Law No. 31 of the year 1976 required listed companies to disclose their performance which is likely to

affect share prices (Naser, 1998; Naser & Al-Khatib, 2000).2 These three institutions are responsible for setting and enforcing regulations, monitoring and regulating market trading and ultimately restoring

investors

con

dence in the Jordanian capital market (JSC, 2007).3 In 2003, JSC instituted 356 enforcement actions mostly for lack of proper disclosure (ROSC, 2005).

M. Al-Akra et al. / The British Accounting Review 42 (2010) 170186172


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with IFRS requirements in preparation of their annual reports, and le annual audited reports at the JSC. Also, this law

required listed entities to form audit committees of three non-executives (see Table 1). The JSC staff is responsible for

reviewing the quality of disclosure in the annual reports, however their review is not comprehensive (ROSC, 2005).

3. Jordanian corporate governance: comparative analysis with OECD code

In line with international trends that came about as a result of nancial crises, a number of governance codes were

developed worldwide. Jordan has developed its corporate governance framework under the sponsorship of the Organization

for Economic Cooperation and Development (OECD). The following sections discuss the OECD principles briey and Jordans

degree of compliance and areas of non-compliance.

3.1. The rights of shareholders

The rst principle of the OECD governance code includes basic shareholder rights to participate in fundamental decisions;

shareholders AGM rights; disproportionate control disclosure; the market for corporate control; and shareholders consid-

eration of the cost/benet of voting. While the 1997 Company Law generally complies with the recommendations of this

principle, there are no guidelines about share authentication and settlement, proportional representation, regulating take-

over bids and the encouragement of institutional investors in Jordanian company law ( ROSC, 2005; Sharar, 2007).

3.2. Equitable treatment of shareholders

This principle calls for the equitable treatment of all shareholders, the prohibition of insider trading and disclosure of any

material interests in transactions affecting the corporation. Jordan complies partially with this principle, lacking adequate

minority shareholder rights and having weak/unclear related-party transaction rules (Sharar, 2007; ROSC, 2005).

3.3. Role of stakeholders in corporate governance

This principle covers the following: respect for stakeholders rights; redress for violation of their rights; permission for

performance-enhancing mechanisms for employees; stakeholdersrights to access relevant information; communication of

concerns about illegal or unethical practice; and an effective insolvency framework. While the 1997 Company Law does not

have a denition of what constitutes stakeholders, it provides for a number of legal protections. The law also does not have

any provisions for the protection of whistleblowers (Sharar, 2007).

3.4. General disclosure requirements

This principle requires the timely disclosure of all material matters about the corporation; high standards for nancial

reporting; conduct of an independent audit annually; effective channels for fair and timely dissemination of other corporate

information; and provision of analysis and advice by external experts. Jordan generally complies with the principle

mandating the use of IFRS, requiring all annual reports to be audited by an external auditor, and mandating audit committees.

However, the monitoring function for nancial reporting is weak (ROSC, 2005).

3.5. Responsibility of the Board

The Board should full certain key functions including reviewing and guiding corporate strategy, selecting, compensating

and monitoring executives, reviewing executives remunerations, managing conicts of interests of management, ensuring

the integrity of the corporations accounting and nancial systems, monitoring the effectiveness of the governance practicesand overseeing the process of disclosure (ROSC, 2005). However, Jordanian law requires all directors to be shareholders,

which jeopardises the independence of boards (Sharar, 2007).4

4. Development of hypotheses

4.1. Disclosure regulation

In January 1990, and following the JACPA recommendations, many Jordanianrms adopted IFRS voluntarily (Rawashdeh,

2003). The enactment of the 1997 Company Law, the 1997 Temporary Securities Law and the 2002 Securities Law were major

changes in the disclosure regulatory environment in Jordan. These laws were aimed at ensuring the adoption and full

4

Jordan reformed its governance practices by establishing the Jordanian Corporate Governance Association (JCGA) with the aim of implementingeffective governance practices.



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enforcement of IFRS by all Jordanian companies. Accordingly, these regulatory reforms changed voluntary compliance with

the IFRS to mandatory compliance. Therefore, these laws are expected to enhance compliance with the IFRS.

Empirical studies examining the impact of disclosure regulation on mandatory disclosure compliance are limited. Earlier

studies focused mainly on the US, such asStigler (1961), Benston (1973) and Simon (1989).5 Later,Fox, Morck, Yeung and

Durnev (2003)examined the inuence of an SEC disclosure rule imposed in 1980 on the accuracy of stock prices. Their

results suggest that management provided more meaningful information because of the enhanced requirements. Bartlett and

Jones (1997)andBeattie, Dhanani and Jones (2008)are two studies based on UK data. They report an increase in regulatory

material in the annual reports of large, listed UK companies.

Recent studies have shifted the focus to developing countries. Inchausti (1997) empirically investigates the inuence of the

imposition of new Spanish accounting rules. She reports an increase in the levels of mandatory information disclosure even

before the new rules became mandatory.Owusu-Ansah and Yeoh (2005)examine the effect of the introduction of the 1993

Financial Reporting Act (FRA) on mandatory disclosure by New Zealand companies. The authors nd signicant improve-

ments in mandatory disclosure compliance by New Zealand companies following the introduction of the FRA. Based on the

above discussion, we formulate the following hypothesis (in the alternative form):

Hypothesis 1: there is greater mandatory disclosure compliance of listed Jordanian companies after the introduction of the

disclosure regulatory reforms than before.

4.2. Corporate governance variables

We investigate the association of the recently-mandated governance mechanisms (non-executive directors, audit

committee and board size) with mandatory disclosure compliance of Jordanian listed companies.

4.2.1. Non-executive directors

Fama and Jensen (1983)contend that boards with a higher proportion of non-executive directors have greater monitoring

ability over management, leading to more information disclosure.Eng and Mak (2003)suggest that the presence of outside

directors may limit management opportunism. Further, non-executive directors are perceived as being respected advisors

who should increase the quality of a rms disclosure (Haniffa & Cooke, 2002). Thendings of previous research support the

positive inuence of non-executive directors on mandatory disclosure compliance ( Chen & Jaggi, 2000; Susilowati, Morris &

Gray, 2005). Therefore, the following hypothesis is formulated:

Hypothesis 2.1: there is a positive association between the number of non-executive directors on the board and mandatory

disclosure compliance of Jordanian listed companies.

4.2.2. The mandate of audit committees

According to the 2002 Securities Law, audit committee members are responsible for monitoring corporate compliance

with mandatory disclosure requirements. As such, we expect to nd that rms with audit committees have higher mandatory

disclosure compliance.Susilowati et al. (2005)report a signicant, positive inuence of the appointment of audit committees

on mandatory transparency scores. Therefore, it is hypothesised that:

Hypothesis 2.2: there is a positive association between the presence of an audit committee and mandatory disclosure

compliance of Jordanian listed companies.

4.2.3. Board size

Mak and Li (2001)argue that smaller boards are more likely to function effectively. John and Senbet (1998)argue that,

while larger boards might imply higher monitoring capabilities, this might be offset by poorer communication and decision-

making inefciencies. Empirical evidence relating to board size is scarce and is yet to nd an association between board size

and corporate disclosure. Accordingly, we hypothesise that:

Hypothesis 2.3: there is a negative association between the size of the board of directors and mandatory disclosure


4.3. Ownership structure

One of the major aims of privatisation is to improve the efciency of government-ownedrms (Mak & Li, 2001;Eng& Mak,

2003). Managers of government-owned rms lack high-powered incentives or proper monitoring, thus leading to weak

governance. Corporate governance can play a signicant role in ensuring the quality of the nancial reporting process. Chiang

(2005)argues that companies with better corporate governance have higher standards of disclosure and transparency.

Empirically, Eng and Mak (2003) and Cheng and Courtenay (2006) illustrate the signicant positive inuence of

government ownership on corporate disclosure. In Jordan, Naser (1998), Naser and Al-Khatib (2000) and Naser, Al-Khatib and

Karbhari (2002) examine the inuence of government ownership onnancial disclosure. Naser (1998) and Naser et al. (2002)

did not nd any association between government ownership and the depth of disclosure by Jordanian rms, whileNaser and

5 The results of these studies indicate that the mandatory disclosure of more meaningful information led to more accurate prices.



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Al-Khatib (2000)report a positive and signicant inuence of government ownership on corporate disclosure. Therefore, it is

not clear whether Jordanian rms with more government ownership disclose more or less than they would have otherwise.

Therefore, our hypothesis is non-directional:

Hypothesis 3.1: there is no association between the proportion of government ownership and mandatory disclosure


Privatisation leads to the transfer of ownership from the government to private owners. Hence, the number of new

shareholders increases signicantly, leading to a diffused ownership structure which results in increased agency costs

(Boycko, Shleifer & Vishny, 1996). To alleviate these agency costs, managers might increase their information disclosure so

that owners can monitor their interests in the rm. An alternative view is that diffused ownership may imply a lack of

monitoring capacity due to low ownership stakes of individual owners, reducing their inuence on the companys disclosure

practices. Jordanian studies (Naser & Al-Khatib, 2000; Naser et al., 2002) nd a negative association between individual

ownership and disclosure. Naser and Al-Khatib (2000) argue that Jordanian investors are not sophisticated and their

investment decisions are uninformed and they exert little inuence on disclosure quality.

Institutional investors are part of the post-privatisation ownership structure. Institutional investors are major holders of

equity and their decisions to buy or sell can affect share prices and management disclosure policies (El-Gazzar, 1998). In

Jordan, however, institutions are either passive or related to a controlling family (ROSC, 2005) implying that they would likely

be associated with lower disclosure. The evidence pertaining to Jordanian individual and institutional investors does not

provide clear evidence on their association with disclosure, hence, we use non-directional hypotheses for these two types of

ownership:

Hypothesis 3.2a: there is no association between the proportion of individual ownership and mandatory disclosure


Hypothesis 3.2b: there is no association between the proportion of institutional ownership and mandatory disclosure


One of the major aims of privatisation is the attraction of foreign investment. Shehadi (2002)contends that over 90% of

foreign direct investment in developing countries has come from privatisation.6 Brown, Earle and Telegdy (2004, p. 12)argue

that foreign owners have better access to nance, management skills, new technologies and knowledge of markets, which

would suggest higher productivity effects. Foreign investors maintain more effective monitoring of management and require

higher disclosure standards (Boubakri, Cosset & Guedhami, 2005).Naser et al. (2002) contend that foreign investors have

more experience in regional and international markets and, hence, they are more likely to demand higher disclosure stan-

dards. Empirical evidence investigating the impact of foreign investors is limited to voluntary disclosure studies. However, the

ndings of these studies support the signicant inuence of foreign investors on disclosure.7 Following the above arguments,

it is hypothesised that:

Hypothesis 3.3: there is a positive association between the proportion of foreign ownership and mandatory disclosure


4.4. Corporate attributes

The study incorporates a number of control variables and tests their association with mandatory disclosure compliance.

These variables are the size of the rm, leverage, protability, auditing rm identity, liquidity, industry type, listing and rm

age. Larger rms have higher agency costs, compelling management to disclose more information to ease agency conicts

(Chow & Wong-Boren, 1987; Diga, 1996). This study uses three variables as proxies for size: total assets, market capitalisation

and net sales. It is also suggested that highly leveragedrms incur higher monitoring costs (Jensen & Meckling, 1976). Thus,

managers of high debt rms tend to reduce these costs by increasing the information disclosed in annual reports. We use

three proxies for leverage: total liabilities to shareholders equity, long-term liabilities to shareholders equity and total

liabilities to total assets.

Moreover, agency theory postulates that the managements of protable rms disclose detailed information to increase

investorscondence, and support their positions and compensation arrangements (Inchausti, 1997). Two variables are usedin this study to measure protability: return on equity (ROE) and prot margin.

Large audit rms are pressured by the World Bank not to sign their names as auditors to any annual report not complying

withIFRS (Street & Gray, 2001). Dumontierand Raffournier (1998)posit that large auditrmscompel their clients to adopt IFRS

because of the superior training of their employees and the existence of economies of scale in the development of competence

in IFRS. We use a dichotomous variable that takes the value of one ifrms areaudited bya bigauditingrm andzero otherwise.

A high liquidity ratio is an indicatorof good management performance. Accordingly, companies with higherliquidity ratios are

expectedto disclose more information.The current ratio (ratioof current assetsto current liabilities) is ourmeasure of liquidity,

since it is commonly used in disclosure studies (seeBelkaoui & Kahl, 1978; Wallace, Naser & Mora, 1994; Naser et al., 2002).

6 Shehadi (2002)suggests that privatisation facilitates the involvement of foreign investment in developing countries through three main channels: the

adoption of regulatory measures, increasing the liquidity of the capital market, and gaining the condence of foreign investors as governments show

commitment to privatisation and liberalization.7 SeeHaniffa and Cooke (2002)and Lakhal (2005).



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It is postulated that rms in the same industry disclose similar information to third parties (Wallace et al., 1994). This study

considers three types of industry: infrastructure (IND1), manufacturing (IND2 default level) and services (IND3).

Our study investigates the disclosure ofrms listed on therst market versus those listed on the over-the-counter (OTC)

market. It is expected that Jordanian companies listed on the rst market would increase their disclosure to increase their

ability to raise funds and reduce monitoring costs. We use a dichotomous variable that takes the value of one ifrms are listed

on the rst market, and zero otherwise.

Owusu-Ansah (1998)contends that older rms are more likely to disclose more information because such disclosure

would endanger their competitive status less than it would younger rms, and younger rms would not have any past

operating history to disclose.

5. Research design and methodology

5.1. Data selection

To test the impact of the regulatory reforms resulting from privatisation, we examine a sample of public non-nancial

companies listed on the Amman Stock Exchange. Financial companies such as banks and insurance companies were not

included since they follow specic disclosure requirements (Naser et al., 2002). Sample companies were chosen based on the

availability of their annual reports in 1996. Companies with 1996 annual reports were used as a basis for the selection of

annual reports for 2004. While this procedure limits the sample size, since some companies were not included due to

bankruptcy, merger or takeover, it is preferred since every company serves as its own control ( Owusu-Ansah & Yeoh, 2005).

A total of 108 non-nancial companies were listed on the Amman Stock Exchange (ASE) in 1996. A letter was sent to the

Company Controller at the Ministry of Industry and Trade in Jordan (where all annual reports are led) requesting the 108

annual reports. However, only 94 annual reports for 1996 were received with complete data. Annual reports for the year 2004

were available at the Jordan Securities Commission website (www.jsc.gov). A number of annual reports were not available at

the website so they were requested from the Company Controller. The nal sample is based on 80 matched pairs of

companies.Table 2shows the distribution of sample companies according to their industry type (7 infrastructure companies,

46 manufacturing and 27 services).

5.2. Dependent variable-mandatory disclosure index (MDI)

This study measures disclosure as the extent to which nancial disclosure is in accordance with International Financial

Reporting Standards (IFRS). This is because the 1997 Company Law and 2002 Securities Law mandated compliance with the

IFRS. Prior to 1990,Jordanianlistedrmscomplied with the1964 Company Law(amended in 1989) which hadno requirements

pertaining tothe form andcontentofnancial statements. Due to the weaknature of the requirementsof the previous Company

Law, the Jordanian Association of Certied Public Accountants recommended the adoption of IFRS which resulted in many

companies voluntarily adopting IFRS in following years (Rawashdeh, 2003). The enactment of the 1997 Company Law and the

2002 Securities Law led to the mandatory adoption of the IFRS by all listed Jordanian rms. Further, the 2002 Securities Law

imposed sanctions such as issuing nes, suspending trading or delisting for non-complying rms. Hence, the 1997 Company

Table 2

Sample size and distribution according to industry.

Industry Industry type N Total 80

Industry 1

Infrastructure

1. Electricity 2 7

2. Cement 1

3. Minerals 2

4. Petroleum 2

Industry 2

Manufacturing

1. Cable and electrical product 3 46

2. Chemical and pharmaceutical 9

3. Engineering 2

4. Food and allied products 10

5. Cigarettes 2

6. Metals and allied products 7

7. Wood and allied products 2

8. Paper and printing 3

9. Textile and allied products 4

10. Clay products 2

11. Leather and tanneries 2

Industry 3

Services

1. Hotels and tourism 4 27

2. Press 2

3. Investment 11

4. Education 2

5. Transport 4

6. Real Estate 4

http://www.jsc.gov/http://www.jsc.gov/


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Law and the 2002 Securities Law were enacted to mandate the use and the enforceability of the IFRS, moving compliance with

the standards from a voluntarystate to onewhere the use of IFRS was a statutory requirement and non-compliance was illegal.

Therefore, the disclosure index consists of information items required by the IFRS. Nevertheless, IFRS were amended several

times between 1996 and 2004. Thus, the 1996 annual reports are measured against IFRS extant and relevant in 1996, and the

2004annual reports aremeasuredagainst IFRS extant andrelevantin 2004. Therefore, a relativemeasure fordisclosure is used.

The company is awarded a score of 1 if it disclosed a mandatory item and a score of 0 if it failed to disclose it.

A vital issue in disclosure research is whether to penalise a rmwhen an item is not disclosed. One way of dealing with this

issue is not to penalise a rm for non-disclosure if the item is not relevant to the rm. Such a judgment can be made after

reading the entire annual report (Cooke, 1992). Further, an unweighted mandatory disclosure index is used.8 Hence, the

mandatory disclosure index (MDI) for each company would be the total number of mandatory items disclosed by the

company divided by the total number of relevant items of the mandatory disclosure index, dened as follows:

MDIjt

Pnjti1

xijtnjt

where MDIjtis the mandatory disclosure index for thejth company in the year t, where tis either 1996 or 2004; njt, number of

mandatory items that were relevant for thejth rm in the year t; xijt 1 if the ith (relevant) item is disclosed by the companyj

in the yeart; xijt 0 if the ith (relevant) item is not disclosed;

Therefore 0 MDIjt 1.

The checklist for the year 1996 is based on IFRS (alternatively referred to as IAS) that were extant and relevant in 1996 as

published by the IASC in its annual volume of standards (IASC, 1995). The study uses a disclosure checklist that was readily

available from Epstein and Mirza (1997) encompassing International Accounting standards (IAS) extant in 1996. These are IAS1, 2, 5, 7, 8, 9, 10, 14, 16, 17, 19, 21, 22, 24, 25, 27, 28, and 32, and E 49. IAS 11 was excluded since it was not relevant to any

company in this sample as none of the companies worked in the construction sector. The mandatory disclosure items of the

year 1996 produced a checklist of 19 IAS (301 secondary items).

The checklist for the year 2004 is based on the IFRS that were extant and relevant in 2004 as published in the IFRS Bound

Volume (IASB, 2004). The study uses a checklist that was available from PriceWaterhouseCoopers (2004), producing

a checklist of 27 IAS and 4 IFRS. These IAS are 1, 2, 7, 8, 10, 12, 14, 16, 17, 18, 19, 20, 21, 23, 24, 26, 27, 28, 31, 32, 33, 36, 37, 38, 39,

40, and 42, and IFRS 2, 3, 4 and 5 (comprising 641 secondary items). 9

5.3. Model specication

We employ multiple regression to examine whether the factors under study are associated with the extent of mandatory

disclosure of Jordanian listed companies. The model specication is shown below:

MDIjt b0 b1Y b2 PNED b3 AC b4SBoard b5 GOV b6FOW b7INDV b8 INST b9 ASSET b10MC b11 NS b12LEV b13LLEV b14GR b15LIQ b16PROF b17PM b18AUD b19AGE b20LIST b21 IND1 b22IND3 ei

where:

MDIjt the mandatory disclosure index;

Y year dummy variable: 1 for the 2004 annual reports, 0 for the 1996 annual reports;

PNED ratio of the number of non-executive directors on the board to total number of board members;

AC audit committee dummy variable: 1 if an audit committee is present, 0 otherwise;

SBoard size of the board number of board members;

GOV total percentage of ordinary shares held by the government;

FOW total percentage of ordinary shares held by foreign investors;

INDV total percentage of ordinary shares held by domestic individuals holding 10% or less of the shares;INST total percentage of ordinary shares held by institutional investors;

ASSET total assets proxy for rm size;

MC market capitalization market value of company ordinary shares (proxy for size);

NS net sales net sales/revenues (proxy for size);

LEV leverage ratio of total liabilities to shareholdersequity (proxy for gearing);

LLEV long-term leverage ratio of long-term liabilities to shareholders equity (proxy for gearing);

GR gearing ratio total liabilities to total assets (proxy for gearing);

LIQ liquidity current ratio ratio of current assets to current liabilities;

PROF protability return on equity (proxy for protability);

8 Evidence from previous research supports the notion that there is no signicant difference between the results produced by the weighted and the

unweighted disclosure indexes (Chow & Wong-Boren, 1987).9

Note that the standards in 2004 have a larger number of secondary items. This was due to the larger number of requirements in IFRS in 2004 comparedto 1996.



9/17

Cross-sectional regression models are run for each year separately, so as to identify the variables that inuenced the extent

of mandatory disclosure in each year. To test for the impact of privatisation, a pooled regression model is estimated based on

the Least Squares Dummy Variables estimator (LSDV) technique using the data of the whole sample ofrms. This technique

includes using a dummy variable for the year and estimating a pooled regression model to control for omitted variables that

vary across the years but remain constant from observation to observation (Hsiao, 2003; Dougherty, 2006). This enables us to

study how disclosure and governance reforms and ownership changes inuence the mandatory disclosure compliance of

Jordanian listed rms.

6. Results and discussion

6.1. Descriptive statistics

Table 3shows the descriptive statistics for the dependent and independent variables during the pre-(1996) and post-

(2004) regulatory reform period.10 The table shows that the mean of the mandatory disclosure compliance in 2004 (0.79) is

notably higher than that of the 1996 sample (0.55). It also indicates that 70% of the sample companies formed an audit

committee in 2004. The percentage of non-executive directors and board sizes were slightly higher in 1996 compared to

2004, implying lack of compliance with the legal requirements. A plausible explanation for this lack of compliance might be

due to the weak enforcement of corporate governance rules ( ROSC, 2005). Privatisation could have indirectly inuenced the

reduction in the percentage of non-executive directors as companies move from the public to the private sector leading to

a reduction in resource expenditures,11 including reducing board sizes and the number of non-executive directors.

Regarding the ownership variables, the table points to an increase in both foreign and institutional shareholdings, while

government and individual ownerships have declined. The decline in individual ownership is somewhat surprising. The

reluctance of many small individuals to trade in the capital market might be a possible explanation, as a result of the political

instability in the region.

Table 4offers a summary of the companiesdisclosure scores for the years 1996 and 2004. Comparing the data for the twoyears, the table shows an increase in disclosure compliance with IFRS over the time period of the study. In 2004, 50% of

companies disclosed between 80% and 90% of the items included in the disclosure index, whereas in 1996 none of the

companies disclosed in that category. Also, in 1996,13% of companies scored between 40% and 50% on the disclosure index, by

2004 none of the companies were in that category. This indicates a noticeable increase in the disclosure compliance with the

IFRS by the sample ofrms.12

6.2. Multiple regression results for cross-sectional models 1996 and 2004

The results of the cross-sectional regression models are shown in Table 5. In addition to the full models, reduced regression

models are estimated. The reduced models are used due to the inclusion of too many variables. This allows us to capture the

variables that provide more important information about the independent variable.13 To select the best reduced model, two

issues must be considered: a selection criterion and a selection procedure. Many selection criteria have been suggested, themost common of which is the Cm criterion (Mallows Cm statistic).

14 As for the selection procedure, the most careful selection

procedure is the all possible models procedurein which all possible models are tted to the data. The selection criterion is

then used on all the models in order to nd the model which is preferable to all others (Statmaster, 2008).

PM prot margin prot before tax/net sales (proxy for protability);

AUD auditor size dummy variable: 1 if auditor is one of the Big 6 (in 1996), the Big 4 (in 2004),

0 otherwise;

AGE rm age number of years since establishment of company;

LIST listing status dummy variable: 1 if company listed on rst market, 0 otherwise;

IND1 industry 1 1 if infrastructure, 0 otherwise;

IND3 industry 3 1 if services, 0 otherwise;

b022 regression estimates;

ei the stochastic disturbance term.

10 The dependent and independent variables are transformed using the normal scores transformation approach. A normally distributed dependent

variable implies that the errors are normally distributed and that the signicance tests are meaningful and have great power (Cooke, 1998).11 Shleifer and Vishny (1997)argue that political interference in a public rm results in excessive employment.12 A pairedt-test is also conducted that compares means of mandatory disclosure in 2004 with those in 1996. We nd signicant differences between the

means of the mandatory disclosure compliance implying that the introduction of the disclosure regulation produced higher disclosure in 2004 compared to

1996.13 When there are a large number of explanatory variables, it is useful to be able to reduce the model to contain only the variables which provide

important information about the response variable.14

Cm RSSm/S

2

2(m 1) n, where RSSm is the residual sum of squares for the reduced model, m is the number of variables in the reduced model,S2 RSSk/(n k 1);k is the number of variables in the full model, and n is the number of observations.



10/17

Table 3

Descriptive statistics of the dependent and independent variables for the whole sample.

Whole sample ofrms in 1996,N 80 Whole sample of rms in 2004, N 80 Pooled

Variable Mean

Median

Minimum

Maximum

SD Mean

Median

Minimum

Maximum

SD Mean

Median

MDI 0.547

0.553

0.414414

0.653333

0.0472 0.789850

0.802897

0.579882

0.901961

0.0694654 0.6684

0.6510

Y _ _ _ 0.500

0.50

Corporate governance variablesPNED 0.5986

0.6125

0.00

0.9167

0.1753 0.5896

0.6364

0.00

0.9167

0.2183 0.5941

0.6305

AC 0

0

0

0

0 0.7000

1.0000

0.00

1.0000

0.4611 0.3500

0

SBoard 9.7875

10

6

14

1.90731 9.175

9

4

14

2.29350 9.4812

9

Ownership variables

GOV 7.63

0

0

99.95

17.52 4.04

0

0

100.00

15.52 5.84

0.00

FOW 0.862

0

0

15.00

2.539 3.39

0.10

0.00

96.99

12.68 2.127

0.038

INDV 45.74

47.33

0

88.81

21.44 37.31

35.48

0.00

78.64

20.30 41.52

42.86

INST 24.77

22.47

0

74.36

17.01 27.45

24.04

0.00

78.68

20.10 26.11

23.07Company characteristics

ASSET 29688505

8904431

314506

390773547

72423275 39040962

13293155

1401542

368831000

72447020 343647

106147

MC 21292817

7720000

434863

4542615

57206353 50299693

13906250

430303

915664820

134241773 355320

990750

NS 18852105

3727263

0

493458976

64327897 31302527

6549134

13945

861840893

104760374 250773

555857

LEV 72.1

43.6

9.7

1088.3

145.2 77.0

30.0

0.9

1185.4

148.8 74.5

36.0

LLEV 10.83

0.00

0.00

116.21

22.11 10.03

0.00

0.00

74.65

17.75 10.43

0.00

GR 69.06

69.07

8.41

99.77

19.31 68.48

75.18

6.23

98.32

23.96 68.77

72.65

LIQ 14.09

1.98

0.12

399.90

57.35 4.576

2.250

0.030

53.880

8.325 9.33

2.18

PROF 4.99

3.65

75.49

128.48

19.92 5.99

8.11

150.91

52.05

22.73 5.49

6.43

PM 3.55

6.02

224.44

100.85

51.94 6.1

12.4

1882.8

230.6

219.0 1.3

9.1

AUD 0.325

0.00

0.00

1.00

0.4713 0.5375

1.00

0.00

1.00

0.5017 0.4313

0.00

AGE 14.10

8.50

1.00

58.00

14.24 22.10

16.50

9.00

66.0

14.24 18.10

13.00


11/17

LIST 0.7500

1.00

0.00

1.00

0.4357 0.6750

1.00

0.00

1.00

0.4713 0.7125

1.00

IND1 0.0875

0.00

0.00

1.00

0.2843 0.0875

0.00

0.00

1.00

0.2843 0.0875

0.00

IND3 0.3375

0.00

0.00

1.00

0.4758 0.3375

0.00

0.00

1.00

0.4758 0.3375

0.00

MDI, the mandatory disclosure index; Y, year, dummy variable: 1 for the 2004 annual reports, 0 for the 1996 annual reports; PNED, number of non-executive

members; AC, dummy variable: 1 if an audit committee is present, 0 otherwise; SBoard, number of board members; GOV, total percentage of ordinary shares he

ordinary shares held by foreign investors; INDV, total percentage of ordinary shares held by domestic individuals holding 10% or less of the shares; INST, total p

investors; ASSET, total assets; MC, market value of company ordinary shares; NS, net sales/revenues; LEV, ratio of total liabilities to shareholders equity; LLEV, ra

GR, total liabilities to total assets; LIQ, ratio of current assets to current liabilities; PROF, return on equity; PM, prot before tax/net sales; AUD, dummy variable: 12004), 0 otherwise; AGE, number of years since establishment of company; LIST, dummy variable: 1 if company listed on rst market, 0 otherwise; IND1, 1 i

0 otherwise.


12/17

To test for the presence of multicollinearity, the variance ination factor (VIF) is calculated for variables in each of the

regression models. In the 1996 cross-sectional model, our analysis shows that the VIF values for the gearing and leverage

variables (14.2 and 13.2, respectively) constitute multicollinearity problems.15 One way of dealing with this problem is to t

highly correlated variables in separate regression models, selecting the variable that provides the greatest explanatory power

while satisfying the regression assumptions (Ahmed & Nicholls, 1994; Wallace & Naser, 1995). Therefore, we drop the gearing

variable in the 1996 model. The same procedure is used in the 2004 cross-sectional model and the variable Asset is dropped as

a result of the high multicollinearity.

Table 5details the regression results for the 1996 and 2004 cross-sectional models. The adjustedR2 of the 1996 full modelis very small and the F-test is insignicant. One possible reason for the low adjusted R2 is that the disclosure behaviour in that

year did not follow any pattern in relation to the variables under study, largely due to unawareness by management of the

importance of compliance with IFRS. The reduced model produced an adjustedR2 of 12.6% and theF-test is signicant at the

0.05 level.16 Long-term leverage is highly signicant (at the 0.01 level) implying that Jordanian listed rms with greater long-

term debt have a preference for using IFRS in the preparation of theirnancial statements. This is explained by long-term

creditors requiring information to assure them that shareholders and management are less likely to diminish the value of

claims arising from bond covenants (Wallace & Naser, 1995). Further, long-term leveraged rms incur higher monitoring

costs, hence, compliance with IFRS facilitates the monitoring role ofnancial statements (Dumontier & Raffournier, 1998).

On the other hand, leverage is negatively associated with disclosure compliance. At rst sight this result is puzzling,

because it contradicts the result of long-term leverage. Nevertheless, leverage comprises both long-term and current debt,17

hence, the negative signicance of leverage implies that the higher the rms current debt the lower their disclosure

compliance with IFRS.18 Thus, a possible explanation is that Jordanian rms with high current debt might prefer to use other

mechanisms to resolve information asymmetry, such as private communication between management and creditors.Industry type 3 has a negative and signicant coefcient at the 0.1 level, implying that rms in the services sector comply

the least with IFRS. This may be due to the less complex nature of their operations, hence their use of less sophisticated

disclosure rules. Non-executive directors are negatively associated with disclosure compliance (at the 0.05 level) indicating

that they were inactive in monitoring management. The negative association can also be attributed to the lack of indepen-

dence of non-executive directors.

The 2004 full and reduced models are signicant at the 0.05 and 0.01 levels, respectively. The full model produced an

adjustedR2 of 14.7% and ve variables are statistically signicant: audit committee, size of the board, auditor type, liquidity,

and the gearing ratio (at the 0.1, 0.1, 0.05, 0.1 and 0.1 levels, respectively). This result con rms that the enforcement of

mandatory audit committees in Jordan has a signicant impact on rms disclosure compliance with IFRS, since it is the

responsibility of the audit committee to ensure that the information disclosed in the annual report is in compliance with the

mandatory requirements of the JSC (including compliance with IFRS). The board size variable has a positive signicant

coefcient, contradicting its expected direction. This may be explained as larger Jordanian rms have larger board sizes since

they have more owners and they need to satisfy those owners by including their representatives as members on the board ofdirectors. Also, the positive signicance of the auditor type variable asserts the importance of the role of big auditing rms in

compelling their clients to comply with the IFRS (since compliance with mandatory disclosure in Jordan means compliance

with IFRS). The percentage of non-executive directors on the board is not signicant, implying that the reform pertaining to

non-executive directors did not enhance mandatory disclosure. This result might be due to the failure of the new 1997

Company Law to provide for explicit specication of the duties of directors. Also, the requirement that all directors on the

board must be shareholders jeopardises the independence of non-executive directors.

Table 4

Distribution of Disclosure Compliance Scores: A Comparison 19962004.

Score range 1996 2004

% of disclosure index No. of rms % in the sample No. of rms % in the sample

4050% 13 16.25 0 0.00

5060% 56 70.00 1 1.25

6070% 11 13.75 9 11.25

7080% 0 0.00 29 36.25

8090% 0 0.00 40 50.00Over 90% 0 0.00 1 1.25

Total 80 100.00 80 100.00

15 A VIF value of 10 represents a severe multicollinearity problem (Naser et al., 2002).16 Although the 1996 reduced model dropped many variables including ownership variables, it provided useful information identifying the most relevant

variables in explaining the response variable.17 Examples of current debts are notes payable, accounts payable and other accrued expenses.18

To con

rm this conclusion, the regression analysis is repeated using a leverage variable measured by the percentage of current debt (long-term debtexcluded) to equity. The results retain the positive signicance of long-term leverage and the negative signicance of the new variable.



13/17

Table 5

Regression analysis of determinants of disclosure.

MDIjt b0 b1Y b2 PNED b3 AC b4 SBoard b5 GOV b6 FOW b7 INDV b8 INST b9 ASSET b10MC b11NS b12LEV b13LLEV b14GR b15LIQ b16PROF b17PM b18AUD b19AGE b20 LIST b21IND1 b22IND3 ei.

Predictor Predicted sign 1996

Full model

1996

Reduced model

2004

Full model

2004

Reduced model

Pooled

Full Model

Pooled

Reduced Model

Constant None 0.0545

0.19

0.0933

0.67

0.6030

1.75*

0.6173

2.32**

0.8289

6.15***

0.8414

10.87***

Year

1.23217.84*** 1.22108.57***

Corporate Governance variables

PNED 0.3267

2.34**

0.2306

2.11**

0.0782

0.62

0.0836

0.75

0.04849

0.91

0.02425

0.51

AC 0.4587

1.71*

0.4859

2.06**

0.3246

2.11**

0.3372

2.36**

SBoard 0.0565

0.37

0.2562

1.69*

0.2519

1.87*

0.06132

1.05

0.07795

1.45

Ownership variables

GOV ? 0.2568

1.35

0.1915

1.19

0.2095

1.45

0.06500

0.96

FOW 0.0549

0.36

0.1623

1.16

0.1666

1.28

0.03702

0.60

0.05310

0.90

INDV ? 0.0742

0.38

0.0114

0.08

0.03586

0.55

INST ? 0.0156

0.10

0.0814

0.57

0.04023

0.68

Control variables

ASSET 0.0259

0.14

MC

0.0313

0.15

0.0225

0.14

0.11156

1.41

0.09517

1.98**

NS 0.0688

0.27

0.0468

0.21

0.04448

0.46

LEV 0.5252

2.28**

0.3538

2.40**

0.2916

1.08

0.2598

1.04

0.10314

1.24

0.12108

1.63

LLEV 0.5466

2.47**

0.5526

2.94***

0.1910

0.94

0.2032

1.06

0.17652

2.09**

0.18580

2.38**

GR 0.5367

1.71*

0.5172

1.79*

LIQ ? 0.0843

0.51

0.3132

1.68*

0.3011

1.81*

0.01525

0.24

0.01779

0.30

PROF 0.2704

1.33

0.1587

1.10

0.2236

1.13

0.2580

1.97*

0.02478

0.32

PM 0.1859

1.07

0.1598

1.12

0.0430

0.17

0.01196

0.16

AUD 0.2545

0.81

0.2624

1.11

0.5930

2.37**

0.5955

2.61**

0.2729

2.41**

0.2270

0.1042

AGE 0.2574

1.33

0.0526

0.38

0.0735

0.58

0.04594

0.68

0.04669

0.86

LIST 0.0947

0.30

0.0365

0.12

0.0117

0.10

IND1 0.4578

0.76

0.2616

0.61

0.3420

0.57

0.2053

0.42

0.2259

0.92

IND 3 0.3879

1.43

0.4462

1.90*

0.3013

0.97

0.2123

0.90

0.1221

1.02

R-Sq(adj) 6.3% 12.6% 14.7% 20.7% 66.7% 68.0%

F-statistic 1.29 2.63** 1.68** 2.38*** 16.93*** 31.66***

*** Signicant at the 0.01 level (all probabilities are one-tailed); **Signicant at the 0.05 level; * Signicant at the 0.1 level; Top values are the regression

coefcients, the bottomare the t-statistics; MDI themandatorydisclosure index; Y year dummy variable:1 forthe 2004 annual reports, 0 forthe 1996

annual reports; PNED number of non-executive directors on the board to total number of board members; AC audit committee dummy variable: 1 if

an audit committee is present, 0 otherwise; SBoard size of the board number of board members; GOV total percentage of ordinary shares held by the

government; FOW total percentage of ordinary shares held by foreign investors; INDV, total percentage of ordinary shares held by domestic individuals

holding 10%or less of the shares; INST, total percentage of ordinary shares held by institutional investors; ASSET, total assets, proxy forrm size; MC,market

capitalization, market value of company ordinary shares (proxy for size); NS, net sales, net sales/revenues (proxy for size); LEV, leverage, ratio of total

liabilities to shareholdersequity (proxy for gearing); LLEV, long-term leverage, ratio of long-term liabilities to shareholdersequity (proxy for gearing); GR,

gearing ratio, total liabilities to total assets (proxy for gearing); LIQ, liquidity, current ratio, ratio of current assets to current liabilities; PROF, pro tability,

return on equity (proxy for protability); PM, prot margin, prot before tax/net sales (proxy for protability); AUD, auditor size, dummy variable: 1 if

auditor is one of the Big 6 (in 1996), the Big 4 (in 2004), 0 otherwise; AGE,rm age, number of years since establishment of company; LIST, listing status,

dummy variable: 1 if company listed on rst market, 0 otherwise; IND1, Industry 1, 1 if infrastructure, 0 otherwise; IND3, Industry 3, 1 if services,

0 otherwise;b022, regression estimates; ei, the stochastic disturbance term.



14/17

With respect to liquidity, the results imply that less liquid rms tend to comply more with IFRS to justify their weak

nancial position. Also, the signicance of the gearing variable implies that the higher the rms debt, the higher is its

compliance with the mandatory disclosure of IFRS (Naser & Al-Khatib, 2000; Naser et al., 2002).

The reduced model produced an adjusted R2 of 20.7% and six signicant variables, audit committee, size of the board,

auditor type, liquidity, gearing ratio and protability. Under this model, protability appears as a signicant determinant of

mandatory disclosure compliance, indicating that managers of protable rms disclose detailed information to increase

investorscondence, and to signal superior performance to the market.

6.3. Multiple regression results for the pooled regression model

A pooled regression model is estimated based on the Least Squares Dummy Variables estimator (LSDV) technique using

the data from both the years 1996 and 2004. Pooling cross-sectional data enables us to study how disclosure regulation,

governance reforms and ownership changes inuences disclosure compliance with IFRS. The pooled regression model is

subjected to the same statistical tests used in the previous models. The VIF values of the gearing and asset variables are 9.5

and 9.3, respectively, indicating multicollinearity problems. We use the same procedure utilised earlier and both variables are

thereby dropped from the model.

Another assumption that must be tested with pooled data is the absence of autocorrelation using the DurbinWatson

coefcient (D), where Dranges from 0 to 4.Dvalues between 1.5 and 2.5 indicate independence of observations. The Durbin

Watson coefcient of the model,D 2.1 (which is close to 2), indicates the absence of autocorrelation.

AsTable 5 shows, the adjusted R2 of the models are 66.7% and 68%, respectively (with F-statistics of 16.93 and 33.66,

respectively, which are signicant at the 0.01 signicance level or better). The year variable, as a surrogate for the introduction

of disclosure regulation, produced the most signicant impact on disclosure compliance with IFRS (at the 0.01 level) in both

the full and reduced models. This result suggests that disclosure compliance with IFRS improved as a result of the enactment

of the 1997 Company Law, the 1997 Temporary Securities Law and the 2002 Securities Law which transformed compliance

with IFRS from voluntary to compulsory.

Auditor type and audit committee presence both emerge as signicant determinants of disclosure compliance with IFRS

(in both models). These ndings support the role of large audit rms and audit committees in signicantly inuencing the

levels of compliance with the IFRS. Long-term leverage appeared to have a signicant positive inuence on disclosure (in both

models), while the market capitalisation coefcient is signicant in the reduced model.

None of the ownership variables coefcients are statistically signicant. Jordanian individual investors investment

decisions are largely uninformed, thus, they would exert little inuence on disclosure (Naser & Al-Khatib, 2000). Also,

institutions in Jordan are either passive or related to a controlling family (ROSC, 2005) which explains the nding that they

have no inuence on mandatory disclosure. Further, the governments weak governance can result in poor disclosure practice.

However, the result for foreign investors is somewhat surprising. One explanation for this could be that foreign investors are

not initiallyat ease in an environment that is unknown to them; therefore, their inuence on disclosure compliance might not

be captured within the time frame of our study period.

6.4. Sensitivity tests

We perform an untabulated test, utilising rank transformation. Advocated by Iman and Conover (1979), rank trans-

formation has great advantages when the data is monotone and non-linear in nature. Rank transformation is utilised by

many disclosure studies:Lang and Lundholm (1993), Wallace and Naser (1995), Haniffa and Cooke (2002)and Ali, Ahmed

and Henry (2004). The results of the rank regression support the ndings regarding the signicant inuence of the intro-

duction of the disclosure regulation and the presence of audit committees on disclosure compliance with IFRS, and the

critical role played by the external auditor to ensure compliance with IFRS. Results of other variables (not reported here, but

available from the authors on request) are consistent with the results of the normal approach, conrming the robustness of

the results.

7. Conclusion

This paper has investigated the inuence of accounting disclosure regulation, governance reforms and ownership changes,

resulting from privatisation, on mandatory disclosure compliance of Jordanian listed companies. We conclude that manda-

tory disclosure compliance has signicantly increased through the time period of the study. We run two cross-sectional

regression models for 1996 and 2004. In 1996, long-term leverage and leverage appeared to be the signicant variables to

inuence the disclosure compliance of Jordanian rms. In the 2004 cross-sectional model, auditor type, the presence of the

audit committee, size of the board, liquidity and gearing ratio emerged as signicant determinants of mandatory disclosure.

These ndings were supported by the pooled regression model implying that the introduction of disclosure regulation and

corporate governance reforms through the mandate of audit committees and the type of auditor have all signi cantly

inuenced the mandatory disclosure compliance of Jordanian listed rms. Ownership structure and the percentage of non-

executive directors on the board were insignicant in inuencing disclosure. Finally, two company attributes appeared to

inuence disclosure compliance in Jordan: market capitalization and long-term leverage.



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Taken all together, we conclude that mandatory disclosure compliance improved signicantly as a result of privatisation,

particularly via reforms to disclosure regulation which account for much of that improvement, and additionally, the mandate

of audit committees.

The study provides several contributions to accounting research and to accounting practice and regulation. The study

shows that corporate disclosure research must consider the interaction of accounting systems and economic factors

contingent to particular countries. This study developed a model that incorporated privatisation and its consequent

disclosure regulation, governance reforms, and ownership structure changes, and rm-specic variables. This enhances the

understanding of the inuence of possible determinants of disclosure practice. The inclusion of a large number of variables

helped explain the variance in disclosure, reected in the high R2 of the pooled model.

Further, this study provides timely ndings given the current reforms in progress by the Jordanian authorities for

improving corporate governance standards. In addition, the study shows that disclosure regulation accompanied by stringent

enforcement mechanisms are needed to ensure compliance with mandatory disclosure requirements. It provides implica-

tions for national and international accounting regulators on the use of disclosure regulation for improving corporate

disclosure.

It also suggests that the Jordan Securities Commission staff, who monitor the quality of disclosure, should improve their

review of the disclosure content of annual reports to ensure higher levels of compliance with mandatory disclosure

requirements (compliance with IFRS was only 79% in 2004).

Moreover, the lack of the signicance of non-executive directors on the board is of particular relevance for policy makers

and regulators in Jordan. The lack of signicance might be due to the requirement of the 1997 Company Law that all directors

on the board must be shareholders. This requirement perhaps needs to be reconsidered as it jeopardises the independence of

non-executive directors. This signies the importance of providing a clear denition for independentdirectors and estab-

lishing effective and enforceable legislative frameworks for corporate governance. It also puts pressure on international

regulators such the OECD and the International Monetary Fund (which adopted the OECD Principles as a benchmark

instrument for its member countries and surveillance procedures) to introduce stringent regulation for non-compliance of

governance principles. The positive lesson of these ndings may also encourage other developing countries to adopt effective

policies with a view to improving legislative frameworks for corporate governance.

This study provides information about the improved disclosure levels of listed companies on the Amman Stock Exchange

(ASE) arising as a result of the introduction of disclosure and governance reforms. It established that the adoption of IFRS

without regulatory oversight will not automatically create the improved disclosures needed to promote foreign and domestic

investment at the ASE.

This study demonstrated that introducing governance and disclosure regulation resulted in higher disclosure levels.

Higher disclosure levels mean better information sharing about capital assets, hence improving the attractiveness of such

investments. Therefore, future research can link the ndings of this study to investment decisions in Jordan and other

developing countries undertaking such reforms.

While this study was able to ascertain the impact of disclosure regulation and governance reform resulting from priva-

tisation on mandatory disclosure, it is still based on a single geographical market. Although our results can be generalised to

the Jordanian market, they may not obtain in other markets. Accordingly, an extension of this study can be through the use of

cross-country analyses that may shed light on how privatisation impacts mandatory disclosure. Additionally, our analysis

employs a disclosure checklist method, which is subject to the problem of coding errors and bias inherent in scoring annual

reports.

Acknowledgements

We would like to acknowledge the constructive comments of Balachandran Muniandy, Darren Henry, John Hillier, Leo

Langa, Patrick Hutchinson, Stephen Owusu-Ansah, the participants at the Global Accounting and Organizational Change

Conference 2008, in Melbourne, and the journals editor Mike Jones, on an earlier version of the paper. Thanks are also due to

two anonymous referees for their helpful comments and suggestions. Any remaining errors are ours.

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