ID 1996 American Accounting AIIsociation

Accounti"ll Horizons
VoL 10 No. 1
March 1996
pp. 18-37
Spontaneous Harmonization Effects of
Culture and Market Forces on
Accounting Disclosure Practices
Marilyn Taylor Zarzeski
Marilyn Taylor Zarzeski is Assistant Professor of Accounting at the University of Cen-
tral Florida.
SYNOPSIS: With several institutions striving to harmonize intemational accounting rules across
various seetors of the world, this study asks whether accounting is so culturally driven that harmoni-
zation is unattainable. The study also asks what, if anything, can change culture in relation to infor-
mation disclosure behavior. Two hundred fifty-six corporate annual reports from France, Germany,
Hong Kong, Japan, Norway, the United Kingdom and the United States were examined in order to
determine whether cultural and market forces correlate with the level of investor-oriented disclo-
sure. Tests also examinad whether the culture-disclosure relationship is different for local versus
international enterprises.
The primary findings show that the secretiveness of a culture does undertie disclosure practices
of its business enterprises. There is evidence that marketforces also affect disclosure behavior: (1)
higher levels of relative foreign sales relate to higher levels of disclosure, (2) lower debt ratios relate
to higher disclosure, and (3) larger firms tend to disclose more information. Secondary findings
show that local enterprises, but not international enterprises, disclose financial information com-
mensurate with the secretiveness of their local culture. Enterprises operating in the global culture,
on the other hand, appear to be disclosing higher levels of information than dictated by their local
culture, perhaps in order to obtain resources at reasonable costs.
These findings may be useful to the Intemational Organization of Securities Commissions in
their effort to harmonize the financial reporting of companies listing on foreign stock exchanges.
Although local culture permeates accounting disclosure, there is evidence that firms operating in
the intemational marketplace may be willing to adhere to a mandated set of minimal accounting
disclosures in order to compete for international resources. Firms already do disclose differently
when operating in the global culture, thereby providing evidence of spontaneous "harmonization"
effects of culture and market forces upon accounting disclosure behavior.
Data Availability: Data for this study were taken from company annual reports. A list of sample
firms is available from the author upon request.
Motivation for this research origina tes
from ongoing international accounting harmo-
nization efforts. Such efforts attempt to alle-
viate alleged investors' decision-making prob-
lems via mandated international accounting
standards. Proponents ofharmonization con-
tend that a mandatory setting of standards
across countries is a reasonable approach for
improving comparability among international
financial statements. Such comparability, it is
assumed, would increase protection of "for-
eign"l investors and would thereby foster the
expansion of international financia! markets.
I "Foreign" is relative to the disclosing company.
This paper received the Association of Charted Accoun-
tanta in the United States 1995 Education Award for
accounting manuscripts.
The author would like to thank her dissertation com-
mittee (Chairman Bipin Ajinkya, Anwer Ahmed, Roy
Crum and Ron Ward) for their invaluable guidance, two
anonymous reviewers, Jeannie Johnson, Robert Lanon,
and Cindy Parks for their very helpful comments.
Submitted July 1995
Accepted December 1995
Spontaneous Harmonization Effects of Culture and Market Forces 19
Opponents of accounting harmonization
argue that enterprises competing in interna-
tional markets will spontaneously disclose fi-
nancial information in order to be competitive.
Regulated disclosures, therefore, are unnec-
essary. AdditionaIly, regulated international
harmonization may not be possible in a busi-
ness world of cultural, legal, poltical and eco-
nomic differences. Financial reporting systems
have evolved over time, and each country's
reporting system serves the needs of a distinct
group of constituents such as public investors,
private creditors or governments.
Several international organizations re-
sponsible for the establishment of accounting
guidelnes are attempting to harmonize ac-
counting standards aeross different segments
of the world. Progress of the International
Accounting Standards Committee (IASC) is
evident by their 32 Intemational Accounting
Standards (lASs). Although there is no re-
quirement for countries to adhere to the IASs,
there are growing numbers of companies re-
porting in compliance with them. Progress
with the European Union (EU) standard s has
occurred over several years, but important
measurement and disclosure issues were re-
solved by permitting two alternative methods
rather than only one. These options reduce the
comparability aeross EU financial statements.
The Intemational Organization of Securi-
ties Commissions (lOSCO) is attempting to
find an acceptable financial reporting system
for enterprises that list securities on a foreign
exchange. There is a possibility that IOSCO
wiIl recommend the IASC standards for com-
panies listing on foreign exchanges. Securities
regulators across the world are seeking rel-
evant and comparable disclosures that may
improve economic resource allocations. For
financial information to be comparable, there
are actually three aspects that must be ad-
dressed: (1) is the same amount of informa-
tion presented (i.e., disclosure issues); (2) is
the same in{ormation presented (i.e., recogni-
tion and measurement issues); and 3) is the
. information equally reliable? (i.e., audit
issues).
This research addresses the first question
by examining disclosure levels. It examines
whether enterprises dependent upon interna-
tional markets for major resources are
spontaneously providing levels offinancial dis-
closure sought by investors. This research also
proposes that local enterprises, but not inter-
national enterprises, disclose financial infor-
mation commensurate with their home
culture. If such evidence exists, then the le-
gitimacy of forced accounting harmonization
for all firms across countries is questionable.
However, firms operating in the international
marketplace may be willing to adhere to a
mandated set of minimal accounting disclo-
sures in order to compete for intemational
resources. This paper attempts to answer
Salter and Niswander's (1995, 394) question:
"What, if anything, can change culture?"
The remainder of this paper is organized
as follows. The next three sections set the
background: the evolution of accounting, the
culture-market influences upon information
disclosure, and an overview of prior account-
ing disclosure studies. The hypotheses and
model development are then described, fol-
lowed by the research results. The last sec-
tion ofthe paper summarizes the findings and
their implications.
EVOLUTION OF ACCOUNTING
Before there is agreement on articulated
rules, the implied rules of conduct over time
are followed (Hayek 1967). Accounting prac-
tices (implied rules) ofien become accounting
standards (articulated rules). Accounting
practices evolve differently across countries
because business relationships evolve differ-
ently. Business relationships differ because of
environmental stimuli, e.g., polities, law, eco-
nomics and culture. If standards come from
practices (voluntary) and practices come from
culture (through business relationships, gov-
ernment, capital markets, financial interme-
diaries and the accounting profession), then
accounting standards appear to be culture-
driven through market {orces.
A culture grows and develops in response
to environmental stimuli, similar to the
growth offirms' accounting disclosure behav-
iors and countries' accounting disclosure stan-
dards. There are several classification stud-
Coovriaht (C) 2001. AII Riahts Reservad.
20
ies that show evidence of environmental pat-
terns associated with national systems of ac-
counting (e.g., Mueller 1967; Radebaugh 1975;
Belkaoui 1983; Salter and Niswander 1995).
Gray (1985) explains that enterprises in eco-
nomically developed countries are probably
more candid so that business performance can
be evaluated by society. More secretive coun-
tries,
2
though, may have developed business
and financing relationships that encourage
direct, private interactions. Such countries
may have developed financial reporting sys-
tems not intended mainly for outside inves-
torso Salter and Niswander (1995) find evi-
dence that cultural secrecy relates negatively
to the development offinancial markets.
'lb understand the development of nter-
national financial markets and the feasibility
ofinternational accounting standards, we now
view the culture-market-standards paradigm
in the global environment. Perhaps the har-
monization issue can be more readily un-
tangled by thinking ofthe cultural differences
as culture-driven through market {orces. The
global market isjust a different "culture" than
the one the firm faces at home. When a firm
does business in the global market, it is oper-
ating in a different "culture" and therefore
may need to have different "practices." Higher
levels of financial disc10sures may be neces-
sary for international survival because disclo-
sure of quality operations should result in
lower resource costs. When enterprises from
more secretive countries perceive economic
gain from increasing their financial disclo-
sures, cultural borrowing may occur. The cul-
ture being borrowed will be a "global market
culture," rather than a specific country
culture.
Hayek (1988) believes that individuals
adapt their activities to events that occur in a
market system. He advances Menger's (1883)
spontaneous ordering of the market in which
practices and institutions arise from activities
of numerous individuals using economic in-
formation in pursuit oftheir own interests. In
other words, disc10sure practices in the inter-
national marketplace arise spontaneously.
The question remains whether institutional-
Accounting Horizons I March 1996
ized disclosure standards are possible in a glo-
bal culture. ls a competitive international
marketplace a strong enough inducement for
countries (or international firms) to borrow the
global culture and agree upon international
accounting standards?
Bloom and Naciri (1989) note that the nine
countries in their study show evidence tbat
local standard setting lags behind environ-
mental and cultural changes. Perhaps inter-
national standard setting also lags behind
environmental and cultural changes. If the
current study finds evidence of global cultural
borrowing,
3
then nternational accounting
standard setting may be feasible at least for
firms operating in the global market.
INFORMATION DISCLOSURE:
CULTURE-DRIVEN THROUGH
MARKET FORCE S
Although it is difficult to separate the im-
pact of cultural forces and market forces on
accounting disc10sure practices, this section
examines prior research related to these
forces. First is a discussion of Gray's (1988)
theory of cultural influence on accounting.
Second, there is an overview of multination-
als and competitive strategy, nationally and
internationally. Third, resource dependence
theory helps to explain the behavior of firms
in a competitive environment.
Gray's Theory of Cultural Influence on
Accounting
As discussed earlier, culture underlies the
business activities of a nation. Utilizing ac-
counting as a s ubculture , Gray (1988) pro-
poses several hypotheses that relate
Hofstede's (1980) four cultural dimensions
(individualism-collectivism, uncertainty
avoidance, masculinity-femininity and power
distance) to accounting systems. Gray (1988)
develops a framework for analyzing the de-
2 Information diselosure, denoting openness of a soci-
ety, relates to the degree of secretiveness of a culture;
3 Such evidence ineludes: (a) firms in the international
marketplace providing higher levels of disclosure prac-
tices than their domestic counterparts and (b) inter-
national firms disclosing similarly across firms.
"" __ _:_t-.Io""'-"W'\I"\A AIIII""II:_L."'- l1""li ____ ._ ....
Spontaneous Harmonization Effects ofCulture and Market Forces 21
velopment of accounting systems by using ac-
countants' vaIue systems, purported to be de-
rived from societal values. The accounting
vaIues used by Gray (1988) inelude profession-
alism versus statutory control, uniformity ver-
sus flexibility, conservatism versus optimism,
and secrecy versus transparency. The last
value grouping forms the foundation for the
current study beca use information disclosure
may depend upon the level of secrecy in each
culture.
Perera (1989) uses Gray's theory (1988) in
a descriptive analysis of different cultural en-
vironments and their accounting systems.
Perera concludes that the Anglo-American ac-
counting model espoused by the IASC is likely
to encounter relevance problems in Continen-
tal Europe and other countries with different
culture-driven markets from the United
States and the United Kingdom. Grayand
Vint (1994) also test Gray's theory (1988) by
using the database of disclosure practices from
a 1984 project conducted by the University of
Glasgow and Deloitte Haskins and Sells. With
27 countries in a univariate regression analy-
sis, the researchers find significant correla-
tions between each cultural dimension and the
average accounting disclosure score of each
country's enterprises.
4
A multivariate regres-
sion analysis with a11 four cultural variables
shows individualism positively related to ac-
counting disclosure and uncertainty avoid-
ance, negatively related to accounting disdo-
sure. Gray's (1988) culture-accounting theory
also has been shown to explain financial re-
porting practices, with disclosures derived by
the Center for International Financia! Analy-
sis and Research (Salter and Niswander 1995).
The current study uses Gray's (1988)
theory of cultural influence upon accounting
disclosures. Gray's theory explains how cul-
ture affects the development ofbusinesses and
their institutions, including accounting sys-
tems. The current study examines the culture-
accounting relationship in a resource depen-
dence context, specifically in a competitive
global market contexto This study questions
whether innovation in disclosure occurs in the
financial reporting behavior of enterprises
dependent on foreign resources. In particular,
do enterprises in the internationaI market-
place disclose contrary to the secretiveness of
their home culture? Ir so, then what causes
such "contrary" behavior?
Multinationa1s and Competitive
Strategy
There are increasing pressures for higher
levels of accountability from multinational
enterprises (Grayet al. 1981). Such pressures
resuIt not only from multinational firms' sig-
nificant power over resources, but aIso from
the risk-reducing incentive offirms to display
themselves as quality firms. Competition in-
volves the revelation and exchange of knowl-
edge or information about quality (Alchian
and Demsetz 1972).
In an analytical capital market scenaro,
Verrecchia (1983) shows that traders are un-
able to interpret withheld information of a
firm as good or bad, in comparison to the firm's
competitors. The traders are likely to discount
the value of the firm, thereby encouraging
thorough disclosure practices by the firmo In
a product market scenaro, Darrough and
Stoughton (1990) use game theory to show
that competition in the product market en-
courages voluntary disclosure because disclo-
sure helps the financial market to value the
entrenched firm more accurately.
5
'lb compete successfullywith firms that pos-
sess knowledge oflocal business conditions and
traditions, the multinational firm must hold
some form of competitive advantage. Porter
(1986) points out that competitive advantage of
a firm can only be understood by analyzing dis-
crete activities and not the firm as a whole. His
examples of discrete activities include account-
ing activities, e.g., disclosures, that are physi-
cally distinct and readily observed.
4 As hypothesized, individualism and masculinity are
positively related to accounting discl08ure, while un-
certainty avoidance and power distance are negatively
related to accounting discl08ure.
5 The cited study is applicable to the sample oC en-
trenched international firms in the current study be-
cause the sample firms are not new to the interna-
tional marketplace.
22
Firms adopting a national competitive strat-
egy may either maintain stable local sources of
capital, materials, labor and customers, or ob-
tain resources via changes in their organization
structure, e.g., vertical or horizontal integration.
Williamson (1975) explains how firms form hi-
erarchies of suppliers and wholesalers in order
to lower transaction costs. Such hierarchies en-
courage private sharing offinancial information,
thereby decreasing information demands from
outsiders.
Firms adopting an international competi-
tive strategy are operating in a global culture
that depends upon global resources. To obtain
foreign customers and enhance public image,
firms may choose to disclose at least as much
as their competitors, which may or may not
be "more" than they are already disclosing in
their home country6 (Lundblad 1991). 'lb ob-
tain foreign capital at lower costs, firms may
likewise provide disclosures similar to their
competitors in order to demonstrate the qual-
ity o earnings and assets (Choi 1973;
Diamond and Verrecchia 1991). For further ex-
planation of the resource-disclosure relation-
ship, next is an explanation of resource de-
pendence theory.
Resource Dependence
Resource dependence theory is an expla-
nation ohow firms manage uncertainty sur-
rounding business transactions (Pfeffer and
Salancik 1978). Firms develop and modify
practices to solve problems that arise as they
attempt to realize value from business trans-
actions. International activity involves added
risks and uncertainties or business firms and
the parties that do business with them. In or-
der to obtain resources at reasonable costs,
firms competing for customers, labor, materi-
als and capital in a global market are likely
to exhibit higher levels of investor-oriented
disclosures than exhibited domestically. Firms
anticipate that increased disclosure willlower
uncertainty about their operations. The cur-
rent study examines the degree to which de-
pendence on local versus international re-
source providers affects accounting disclosure
behavior of resource seekers, i.e., business
firms.
Accounting Horizons I March 1996
ACCOUNTING DISCLOSURE
STUDIES
There has been research interest in ac-
counting disclosure behavior in annual reports
since, at least, the 1960s. Disclosure research
pertinent to the current study can be divided
into two categories. The first category ineludes
accounting diselosure questionnaires sent to
various parties within the financial reporting
process. Using the relevance ranking of dis-
closure items, researchers developed account-
ing diselosure indices or performed statistical
tests of disclosure rankings (Cerf 1961;
Singhv and Desai 1971; Buzby 1974; Chandra
1974; Baker et al. 1977; Frth 1978;
McKinnon 1984). These studies show that
user groups assess the value offinancial dis-
closures differently. Therefore, it is important
for the current study about investor-oriented
diselosures to in elude those items that inves-
tors deem important.
The second category of relevant disclosure
studies involves the use o a disc10sure index
to measure required, voluntary or total ac-
counting disclosure in annual reports. With
diselosure as the dependent variable, correla-
tions are investigated not only for U .S. f1rIIls
but also for foreign firms (Singhvi 1968; Choi
1973; Barrett 1976; Firth 1979; McNally et al.
1982; Cooke 1991). Regression studes o In-
dia, Japan, Mexico, New Zealand and the U.K.
show that firm size is related positively to the
level of accounting diselosure. Other variables
related to disclosure are stock market listing
and industry sector (manufacturing). Choi
(1973) found evidence of increased diselosure
when firms enter the Eurobond market.
Barrett (1976) found that the annual report
disclosures of U.S. and U.K. companies dif-
fered from those in France, Germany, Japan,
Netherlands and Sweden. Salter and
Niswander (1995) used Bavishi's (1991) tabu-
lated disclosure scores for the world's leading
1,000 companies and found that cultural se-
6 Even though the U.S. and U.K. finns faee high disclo-
sure standards domestieally, they can inerease their
total dsclo8ure by providing more nonfinancial nfor-
mation such as employee data, produetion and baek-
log infonnaton.
Coovriaht \l:) 2001. Al! Riahts Reserved.
Spontaneous Harmonization Effects of Culture and Market Forces
23
crecy is negatively related and market capi-
talization is positively related to level of an-
nual report disclosure.
Also important here is an empirical study
of accounting disclosure requirements
7
across
34 stock exchanges (Adhikari and Tondkar
1992). From their English-Ianguage disc1o-
sure-preference survey offinancial executives
across 41 countries, the researchers develop
a disclosure scoring method and use it to mea-
sure each country's dependent variable (re-
quired disclosure for listing on stock ex-
change). Because this scoring method is re-
cent, is based upon investors' opinions across
countries, and encompasses several items not
inc1uded in other scoring methods, I combine
it with prior methods for the measure of the
dependent variable in the current study. Fur-
ther explanation is provided below in the dis-
cussion of the dependent variable.
MODELDEVELOPMENT
In order to link culture and market forces
to investor-oriented disclosure practices of
enterprises across countries, I develop the In-
ternational Disc10sure Model. The market
forces are relative foreign sales, debt ratio and
total assets,8 while the cultural forces are un-
certainty avoidance, individualism-co11ectiv-
ism, masculinity-femininity and power dis-
tance (Hofstede 1980). The rationale for each
independent variable and its relationship to
accounting disclosure follows the pictorial dis-
play ofthe model in figure 1. Later, the Inter-
national Dependence Model, a variation ofthe
International Disc10sure Model, examines
whether the culture-accounting relationship
is different when businesses operate in the
international marketplace.
Development of Research Hypotheses
This section presents the International
Disclosure Model and the International De-
pendence Model.
International Disclo8ure Model
Dependent Variable. Investor-oriented
disclosure practices, the dependent variable,
includes both required and voluntary disclo-
sure items in English-version annual reports
from seven countries. Other international
comparative studies have followed the ap-
proach that I have followed (see, for example,
Barrett 1976, Choi 1973). 'lb develop a com-
prehensive scoring method, 1 use a11 disclosure
items in the fOllowing accounting disclosure
studies: Adhikari and 'lbndkar (1992), Barrett
(1976), Choi (1973) and Singhvi and Desai
(1971). Table 1 provides the disclosure items
and their one-to-four weightings, with a four
indicating highest importance to analysts.
9
It
is important to use investor-oriented disclo-
sures for the dependent variable because in-
vestors are typically the main users of annual
reports. Annual reporta appear to be the in-
tended outlet of most accounting harmoniza-
tion efforts.
Each company's weighted dependent vari-
able is calculated as follows. If the disclosure
item appears in the annual report, then the
weighting is added to the total disclosure
score. After scoring the entire annual report,
the total disclosure score is divided by the to-
tal possible score; this percentage becomes the
dependent variable. The unweighted score is
calculated similarly, except that each disclo-
sure item receives one point rather than a
weighted number.
Independent Variables. Three market
forces and four cultural forces comprise the
independent variables of the International
Disclosure Model. The plus or minus in the
parentheses indicates the hypothesized rela-
tionship between disclosure and each indepen-
dent variable. Figure 2 provides the Model in
equation format and summarizes the mea-
surement of each variable. Each hypothesis
below is stated in the alternate form, rather
7 An examination of country disclosure requirements
provides a view different from the enterprise disclo-
sure studies discussed above.
s 'lbtal assets acta more as a control variable than a
market variable.
9 Fint, the Adhikari and 'lbndkar (1992) one-to-five
rankings are converted to one-to-four rankings in or-
der to be comparable to the other three studies. If
available in the Adhikari and 'lbndkar (1992) study,
1 use their ranking because it is most recent and glo-
bal. Then, for the remaining discl08ure itema, 1 use
the average of the other researchers' acores or just the
score itaelf ir only one researcher used the disclosure
item.
Coovriaht @ 2001 . AII Riahls Reserved.
24
Accounting HorizonslMarch 1996
FIGURE 1
Development of International Disclosure Model
Resource Providers Independent Variables Dependent Variable
r---------------,
MARKET FORCES L _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ J
Product Markets 1 Customers-Foreign Sales I
I
Firm Size
I
...
Capital Markets
I
Debt Ratio
I
INVESTOR-
ORIENTED
DISCLOSURE
PRACTICES
r---------------,
CULTURAL FORCES L _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ J
Uncertainty Avoidance .
r
Individualism-Collectivism
Masculinity-Femininity
Power Distance
than the null form that the study hopes to re-
ject. The measures for the market variables
are in the corporate annual reporta, and the
measures for the cultural variables are in
Hofstede's study (1980).
FSALES%( +), foreign sales divided by to-
tal sales, is a relative value. Foreign sales is
an international market force that is expected
to influence accounting disclosure behavior of
business enterprises. If companies have more
foreign sales, they are likely to have more for-
eign operations, labor and capital. 'lb obtain
such resources at reasonable costs, it is im-
portant that companies share information
about the quality of their operations.
Saudagaran (1988) found a significant posi-
tive relationship between the percentage of a
firm's foreign sales to total sales and the list-
ing of its shares in foreign markets.
Hypothesis 1: Companies with higher Ievels
of foreign sales to total sales are likely to
provide higher levels of investor-oriented
disclosures.
DEBTRATIO(-), total debt divided by to-
tal assets, is both a local and international
market force beca use debt structures vary
within countries and across countries (Sekely
and Collins 1988). If companies have higher
debt ratios, it is likely that they share more
private information with their creditcrs. Com-
panies with higher debt ratios, on the aver-
age, probably exist in countries with high un-
certainty avoidance and likely have developed
banking relationships and interlocking corpo-
rate ownerships as alternate capital sources
to public ownership. Conversely, companies
with lower debt have a higher percentage of
stock ownership, which could encourage inves-
tor demand for information.
Hypotbesis 2: Companies with lower debt
ratios are expected to have higher levels
of investor-oriented disclosures.
FIRMSIZE( +), the total assets of a com-
pany, is expected to relate positively to disclo-
sure because larger companies, on the aver-
age, are likely to have higher public demands
for information. Larger companies are often
more internationally dependent on foreign
resources. As mentioned earlier, numerous
studies show firm size to be positively related
Coovriaht :J 2001 . AII Riahts Resarv8d
Spontaneous Harmonization Effects of Culture and Market Forces 25
TABLE 1
Disclosure Weights for Comprehensive Scoring Method
DISCLOSURE ITEMS Weight DISCWSURE ITEMS Weight
GENERALINFORMATION FINANCIAL INFORMATION
Company objectives 2.95 Segment earnings-products and cust. 3.05
PP&E function, location, size 2.6 Segment eamings-geographic 3.05
Products, including new 2.95 Segment revenue-products and cust. 2.47
R&D informationlprogress 3 Segmentrevenue-geographic 3.47
R&D info/progress, incl. expense 3.5 Discussion of company results 3.1
Employee information 3.3 Discussion of signif. accounting polices 3
Capital expenditures-current 3.15 Allowance for doubtful accounts 3.3-
Capital expenditures-planned 3.15 Inventory breakdown 1.67
Dependent on major customers 3 Order backlog information 1
Industry trendslposition 3.2 Tangible asset breakdown-PP&E 3
Orig.cost, accum.depm, depr exp. 2
INFORMATION ABOUT MANAGEMENT Current market value of market. seco 2.5
Company director information 2.7 Plant capacity usedloutput 3
Management information 2.7 Changing price levels information 3
Deferred taxes-expensed vs. paid 1.75
COMPANY'S CAPITAL Income statement-single 3
Stock details 3.2 Income statement-comparative 4
Number and types of shareholders 2.5 Income statement-relevant subclasses 1
Large shareholders-name&size 2.95 Distribution of Income 1
Substantial interest shareholders 3.3 Balance sheet-single 3
Options,warrants, conversion rights 3.1 Balance sheet-comparative 4
Historical price range & trading volume 2.7 Balance sheet-relevant subclasses 1
Co. & subs-loan capital detaiVprin.&int. 3.65 Eamed surplus-reconciliation 3.17
Sales or gross margin only 1.5
FINANCIAL INFORMATION Both sales and gross margin 3
Hist. of operating & fin. data-5 years 2.1 Past pension fund liability 2.1-
Hist. of operating & fin. data-9 years 2.9 Advertising expense 1
Audited financial statements 3.75 Contingent liabilities 1
Statement of cash flows--comparative 3.3
Statement of cash flows-single 3
Dividend record and future policy 3.3 Major factors to influence next year 3.4
Consol. & uncon. subs, incl. consol.stmts 3.35 Profit Forecast 3.4
Investments not subs-information 2.85 Cash projections for 1 to 5 years 3.3-
TOTAL NUMBER OF DISCLOSURES
52 *
- = Disclosure item deemed important by creditors (Chow and Wong-Boren 1987).
* = Although there are 58 rows of disclosure items, only 52 are unique to a firmo
to accounting disclosure within a country;
therefore, firm size
10
is considered more as a
control variable than a market variable. This
study examines whether larger companies
across several countries are more likely to
10 The natural log transformation of total assets is
deemed appropriate for this study because the data
shows a positive skewness, indicating nonlinearity.
Note tbat tbe nontransformed raw data for firm size
has no heteroscedasticity problem; the coefficients are
significant but in hundred thousandths.
Copyright 2001. AII Rights Reserved.
26 Accounting HorizonslMarch 1996
FIGURE 2
International Disclosure Model
Directional Relationships and Measurement of Variables
Panel k Directional Relationships
DISC = b
o
+ b1FSALES% - b
2
DEBTRATIO + b
3
FIRMSIZE
- b
4
UNCER
c
+ bsINDIV
c
+ bsMASCU
c
- b, POWER
c
+ E
Panel B: Meuurement ofVariables

DISC
=
Total enterprise disclosure/total possible disclosure points
Ma.rket Forces
FSALES%
DEBTRATIO
=
=
Foreign sales/total sales
Total debt/total assets
FIRMSIZE
=
Naturallog oftotal assets ($U.S. millions)
CultuIal E!2I!lilfl
UNCERl
INDIV
MASCU
POWER
=
=
=
=
Uncertainty avoidance
Individualism versus Collectivism
Masculinity versus Femininity
Power distance
Subscripts: i = Enterprise-specific c = Country-specific
1 For each of the four cultural dimensions of the Hofstede (1980) study, the country vaIues range frorn 6
to 112. A higher vaIue indicates more of that particular cultural trait.
have higher levels of investor-oriented
disc1osures.
Bypothesis 3: Larger companies are more
likely to have higher levels ofinvestor-ori-
ented disc1osures.
The following (our cultural (orces are mea-
sured as continuous variables, ranging from
6 to 112. These measures were developed by
Hofstede (1980)11 in a multidimensional scaI-
ing ofwork-related surveys from over 160,000
IBM empIoyees aeross 64 countries. This study
uses Gray's (1988) secrecy/transparency hy-
potheses that relate each cultural dimension
to information disc1osure. Companies of more
secretive countries (with more private means
of obtaining resources) are more likely to dis-
close less public information. As hypothesized,
Salter and Niswander (1995) found a nega-
tive relationship between secrecy and disclo-
sure practices, with uncertainty avoidance
and individualism being significantly related
to disclosure.1
2
UNCER(-), uncertaintyavoidance, one of
Hofstede's (1980) four cultural dimensions,
signifies the degree to whieh a society can ae-
cept ambiguity. Companies in strong uncer-
tainty avoidance eountries are more likely to
disc10se less information public1y beca use
more certain
13
relationships exist, e.g., bank
financing and c1osely-held company owner-
11 Although this study is dated 1980, it is applicable to
today's environment because country culture changes
slowly. Although Hofstede's work has enhanced our
awareness o global cultural characteristics, it is im-
portant to remember that environment changes within
and outside a company are continually changing cor-
porate culture at a pace more rapid than country cul-
ture changes.
12 Salter and Niswander (1995) use secrecy rather than
disclosure or their dependent variable. The disclosure
scores are multiplied by miDUS ODe in order to hypoth-
esize, or example, that higher individualism relates
to lower secrecy. Therefore, their expected directional
relatioDships are opposite o the current study's
hypotheses.
13 "Certain" refers to direct relationships that are more
prvate and predictable.
Coovriaht 2001. Al! Riahts Reserved.
Spontaneous Harmonization Effects of Culture and Market Forces
27
ship. On the contrary, societies exhibiting
weak uncertainty avoidance are more likely
to have developed business relationships and
institutions that do not necessarily reduce
uncertainties. Such societies are more likely
to have companies with widely-held ownership
and capital markets exhibiting substantial
new financing and ongoing trading activity.
Companies in such weak uncertainty avoid-
ance countries are more likely to disclose
higher levels ofpublic investor-oriented infor-
mation in order to compete in open market
settings.
Hypothesis 4: Companies from weak uncer-
tainty avoidance countries are more likely
to discIose more investor-oriented informa-
tion than those of strong uncertainty
avoidance countries.
INDIV( +), individualism versus collectiv-
ism, represents the degree of separateness
within a soclety. Collectivist socleties, with less
individuality, are expected to discIose lower
levels ofpublic information because their fami-
lies and in-groups, for example, foster secrecy.
Individualistic societies are less likely to have
developed large closely-held companies and
are likely to be less dependent on banking re-
lationships for capital. Because there are rela-
tively less secretive business relationships in
an individualistic society, its companies are
more likely to exhibit higher levels of public
investor-oriented information.
Hypothesis 5: Companies from individual-
istic countries are more likely to disclose
more investor-oriented information than
those of collectivist countries.
MASCU(+), masculinity, is a cultural ten-
dency toward assertiveness and achievement.
More masculine countries are likely to be
growth-oriented, economically and otherwise.
Such countries are more likely to advocate
business relationships and institutions that
foster growth activities. 1b compete cost effec-
tively in the business world, businesses in
masculine societies are more likely to disclose
higher levels of information.
Hypothesis 6: Companies from masculine
countries are more likely to disclose more
investor-oriented information than those
offeminine countries.
POWER(-), power distance, denotes the
dispersion of authority in a society. In a soci-
ety with high power distance, there is less dis-
persion of and less questioning of authority
figures. High power distance societies are
likely to have developed businesses and re-
lated institutions that discourage extensive
sharing ofinformation. Contrarily, enterprises
in low power distance countries are likely to
face the demands oftheir constituents by dis-
closing higher levels of information.
Hypotbesis 7: Companies from low power
distance countries are more likely to
disclose more investor-oriented informa-
tion than those of high power distance
countries.
lnternational Dependence Model
A second model, the International Depen-
dence Model, incIudes the variables ofthe In-
ternational Disclosure Model. However,
subsamples of the total sample of companies,
are used to examine whether enterprises do-
ing business mainly in their home country are
more likely to disclose information commen-
surate with their home culture, while enter-
prises doing business internationally are
likely to discIose information commensurate
with the global culture. If an enterprise com-
petes in the international marketplace, it faces
additional risks and uncertainties with the
procurement of competitive resources. To re-
duce the costs of risks and uncertainties, an
enterprise from a more secretive country may
be willing to disclose more information to the
publico
The international dependence proxy is the
level of total foreign sales of an enterprise
within its own country.14 It is deemed neces-
sary to perform the split within each country
14 Note that total foreign sales is not the same as foreign
sales percentage. Pearson correlation tests show a .05
relationship between the two foreign sales figures.
This allow8 me to keep the foreign sales percentage
variable as an independent variable in the Interna-
tional Dependence Model.
Coovriohl (Cl?OO1 Al! Rinhl" R ...... rvAl'l
28
because countries exhibit varying dependence
on world markets. As in the International Dis-
closure Model, the dependent variable of the
International Dependence Model is total
disclosure.
Each country's enterprises are split in half
to obtain two subsamples: high international
firms and low international firms. For ex-
ample, of the 31 firms in the French sample,
the 16 firms with foreign sales of less than 6
billion French franca are in the first subset
representing low international dependence.
The 15 firms with foreign sales of more than
6 billion French francs are in the second
subset representing high international
dependence. AH countries' low international
dependence firms are then combined, as are
the high international dependence firms. The
two resulting subsets are used to measure
whether low versus high international depen-
dence makes a difference in the culture-dis-
closure relationship.
Hypothesis 8: Firms exhibiting low depen-
dence on international resources are likely
to exhibit a significant relationship be-
tween disclosure and the secretive nature
oftheir home culture, but the firms exhib-
iting high dependence on international
resources are likely to show little or less
culture-accounting relationship.15
Research Design
The random sample of enterprises is se-
lected from Compustat Global Vantage (1990)
or the International Brokers' Estimate System
(1986-1992) in order to ensure that there is
investor appeal. The sample is a composite of
small, medium and large business firms, by
size of revenue; this size variation allows for
examination of disclosure behavior of local
versus international firms because (in the
sample selection stage) larger firms are as-
sumed to have higher levels of foreign sales.
The variation in firm size in this study differs
from the Salter and Niswander (1995) study
that included companies from the largest
1,000 in the world.
Because disc10sures across industries vary
somewhat, this research primarily ineludes six
Accounting HoruonslMarch 1996
manufacturing industries: building construc-
tion, chemicals, electronic equipment, fabri-
cated products, machinery and transportation
equipment. These industries represent several
of the major imports and exports of the coun-
tries in this study. Saudagaran and Biddle
(1995) found that industry exports to specific
countries positively relate to the choice offor-
eign listing locations. In other words, compa-
nies in certain industries appear to list on cer-
tain foreign stock exchanges because the firms
have more exports to those countries.
Seven industrialized countries are exam-
ined: France, Germany, Hong Kong, Japan,
Norway, the U.K and the U.S. The cultural
diversity of these countries makes possible an
analysis ofthe culture-disclosure relationship.
From 795 requests for English version
annual reports, 1 received a 33 percent
response rate. Of the 266 annual reporta re-
ceived, 256 provided the information needed
for this study.16 A test for non-response bias
indicated no bias presento The intent of this
study, to obtain companies with varying lev-
els ofinternational resource dependence, ap-
pears to have been achieved with the receipt
of small, medium and large companies' annual
reporta.
1 use descriptive analysis to examine av-
erages and ranges of the company data and
cross-sectional analysis to investigate the re-
search hypotheses. Ordinary least squares
regression analysis statistically examines the
International Disclosure Model to determine
whether culture and market forces correlate
with investor-oriented disclosures. A Wald test
statistically examines the International De-
pendence Model to determine whether there
15"Less relationship" implies that the statisticalsignifi-
canee of any relationship between culture and account-
ing in the high international firms will not be as strong
as its significance in the low international firms. In
other words, the high international firms will act more
like the global competitive culture then possibly their
local culture.
16 The 256 annual reports are disbursed as follows: 1991
(1), 1992 (l08), and 1993 (147). My requests for
"the most recentO annual reports were sent between
January and April of 1994.
CI'Il'Ivri"ht !el 2001 AII Ri"ht .. R ...... rv .....
Spontaneous Harmonization Effects o( Culture and Market Forces
29
are differences in the culture-disclosure rela-
tionships when firms have low versus high
international dependence.
17
RESEARCH RESULTS
Descriptive Analysis
Table 2 presenta descriptive statistics for
the total sample of companies and for coun-
try samples. First, the statistics for the total
and country samples show that the intended
research design has been attained. The total
company sample ranges in size from U.S.$24
million to U.S.$192 billion asseta. With the
wide ranges of each cultural variable in the
total sample, it is clear that cultural diversity
has been achieved with this sample of busi-
ness enterprises. The ranges ofthe dependent
variable and the other independent variables
also show wide variation aeross enterprises,
thereby providing for the possibility of statis-
tical relationships. Note that the debt ratio of
a few enterprises is higher than 100 because
the stockholders' equity is negative.
18
Second, the statistics for the country
samples in table 2 show that the U.S. enter-
prises have the highest average disclosure
(73%) in their annual reporta, with the U.K.
being a close second with 68.7%. These high
disclosure scores are as expected because prior
studies have shown high disclosure in Anglo-
American countries. While Japan and the U.S.
exhibit the lowest average foreign sales to to-
tal sales (about 27%), Norway and France
show the largest (in the 54-59% range). These
resulta may indicate that Japanese and U.S.
companies have large local populations to
which they seU their products, while Norwe-
gian and French companies seek more foreign
customers. Norway has the highest average
debt ratio (72.8%), with Germany at 71.6%
and Japan at 68.7%. Several studies have
noted that Germany and Japan rely heavily
upon bank debt. In this sample, the largest
firms, on the average, are located in Japan,
the U.S. and Germany, in descending order.
This result is consistent with these countries
being noted for their high level of industrial
growth. Of the seven countries, the U.K. ex-
hibits, on average, the smallest firms.
Third, because the Pearson correlation
coefficienta show very Httle multicollinearity
present aeross the independent variables, a
table is not presented. Individualism and
power distance show moderate collinearity at
-.67, which is expected because eacb ofthese
cultural variables defines a person's relation-
ship in society. Individualism defines a
person's relationship with other people in a
society, while power distance defines a person's
relationship with powerful institutions in a
society. Variance inflation factors are exam-
ined and no severe multicollinearity is found.
Total foreign sales, the international proxy, is
highly related to total assets, but barely
related to the natural log of total assets
(Pearson correlation coefficienta of .94 and .32,
respectively).
FinalIy, although not displayed in table 2,
the six industry samples show some interest-
ing statistics. The highest average disclosure
(72.1%) is found in the chemical companies,
with the lowest disclosure (59.6%) found in
building construction firms. The building con-
struction firms also display the lowest aver-
age foreign sales at 14%. The building con-
struction findings are consistent with its re-
gional and local nature. The highest foreign
sales are made by firms in the chemical in-
dustry (45.6%) and in the transportation
equipment industry (45.5%). The highest av-
erage debt ratio (68.2%) occurs in the trans-
portation equipment enterprises, probably
because almost half of those enterprises are
German or Japanese. In this study, the larg-
est firms exist in the transportation equip-
ment and electrical equipment industries,
17 The Wald test is peonned on ea.ch cultural variable
in the two reduced models (low and high). The F-test
compares the low versus high international depen-
dence samples to determine whether there is a ditrer-
ent etrect of each cultural variable on disc1osure. For
this study, the Wald test is more appropriate than tbe
Chow test because it can examine structural ditrer-
ences between individual parameters and groupa of
parameters, while using only one covariance matrix.
The Chow test examines overall structural dift'erences
only.
18 Tests that exc1ude these four finns show similar re-
sults to the tests tbat include tbese firmB.
Cru'lVrinht <Cl2001 Al! Rinhho R ...... rvAl'l
30 Accounting Horizons I March 1996
TABLE2
International Disclosure Model Descriptive Statistics
7btal Sample
Al1 Enterprises (n=258)
MeJm
Std.Dev. MiDimllm Maximlllla
DISC(%) 61.8 13.5 12 89
FSALES% 38.9 27.3 O 100
DEBTRATIO (%) 59.7 20.3 2 171
FIRMSIZE ($U.S. mil.) 6,853 22,006 24 192,876
UNCER 56.3 22.5 29 92
INDIV 69.7 22.3 25 91
MASCU 61.9 20.0 8 95
POWER 46.6 13.5 31 68
Country Mude,.
France (n=31)
Mmm Stci.DeV. MiDimYID
M a ~ n m l
DISC (%) 62.8 12.2 29 87
FSALES% 54.8 20.5 12 91
DEBTRATIO (%) 65.5 15.6 36 93
FIRMSIZE ($U.S. mil.) 5,222 8,466 83 44,311
Germany (n=29)
DISC (%) 57.3 10.6 26 80
FSALES% 49.4 17.0 7 75
DEBTRATIO (%) 71.6 13.2 43 93
FIRMSIZE ($U.S. mil.) 8,443 14,834 55 53,284
Hong Kong (n=29)
DISC (%) 56.8 6.3 47 69
FSALES% 38.3 37.7 O 98
DEBTRATIO (%) 34.3 16.8 2 66
FIRMSIZE ($U.S. mil.) 1,972 3,034 38 10,461
Japan (n-39)
DISC (%) 59.7 11.6 27 80
FSALES% 26.1 21.0 O 74
DEBTRATIO (%) 68.7 15.5 36 95
FIRMSIZE ($U.S. mil.) 12,071 18,245 455 80,465
Norway (n=16)
DISC (%) 59.3 17.6 32 81
FSALES% 59.0 34.3 O 78
DEBTRATIO (%) 72.8 28.2 47 171
FIRMSIZE ($U.S. mil.) 1,365 2,839 24 11,705
United Kingdom (n-47)
DISC (%) 68.7 8.7 52 86
FSALES% 41.4 30.2 O 85
DEBTRATIO (%) 55.9 17.0 19 107
FIRMSIZE ($U.S. mil.) 675 1,061 53 5,629
United States (n=65)
DISC (%) 73.0 8.2 48 87
FSALES% 27.8 18.2 O 70
DEBTRATIO (%) 57.1 17.7 15 103
FIRMSIZE ($U.S. mil.) 11,787 38,796 32 192,876
Note: The country samples do not inelude culture because Hofstede's (1980) cultural variables do not
allow for cultural variation within a country. No such study exists.
CODvriaht <Cl2001 . AII Riahts Resarvad
Spontaneous Harmonization Effects of Culture and Market Forces 31
with average assets of U.S. $23 billion and
U.S.$9 billion, respectively.
Intemational Disclosure Model
7btal Sample
Results ofthe ordinary least squares (OLS)
regression of the total sample in table 3 show
strong support (p < .0001) for the hypotheses
ofthe International Disclosure Model. AH vari-
ables except power distance are highly signifi-
cant and are related to disclosure in the hy-
pothesized directions. Together, the indepen-
dent variables explain 48% ofthe variation in
investor-oriented disclosures of business
enterprises.
The estimated coefficient for foreign sales
(FSALES%) is positively related to disclosure,
thereby indicating that firms dependent on
foreign customers are more willing to disclose
higher levels ofinvestor-oriented information
in their annual reports. The DEBTRATIO is
negatively related to disclosure, an indication
that firms with more debt are likely to dis-
close less public information. The FIRMSIZE
coefficient exhibits a positive relationship,
thereby suggesting that larger firms disclose
more annual report information.
Three ofthe four culture-accounting rela-
tionships are highly significant. As predicted,
individualism (lNDIV) and masculinity
(MASCU) are positively related to disclosure,
while uncertainty avoidance (UNCER) is
negatively related. Because power distance
(POWER) is moderately correlated with
INDIV, a multivariate analysis, such as trus
model, can result in confounding effects with
variables that are correlated. The culture-ac-
counting results are evidence that the secre-
tiveness of a country is associated with the
investor-oriented disclosure levels ofits busi-
ness enterprises and are support for Gray's
(1988) hypotheses.
Alternate 7est8 (not pre8ented in
tabular torna)
In addition to the weighted disclosure
scores, 1 examined unweighted scores for the
dependent variable. In other words, for each
item disclosed by a company, one point is as-
signed, rather than a number between one and
four. Cross-sectional analysis of the
unweighted disclosure scores in a regression
model show results that are extremely simi-
lar to those with the weighted scores. In the
unweighted model, the explanatory power is
one percentage point lower and the estimated
coefficients of the variables are somewhat
lower, when compared with the weighted
model. The only significance level that is
slightly lower relates debt ratio to disclosure;
the significance drops from a .05 to a .10 level.
The total sample for the International Ds-
closure Model is also tested with weighted
scores using the disclosure scoring methods
of Adhikari and Tondkar (1992), Barrett
(1976), Choi (1973) and Singhvi and Desai
(1971). Results are very similar to those ofthe
comprehensive scoring method of trus study.
The explanatory power of the four additional
models ranges from 45 percent to 50 percent,
with a11 variables except power distance sig-
nificantly related to disclosure, in the direc-
tions predicted.
Country Model.
Also in table 3 are OLS results of each
country's enterprise disclosures regressed on
foreign sales, debt ratio and firm size. AlI three
independent variables significantly heIp to
explain 28 percent ofthe disclosure variation
in French annual reports and 49 percent of
the disclosure variation in Japanese annual
reports.
19
In each country model, firm Bize is
positively associated with disclosure at a sig-
nificance level ofp < .05 or better. The coeffi-
cient of debt ratio is negatively related to dis-
closure in three countries, France, Germany
and Japan, evidence of their strong banking
and government relationships. Foreign sales
19 On]y EngJish version annual reporta are used in this
study because the point of view is that of an EngJish-
reading investor. The prior accounting discl08ure atud-
ies cited in this paper are based upon U.S. investora,
except for: (1) Firth's (1978) atudy about U.K. users
and (2) the Baker et al. (1977) study about U.S. and
AuatraJian usera. The 1992 stock exchange discl08ure
survey of Adhikari and 'lbndkar (1992) W88 sent to 41
countrles, but all the surveys were written in English.
English is considered to be the globallanguage ofbusi-
nes8. It is the language to which companiea moat of-
ten translate their annual reporto
Cnnvrinhl <el ?OO1 AII Rinht.. R ...... rv.,n
32 Accounting Horizons I March 1996
TABLE3
Intemational Disclosure Model Regression Results
DISC = b
o
+ b1FSALES% - b.fJEBTRATIO + baFIRMSIZE
- bol UNCER
c
+ b
5
INDN
c
+ bsMASCUc - b,'OWER
c
+ E
7btal Sample (n=256)
Expected Estimated
Variable Rel&2DlbiD
Intercept NA 17.020
FSALES% +
0.105
DEBTRATIO -5.799
FIRMSIZE +
3.120
UNCER -0.184
INDIV + 0.307
MASCU +
0.099
POWER 0.159
F-value: 34.37 (Prob. > F = .0001) Adjusted R-Square: 0.48
eou"fry Models
Yariable
France (n=3l)
lntercept
FSALES%
DEBTRATIO
FIRMSIZE
Expected
Rel&2
nsh
iD
NA
+
+
Estimated
Coefficient
44.719
0.118
-30.937
4.110
F-value: 5.01 (Prob. > F = 0.0068) Adjusted R-Square: 0.28
Germany (n-29)
lntercept
FSALES%
DEBTRATIO
FIRMSIZE
NA
+
+
45.288
0.046
-19.631
3.141
F-value: 3.25 (Prob. > F = 0.0386) Adjusted R-Square: 0.19
Hong Kong (n=29)
Intercept
FSALES%
DEBTRATIO
FIRMSIZE
NA
+
+
46.017
0.055
1.567
1.323
F-value: 1.65 (Prob. > F = 0.2027) Adjusted R-Square: 0.06
Japan (na39)
Intercept
FSALES%
DEBTRATIO
FIRMSIZE
NA
+
+
22.797
0.141
-13.171
4.997
F-value: 13.32 (Prob. > F = 0.0001) Adjusted R-Square: 0.49

2.965
4.972
-1.772
9.297
-5.700
9.046
3.157
2.610
lStatisic
3.057
1.261
-2.468
2.853
4.067
0.407
-1.319
2.741
9.000
1.454
0.200
1.762
2.423
1.991
-1.447
4.583
One-Tail
DYalue
0.0016
0.0001
0.0388
0.0001
0.0001
0.0001
0.0009
0.0048 nps
One-Tail
DYalue
.0025
.1091
.0101
.0041
.0002
.3438
.0995
.0056
.0001
.0792
.4217
.0451
.0103
.0271
.0783
.0001
(Continued on next page)
Spontaneous Harmonization Effects ofCulture and Market Forces 33
TABLE 3 (Continued)
Expected Estimated One-Tail
Variable Re1aiimllbill
Coefficieni t S i l ~ i l i i ~ p-Value
Norway (n=16)
Intercept NA -12.129 -0.876 .1991
FSALES% +
-0.041 -0.464 .3253
DEBTRATIO 22.857 2.131 .0272nps
FIRMSIZE +
9.438 5.193 .0001
F-value: 9.94 (Prob. > F = 0.0014) Adjusted R-Square: 0.64
United Kingdom (n=47)
Intercept NA 44.585 8.217 .0001
FSALES% +
0.138 4.169 .0001
DEBTRATIO 3.707 0.666 .2545
FIRMSIZE +
2.823 3.213 .0012
F-value: 14.64 (Prob. > F = 0.0001) Adjusted R-Square: 0.47
United States (n=65)
Intercept
FSALES%
DEBTRATIO
FIRMSIZE
NA
+
+
55.412
0.203
1.286
1.525
18.199
4.489
0.270
3.221
.0001
.0001
.3939
.0010
F-value: 21.58 (Prob. > F = 0.0001) Adjusted R-Square: 0.49
nps = not predicted sign
is most positively related to disclosure in the
U.K, the U.S. and Japan. These three coun-
try models have high explanatory power (ad-
justed R-squares of at least .47), which means
that the independent variables help to explain
47 percent of the variation in annual report
disclosures.
Norway, with the smallest sample size, has
explanatory power of 64%, with larger firms
disclosing more information, but higher debt
ratios influencing higher disclosure levels,
opposite ofthe prediction. In the sample, Nor-
way has moderate uncertainty avoidance, but
high debt ratios. Norwegian companies have
been shown to have high debt structures
(Sekely and Collins 1988). With a population
of four million people, Norway may not have
significant equity ownership of companies.
Except for Hong Kong, the overall signifi-
canee ofthe F-value for each country model is
.05 or better, which is the conventionallevels.
Hong Kong's country model explains the least
amount of disclosure variation that occurs in
their corporate annual reports. Per the stan-
dard deviation of disclosure in table 2, these
reports also have the least variation to be ex-
plained.
International Dependence Model
In general, the Wald test of the Interna-
tional Dependence Model shows strong evi-
dence to support H8. There is evidence that
companies more dependent on local resources
(low international dependence) disclose infor-
mation consistent with their local culture,
while companies more dependent on interna-
tional resources (high international depen-
dence) disclose either lesslike their home cul-
ture or unlike their home culture. In particu-
lar, table 4 presents the results ofthe various
Wald tests for the International Dependence
Model.
34 Accounting Horizons I March 1996
7btal Foreign Sale. as Internanonal
Dependence Proxy
Next, the cultural grouping (i.e., all four
cultural forces)20 is tested for structural
change, with evidence that intemational firms
disclose differently than local firms because
of cultural secretiveness. AlI four cultural vari-
ables are examined here as a group in rela-
tion to accounting disclosure. The group mea-
First, in the upper portion of table 4 is a
summary of the structural changes tested by
the Wald tests. Between low versus high in-
temational firms, there is a significant change
in the relationship of disclosure and the inde-
pendent variables in total (whole model)o The
significance level is a p-value of .05 or better.
That overall model measure, however, does not
tell us specifics about the focus o this test-
the culture-accounting relationship.
20 The marlretgrouping, not part ofthe hypotheais, also
shows changes in disclosure from the low to the high
intemationally dependent firms. Firm size drives tbe
resulta, with leas of a positive relationship occurring
between firm size and disclosure as the companies get
larger.
TABLE4
International Dependence Model
Test of Structural Change in the Culture-Disclosure Relationship
International Proxy: Total Foreign Sales Within a Country
Dependent Variable: Total Disclosure
Wald 'Thst
Summary
Resulte
Wald Test
Detall Reaults
(Culture Only)
Low Versus High
International
Dependence
Whole Model
Market Grouping
Culture Grouping
UNCER
INDIV
MASCU
POWER
Low
International
Dependence
Structural
Change
(Prob>F)
.05
.05
.01
.01
ns
.05
ns
High
International
Dependence
Coefficients and t-Statistics
UNCER(-)
INDIV(+)
MASCU(+)
POWER(-)
Sample Size n = 256
Note 1: A one-tail t-test is used.
-0.35 (-6.59) -0.11 (-2.39)
0.35 (6.99) 0.35 (7.47)
0.12 (2.45) *** 0.02 (0.63) na
0.29 (3.13) nps 0.15 (1.81) **
Adj. R-Square 0.52
Note 2: White's Test shows no heteroscedasticity presento
*.** = p < .001; *** = P < .01; *. = P < .05; * = p < .10
npd = not predicted directional change
nps = not predicted sign
ns = not significant
r.nnvrinht te)?m1 4.11
Spontaneous Harmonization Effects of Culture and Market Forces
35
sure tells us there is a change (at the p < .01
significance level) in the culture-accounting
relationship, but it does not tell us what par-
ticular cultural variables are influential or in
whieh direction the ehange oecurs.
FinalIy, the separate cultural variables are
tested via a third Wald test. Results in the
lower portion of table 4 provide relatively
strong evidenee that uncertainty avoidance
and masculinity are cultural traits that relate
differentIy with accounting discIosure, de-
pending upon the degree of internationalism
of a firmo For example, at a significance level
of .01 or better, table 4 provides evidence that
the relationship ofuncertainty avoidance and
accounting disclosure is stronger for the low
international firms. AB predicted, local firms
disclose more like their culture than do nter-
national firms (the absolute value of the
UNCER coefficient of local firma is stronger
at -0.35 than is the -0.11 coefficient). Mascu-
linity is significantly related to disclosure for
local firms, but not significantly related for in-
ternational firms, as predicted. Individualism
has no structural change. Power distance,
probably because it is negatively correlated
with individualism and therefore has con-
founding effects, is not significant or of the
proper signo
SUMMARY AND IMPLICATIONS
This study examines the relationship be-
tween enterprise aceounting disclosure and
both market and cultural forces across seven
countries. It attempts to ascertain whether
culture underlies corporate disc10sure behav-
ior and whether international resource depen-
dence causes firms to disclose higher levels of
information. The study a1so investigates
whether local firma disclose information com-
mensurate with the secretiveness of their
home culture, while internatonal firms dis-
close information commensurate with the glo-
bal culture that is differently market-driven.
1 argue that intemational firms from secre-
tive countries are likely to be motivated to ds-
close higher levels o public information than
they would at home, in order to show the qual-
ity of their operations.
The results ofthe International Disclosure
Model are consistent with resource depen-
dence theory. There is evidence that compa-
nies with higher oreign sales (customers) are
more likely to disc10se higher levels of inves-
tor-oriented information. Companies with
reater dependence on debt financing, i.e.,
usually a more local resource, are found to
disc10se less public information. Being more
likely to compete internationally for resources,
larger companies disclose higher levels ofin-
vestor-oriented inormation. The Interna-
tional Disc10sure Model also provides evidence
of Gray's (1988) theory of cultural influence
upon accounting, that the secretive nature o
a culture relates to the level of accounting dis-
c10sure practices. Companies domiciled in cul-
tures possessing more individualism, more mas-
cu1inity and lesa uncertainty avoidance are more
likely to disc10se higher levels of information.
The theory o cultural borrowing is mani-
fest in the results ofthe International Depen-
dence Model. When firms are more interna-
tionally dependent, their disclosure behavior
is different from their home culture. In other
words, international firms from more secre-
tive countries borrow the global culture of
their competitors, as evidenced by less secre-
tive disc10sure practices ofinternational firms.
This study not only provides additional sup-
port for the relationship between levels of fi-
nancial disc10sure and cultural secrecy, but
also goes further by answering Salter and
Niswander's (1995) question about what can
change culture: dependence on intemational
resources. 'lbtal foreign sales has been shown
to be a viable proxy for intemational depen-
dence, with potential usefulness in future in-
ternational research studies.
The results o this empirical study are
important because they suggest that total ac-
counting harmonization may be difficult since
accounting disc10sure practices appear to be
culture-driven through market forces. The
quest to harmonize accounting standards
across aU companies in a11 countries is a de-
batable position.
The results imply, though, that firms op-
erating in the international marketplace are
Coovrioht @ 2001. AII Riohts Reserved.
36
spontaneously disclosing high levels of public
information. These firms show evidence of
harmonization effects of global culture and
market forces on their accounting disclosure
behavior. The global market may exert suffi-
cient force as to make regulated harmoniza-
Accounting Horizons/ March 1996
tion for multinational corporations unneces-
sary. On the other hand, the findings suggest
that it may be possible for the IASC and
IOSCO to harmonize accounting disclosures
for firms listing on foreign stock exchanges.
REFERENCES
Adhikari, A., and R. H. 'lbndkar. 1992. Environmental factors influencing accounting disclosure require-
ments of global stock exchanges. Journal o{ International Financial Management and Accounting 4:
75-105.
Alchian A., and H. Demsetz. 1972. Production, information costs, and economic organization. TIu! Ameri-
can Economic Review 62: 777-795.
Baker, H. K., R. Chenhall, J. Haslem, and R. Juchau. 1977. Disdosure of material information: A cross-
national comparison. TIu! International Journal o{ Accounting 13 (1): 1-18.
Barrett, M. E. 1976. Financia! reporting practices: Disclosure and comprehensiveness in an internationa!
setting. Journal o{ Accounting Research 14 (1): 10-26.
Bavishi, V. 1991 International Accounting and Auditing Trends, 2nd edition. Princeton, NJ: Center for
Intemational Financia! Analysis and Research.
Belkaoui, G. F. 1983. Economic, poltica! and civil indicators and reporting and disclosure adequacy:
Emprica! investigation. Journal o{ Accounting and Public Policy 2: 207-219.
Bloom, R. and M. A. Naciri. 1989. Accounting standard setting and culture: A comparative analysis ofthe
United States, Canada, England, West Germany, Australia, New Zealand, Sweden, Japan, and Swit-
zerland. TIu! International Journal o{ Accounting 24: 70-97.
Buzby, S. L. 1974. Selected items ofinformation and their disclosure in annual reports. The Accounting
Review 49: 423-436.
Ce, A. R. 1961. Corporate Reporting and Investment Decisions. Berkeley, California: Public Accounting
Research Program.
Chandra, G. 1974. A study of the consensus on disclosure among public accountants and security ana-
1ysts. TIu! Accounting Review 49: 733-742.
Choi, F. 1973. Financial disclosure and entry to the European capital market. Journal o{ Accounting Re-
search 11: 159-175.
Chow, C., andA. Wong-Boen. 1987. Voluntary financial disclosure by Mexican corporations. The Account-
ing Review 62: 533-541.
Cooke, T. E. 1991. An assessment ofvoluntary disclosure in the annual reports of Japanese corporations.
TIu! International Journal of Accounting 26: 174-189.
Darrough, M. N., and N. M. Stoughton. 1990. Financial disclosure policy in an entry game. Journal of
Accounting and Economics 12: 219-43.
Diamond, D., and R. Verrecchia. 1991. Disclosure, liquidity, and the cost of capital. TIu! Journal o{ F-
nance 46: 1325-1359.
Firth, M. 1978. A study of the consensus of the perceived importance of disc10sure of individual items in
corporate annual reporta. TIu! International Journal of Accounting 14 (1): 57-70.
--o 1979. The impact of size, stock market listing, and auditors on voluntary disclosure in corporate
annual reporta. Accounting and Business Research 9: 273-280.
Global Vantage. 1990. New York: Standard & Poor's Compustat Services.
Gray, S. 1985. Cultural influences and the internatonal classfication of accounting systems. EIASM
Workshop on "Accounting and Culture." Amsterdam.
--o 1988. Thwards a theory of cultural influence on the development of accounting systems interna-
tionally. ABACUS 24: 1-15.
--, J. Shaw, and L. McSweeney. 1981. Accounting standards and multnatonal corporations. Jour
nal oflnternational Business Studies 12: 121-136.
--, and H. M. Vint. 1994. The impact of culture on accounting dsc1osures: sorne international evi-
dence. Working paper: Unversity ofWarwck, England.
CODvriaht @ 2001. Al! Riahts Reserved.

Spontaneous Harmonization Effects of Culture and MarJret Forces 37
Hayek, F. A. 1967. Studies in Philosophy, Politics, and Economics. Chicago, IIlinois: The University of
Chicago Presa.
--o 1988. The Fatal Conceit: The Errors of Socialismo Chicago, Illinois: The University oC Chicago
Press.
Hofstede, G. 1980. Culture' s Consequences: International Differences in Work-Related Values. Beverly Hills:
SAGE Publications.
Internatonal BroJrers Estmate System aBES). 1986-1992. Summary Data Tapes. N ew York: IIBIEIS, Inc.
Lundblad, H.I991. Factors underIying voluntary discl08ure: An application ofmulti-attribute utility theory
to financial disclosure. Working paper, California State University, Nortbridge, California.
McKinnon, J. L. 1984. Application of Anglo-American principIes of consolidation to corporate financial
disclosure in Japan. ABACUS 20: 16-33.
McNally, G., L. Eng, and C. Hasseldine. 1982. Corporate financial reporting in New Zealand: An analysis
of user preferences, corporate characteristics and disclosure practices for discretionary information.
Accounting and Business Research 13: 11-20.
Menger, C. 1883. Investigations into the methods of the Social Sciences with Special Reference to
Economics.New York: New York University Press.
Mueller, G. 1967. International Accountng. New York: Macmillan.
Perera, M. 1989. Towards a framework to analyze the impact of culture on accounting. The International
Journal of Accounting 24: 42-56.
Pfeffer, J., and G. Salancik. 1978. The External Control ofOrganizations: A Resource Dependence Perspec-
tive. New York: Harper & Row, Publishers.
Porter, M. E. 1986. Changing patterns of international competition. California Management Review 28
(2): 9-41.
Radebaugh, L. H. 1975. Environmental factors influencing the development of accounting objectives, stan-
dards and practices in Pero. International Journal of Accounting Education and Research 11 (1):
39-56.
Salter, S. B., and F. Niswander. 1995. Cultural influence on the development of accounting systems inter-
nationally: A test of Gray's [1988] theory. Journal of International Business Studies 26 (2): 379-397.
Saudagaran, S. M. 1988. An empirical study of selected factors influencing the decision to list on foreign
stock exchanges. Journal of International Business Studies 19 (1): 101-127.
--, and G. C. Biddle. 1995. Foreign listing location: A study of MNCs and stock exchanges in eight
countries. Journal of International Business Studies 26 (2): 319-341.
Sekely, W. S., and J. M. Collins. 1988. Cultural influences on international Capital Structure. Journal of
International Business Studies: 87-100.
Singhvi, S. 1968. Characteristics and implications o inadequate disclosure: A case study of India. The
International Journal of Accounting 3 (2): 29-43.
--, and H. Desai. 1971. An empirical analysis of the quality of corporate financial disclosure. The
Accounting Review 46: 129-138.
Verrecchia, R. E. 1983. Discretionary disclosure. Journal of Accounting and Economics 5: 179-194.
Williamson, O. 1975. MarJrets and Hierarchies: Analysis andAntitrust Implications. New York: Free Press.
Coovriaht (!l) 2001 Al! Riaht10 R ...... rvAtl