From Disclosure Indices to Business Communication:

A Review of the Transformation

by Hannu J. Schadewitz and Dallas R. Blevins

This article is designed for the use of a wide variety of readers. The nature of this work is such that some of it will appeal to one group of readers, while another part will appeal to a different group. For this reason, there are numerous links in the article in order to enable the reader to go directly to the particular information which meets their needs.

Regardless of the host country, disclosures are used to inform a firm's interest groups about its affairs. These reports are necessary because information asymmetry exists between the firm's owners and its managers. The resulting possibilities of adverse selection and moral hazard give rise to the serious investigation of the quality, quantity, and timing of reporting. Further, internationalization has caused new challenges to the efficient communication of firms with their shareholders and in the harmonization of differing accounting rules across countries. A transformation from disclosure index studies to business communication studies has occurred.

This review traces the international development of one of the major areas of inquiry. The analysis begins in 1961 as a series of individual variable identification studies and broadens into a more generic line of inquiry: that of business communication. In the early phase, the emphasis is on the attempt to capture some quantitative measure(s) of actual disclosure in the various accounting reports. Disclosure scoresheets provide an empirical listing of the elements included in financial reporting. This search expands without much focus on the normative foundation underlying the disclosures. During the second half of the 1970s and the first half of the 1980s, research interest tends toward an agency theory base. The late 1980s witnesses a drive toward a more firm theoretical foundation explaining disclosure. This more recent focus is on the investor communication associated with accounting statements.The new emphasis is consistent with the theory of finance that: (1) recognizes the existence of information asymmetry and (2) argues that price is related to earnings.