Signalling Theory and Voluntary Disclosure to the Financial Market - Evidence from the Profitability Indicators Published in the Annual Report

29 Pages Posted: 19 Sep 2011

See all articles by Laura Bini

Laura Bini

University of Florence - Department of Business Administration

Francesco Giunta

University of Florence - Dipartimento di Scienze Aziendali

Francesco Dainelli

University of Florence - Department of Business Administration

Date Written: October 1, 2010

Abstract

Signalling theory posits that the most profitable companies provide the market with more and better information. The research, however, reveals disaccording results.

Because the general disclosure level depends on many factors, our paper centres on a focal point of the signal that companies send to the financial market: the profitability indicators. As several studies have shown the strong relevance of this type of data, the hypothesis is that the most profitable companies should disclose more profitability indicators.

A sample of UK and Italian firms has been selected to verify if signalling policies are adopted in two very different cultural, economic, and legal contexts.

After controlling for size, risk, industry, and country, our results support our hypothesis. We conclude that the market is capable of controlling the production and use of information, concentrating it on the focal points of the agency relationship. Moreover, our results seem to dismiss the relevance of the European Directive 51/2003, which generally requires the company to communicate performance indicators. In fact, the most profitable companies communicate such data independent of any legal requirement. Less profitable companies, on the other hand, might be induced to massage their disclosure, presenting useless or doctored ratios.

Keywords: information asymmetries, signalling theory, voluntary disclosure, profitability indicators

JEL Classification: M41

Suggested Citation

Bini, Laura and Giunta, Francesco and Dainelli, Francesco, Signalling Theory and Voluntary Disclosure to the Financial Market - Evidence from the Profitability Indicators Published in the Annual Report (October 1, 2010). Available at SSRN: https://ssrn.com/abstract=1930177 or http://dx.doi.org/10.2139/ssrn.1930177

Laura Bini (Contact Author)

University of Florence - Department of Business Administration ( email )

via delle Pandette, 9
Florence, Florence 50127
Italy

Francesco Giunta

University of Florence - Dipartimento di Scienze Aziendali ( email )

Piazza di San Marco, 4
Florence, 50121
Italy

Francesco Dainelli

University of Florence - Department of Business Administration ( email )

via delle Pandette, 9
Florence, Florence 50127
Italy

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