Wijantini—Voluntary Disclosure in the Annual Reports...
Gadjah Mada International Journal of Business
September-December 2006, Vol. 8, No. 3, pp. 343–365

VOLUNTARY DISCLOSURE IN THE ANNUAL
REPORTS OF FINANCIALLY DISTRESSED
COMPANIES IN INDONESIA*
Wijantini
This paper examines voluntary disclosure in the annual reports
of financially distressed companies in Indonesia. The disclosure
score range is between 3 percent and 49 percent with the mean and
median score of 25 percent and 26 percent, respectively, at the onset
of distress. The score is measured as the ratio of the total items
disclosed to the maximum possible items score applicable to the firm.
The most disclosed items are in the category of financial highlights
and general corporate information whereas the three least disclosed
items concern projections, liquidity, and research and development.
Moreover, the results of this study reveal that the level of voluntary
disclosure in the financially distressed firms is higher than that in
non-financially distressed firms. There is no significant difference
between the types of information disclosed by the 2 groups. The
statistical tests are applied for various years. Consistent with findings in previous studies, the size of the firm appears to be a positive
variable significantly affecting the disclosure level.
Keywords: disclosure; financial distress; leverage; variability of performance; size

Acknowledgement: This paper is based, in part, on my thesis completed at the University of
Birmingham, UK. I am indebted to my supervisor, Dr. T.A Adedeji for his valuable comment, to
my colleague Prof. Dr. Andreas Budihardjo and Prof. Ignas G.Sidik, DBA for their helpful
suggestions. Remaining errors are my responsibility.
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Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

Introduction
In 1997, the Asian crisis hit Indonesia and caused a huge number of
business failures. In addition, 117 systemic banking crises have occurred in
93 countries around the world since
the late 1970s and the costs of corporate restructuring reached billions of
U.S. dollars for these countries (Ramos
1999; Caprio and Klingebiel 1999).
Many studies referred to weak
corporate governance as a factor which
may have worsened the Indonesian
economy during the crisis (Husnan
2001; Claessens et al.1999; Claessens
et al. 2000; Claessens et al. 2002; Obata
2001). Disclosure is closely related to
good corporate governance practice.
By applying corporate transparency,
information asymmetry can be reduced, hence minimizing the negative
consequences of adverse selection and
moral hazard problems (Utama 2003).
Consequently, higher disclosure may
reduce related costs in the period of
financial distress. Predicated upon the
aforementioned context, this study attempts to identify an important issue to
examine whether troubled firms in Indonesia make voluntary disclosures.
The objectives of this paper are to
explore (1) the extent to which financially distressed firms in Indonesia
make voluntary disclosures by producing voluntary disclosure score, (2)
the types of information or items that
they disclose voluntarily in annual reports, (3) the comparison of types and
level of voluntary disclosure between
financially distressed and non-finan344

cially distressed firms, and (4) the factors influencing the degree of voluntary disclosure in Indonesia.
This study purports to give a significant contribution to accounting
knowledge by offering a comprehensive list to measure the voluntary disclosure level of financially distressed
firms in Indonesia and reveals the extent of the disclosure. This paper also
provides a comparison of the types of
information categories disclosed by
distressed and control firms. Most
importantly, it demonstrates that the
level of voluntary disclosure in financially distressed firms is higher than
that in non-financially distressed firms.
It also demonstrates that financial distress and size contribute positively to
the level of firms’ voluntary disclosure.

Brief Literature Review
There are some studies exploring
disclosures in troubled firms (Frost
1997; Webb 2002, among others). Frost
takes a sample of U.K. firms which
received first time modified audit reports and were experiencing financial
difficulties while Webb examines U.S.
firms making voluntary disclosures in
the Management’s Discussion and
Analysis (hereafter, MDA) section of
the Annual Reports of firms with an
Altman’s Z-score in the bankruptcy
prediction region (1.20 or lower). However, none of the disclosure studies
takes a sample of Indonesian financially distressed firms. Prior studies of
disclosure in Indonesia did not specify

Wijantini—Voluntary Disclosure in the Annual Reports...

whether or not their samples were financially distressed (Susanto 1992;
Utama 2003).
Several empirical studies have
examined the voluntary disclosures in
annual reports within national settings.
The studies were in New Zealand
(Hossain et al. 1995), Sweden (Cooke
1989), Japan (Cooke 1991), Mexico
(Chow and Wong-Boren 1987), the
U.K. and the U.S. (Gray et al. 1995).
Using Indonesian samples, Susanto
(1992) investigates the extent of corporate disclosure in annual reports of
companies listed on the JSX. The conclusions of his study are as follows.
First, the level of voluntary disclosure
is greater for foreign-based companies
than for their domestic counterparts.
Second, the degree of disclosure is
greater for companies listed on the
JSX before the enactment of new regulations of 1987 than for those listed
after this date. Third, the extent of the
disclosure is not associated with the
degree of foreign ownership restriction.
Utama (2003) referred to the study
conducted by Gunawan (2000) which
replicated the scoring method proposed
by Botosan (1997). The method was
developed for measuring the amount
of voluntary information in the United
States manufacturing samples in 1990.
Consequently, the score contains not
only a list of voluntary information
disclosed in the annual reports of public listed companies in Indonesia but
also the mandatory information, since
the disclosure regulations of the countries are different. For example, a brief

history of company is voluntary under
U.S. regulations (Gray et al. 1995) but
it is mandatory under Indonesian Capital Market Supervisory Agency regulations.

Hypothesis Development
Voluntary Disclosure and
Financial Distress
Financial distress increases market uncertainty since the circumstances
are often more complicated than normal condition (Opler and Titman
1994). Moreover, poor governance in
Indonesian banking systems provides
a natural setting for high information
asymmetry between bank creditors and
borrowers. Several issues suggest that
most Indonesian banks are better classified as connection lending banks
rather than as relationship banking.
The Indonesian government regulation in October 1988 provided for a
rapid domestic bank growth without
adequate controlling and management
systems. During this period, the banks
competed to attract customers both for
lending and funding and this has also
impacted on banking officer turnover
and quality. With inadequately qualified banking officers and a poor credit
monitoring system, most banks granted
loans on a collateral basis. In extreme
cases, the bank did not carefully check
the condition of pledged assets. Sheer
competition among banks made officers decide to grant credit mostly on the
basis of asset documentation of the
collateral.
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Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

An extensive theoretical literature
shows that collateral can mitigate moral
hazard and adverse selection problems
in loan contracting (Chan and Thakor
1987; Stiglitz and Weiss 1981). However, Rajan and Winton (1995) suggest that collateral is likely to be effective only if its value can be monitored.
Poor collateral monitoring systems,
especially after granting loans, poor
borrower’s information and record
systems, inferior officer quality and
weak control of credit systems frequently impaired the Indonesian banking industry. In this case, collateral
base lending does not give benefit in
monitoring credit. Husnan (2001)
states, “the deregulation of banking
industry and the liberalization of capital account [in Indonesia] created a
variety of new sources of financing for
the corporate sector. However, the
banking system proved incapable of
performing its intermediation function.
Because regulation was weak, banks
could earn profits even when they did
not gather and process information
about risk.”
Thus, Indonesian banks do not
have good reputation in managing client information; managers of distressed
firms therefore have an incentive to
disclose more through various information venues in an effort to convince
creditors of their chance of eventual
survival. The most reliable information of future cash flows can be obtained from the managers of firms.
Managers generally have better information about the firm’s internal operations than do outside investors, but
346

they may lack the incentives to make
the best use of this information (Wruck
1990). At this stage, creditors and
shareholders might be more aware of
the quality of disclosure provided by
financially distressed firms to assist
them in making crucial decisions.
Trueman (1986) suggests that managers should use voluntary disclosure to
generate a signal about their management skills in assisting distressed firms
out of financial difficulty.
Further, previous studies suggest
comprehensive organizational changes,
governance and structure often accompanying financial distress. These restructuring activities benefit firms
which increase the level of disclosure.
Healy et al. (1995) find that management changes, major business restructuring, and access to capital markets
are associated with improved disclosure. In other words, being financially
distressed creates value by improving
the transparency of the firm. One of
the possible explanations is as follows: financial distress increases conflicts among the stakeholders. The
conflicts lead to complex information
and inference problems for
claimholders trying to value a distressed firm. In order to meet their
needs, management has an incentive
to disclose more. In addition, given the
risk of job loss accompanying poor
earnings performance in the time of
financial distress, managers may try to
elaborate on their performance by increasing corporate disclosure. Based
on these arguments, a hypothesis can
be formed.

Wijantini—Voluntary Disclosure in the Annual Reports...

H1 : The level of voluntary disclosure
in financially distressed firms is
higher than that in non-financially distressed firms.

Voluntary Disclosure and Size of
the Firm
An association between disclosure and size of firm is expected in
Indonesia if the following conditions
apply. First, bigger size in firms is
positively correlated with greater numbers of capital providers. Disclosure
may increase with firm size because
claimants demand greater disclosure.
Second, there may be a fixed component of disclosure costs so that smaller
firms may be reluctant to disclose them
frequently. In addition, the cost of disseminating information may be higher
for small firms because the news media are more likely to carry stories
about large firms, and security analysts too are more likely to attend their
meetings (O’Flaherty 1984). Lang and
Lundholm (1993) support the hypothesis that the analysts’ rating increases
with firm size, but provide no evidence related to disclosure cost. Their
study reveals that more disclosure is
found in large firms than in small firms,
suggesting that there may be a fixed
component of disclosure cost. Accordingly, the cost per unit of size should
decrease. Third, another possible explanation comes from the transaction
cost hypothesis. Under this hypothesis, disclosure will increase with firm
size because the incentives for private
information acquisition are greater for
large firms where the profit of trading

on private information is higher (King
et al. 1990).
The above cases suggest higher
disclosure with bigger sized firms.
Consistent with these arguments, a
positive relationship between firm size
and voluntary disclosure has been identified in many studies in U.S. setting
(Firth 1979; Lang and Lundholm 1993,
among others), Sweden (Cooke 1989),
New Zealand (Hossain et al. 1995),
Japan (Cooke 1991), China and Hong
Kong (Ferguson et al. 2002) and Indonesia (Susanto 1992). Consequently,
it is hypothesized that:
H2: Voluntary disclosure is positively
related to the firm size.

Voluntary Disclosure and
Performance Variability
If the variability of performance
measures the degree of asymmetric
information, the disclosure may be
associated with variability in the following ways. Higher variability of past
performance indicates higher
unpredictability of performance. Because the adverse selection problem
increases with information asymmetry, disclosure will increase with information asymmetry. In other words,
higher variability of performance leads
to higher disclosure.
Some evidence suggests that disclosure may increase when perceived
management information asymmetry
is high. Firms appear to disclose considerable information because the information asymmetry between managers and claimants is high (Cohen
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1992). Further, managerial earnings
forecasts have previously been found
to correct deviations between management and outsiders (Ajinkya and
Gift 1984). Lang and Lundholm (1993)
explain that disclosure might increase
with performance variability. Higher
performance variability raises firms’
vulnerability to legal action; firms may
thus increase disclosure to reduce it.
Their study confirms that disclosure
scores are higher for firms with a
weaker relation between annual stock
returns and earnings as the proxy for
higher information asymmetry.
In terms of future uncertainties,
during times of distress, firm’ claimants encounter a higher probability of
bankruptcies. The condition is exacerbated with high uncertainty about future performance due to the Asian crisis. Managers, expected to have more
inside knowledge, may try to inform
the company’s claimants about the
current situation in the firms and any
temporary shock in the company performance. Based on the association
between performance variability and
voluntary disclosure among financially
distressed firms in Indonesia, it is hypothesized that:
H3: Voluntary disclosure is positively
related to the variability of performance

Voluntary Disclosure and
Leverage
Agency theory postulates that the
separation of ownership and control
causes conflict of interests between
principals and agents. Jensen and
348

Meckling (1976) claim that agency
costs are borne by firms which therefore have incentives to provide voluntary information to reduce costs. Moreover, they theoretically argue that
agency costs will be higher for firms
with higher debt because of the increased potential for wealth transfers
from creditors to shareholders and
managers. Thus, agency theory suggests that the extent of voluntary disclosure will be an increasing function
of leverage.
Empirical findings of this relation are mixed. Hossain et al. (1995)
identify a positive relationship between
leverage and disclosure for New
Zealand firms. Bradbury (1992) finds
a significantly positive association
between leverage and the extent of
voluntary segment disclosure in diversified companies. However, Meek et
al. (1995) report a significant negative
relationship between leverage and voluntary disclosure for U.S., U.K., and
continental European multinationals,
although Chow and Wong-Boren
(1987) and Craswell and Taylor (1992)
find no relationship between leverage
and disclosure in their samples.
Financially distressed firms generally have high leverage with high
probability of bankruptcy. Transfer of
wealth from creditors to shareholders
and managers is minimized in this
situation. The association between leverage and disclosure can be explained
provided high leverage is associated
with high conflict of interests due to
greater numbers of creditors. In this
case, managers have incentives to re-

Wijantini—Voluntary Disclosure in the Annual Reports...

lease more information. To examine
the relation between leverage and voluntary disclosure of financially distressed companies in Indonesia, we
formulate the following hypothesis:
H4 : Voluntary disclosure is positively
related to firm leverage.

Sample Description
Identifying Financially
Distressed Firms
To be included in the sample, firms
must satisfy several criteria. First, they
had an interest coverage ratio between
0 and 1 for at least one year between
1997 and 2002. The interest coverage
ratio is calculated from the Datastream
by dividing operating profit before interest expense, income taxes, depreciation and amortization with interest
charges. In this case, the interest charges
(Datastream code number: 2408) represent the aggregate value of interest
paid less interest received. The samples
contain nonfinancial firms only, and
40 firms meet this criterion. Other reasons, for instance, incomplete data or a
missing series of annual reports (one
firm) and four firms in the samples
going private in the year before the
onset of distress, reduce the number of
firms in the samples to 35. The onset
year is the year when firms for the first
time have interest coverage ratio between 0 and 1, and conduct debt restructuring.
An interest coverage ratio between
0 and 1 does not mean that firms will
necessary become financially dis-

tressed, that is, have difficulties in
fulfilling the covenants in their debt
contracts. Debt payment can be made
from other sources than operating income, for firms have many options to
obtain the cash needed to avoid default, including utilizing cash reserves,
reducing inventory levels, extending
trade creditors, drawing upon bank
lines of credit, restructuring debt payments prior to default, raising equity
and selling assets (Whitaker 1999).
The following additional criteria
should be deemed to determine the
onset of distress. The auditor disclosure in notes to the financial statements must indicate that the firms are
negotiating with their creditors to restructure their debts in order to avoid
default. Debt restructuring is defined
as an exchange of financial claims
which a firm makes to avoid defaulting on its debt, including exchanges
such as maturity extensions (Gilson
1990). After this screening, six firms
were not supported by restructuring
news and the remaining samples contain 29 financially distressed firms.
Most of the firms (16) plunged
into financial distress for the first time
in 1998 (55.2 percent). Seven firms
renegotiated their loans with their creditors in 1997 and the remaining firms in
the samples rescheduled their debts
for the first time in 1999 and 2000.

Disclosure Index/Score
There are some approaches to
developing a theoretical concept and
operational measure of the disclosure
index. Patton and Zelenka (1997) sug349

Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

gest the following methods. First, the
index may be extended from a normative decision model against the usefulness of the disclosures. Second, it may
refer to the evaluation of analysts as
experts in assessing the quality of disclosure. Third, it may use certain disclosures which give a significant effect to market reaction. Finally, it may
be assessed on its fulfillment of particular disclosure regulations. Similarly, Hooks et al. (2001) adopt three
phases in constructing the disclosure
index. First, they identify the potential
disclosure items which the scoring
sheet may include. Subsequently, they
develop a draft index after listening to
an expert panel. Eventually, they produce a final index reviewed by a panel.
In other words, the index is developed
through a pilot study, scoring process,
and expert evaluation phases.
In order to offer a list of comprehensive indices for financially distressed firms, the following paragraph
will review two chosen scoring indices produced by Botosan (1997) and
Webb (2002). By examining the advantages and disadvantages of each
index, the proposed index may present
a more suitable and comprehensive
index for Indonesian financially distressed firms.
Botosan (1997) offers an index
consisting of 82 disclosure items, of
which 19 are only additional information with no point score (see Appendix
B). She applies various studies of information needed by investors, accountants, and businesses to choose the
items included in the annual reports.
350

The main studies are: the study of the
American Institute of Certified Public
Accountants (1994) on business reporting (the Jenkin Committee report),
the SRI International survey (1987) of
investor information needs and the
Canadian Institute of Chartered Accountants’ study (1991) In detail, she
identifies 63 items of information categorized into five sections: background
information, summary of historical
results, key nonfinancial statistics, projected information, and management
discussion and analysis. She claims
that her index is an unweighted measure of disclosure level, except as follows. First, the quantitative information is awarded one more point than
the qualitative. The reason is that more
specific information is viewed as more
credible. Second, projected sales and
earnings information provided by
multi-segment firms is weighted by
the fraction of consolidated earnings
or sales being forecasted. Third, if
there is inconsistency between the content of management discussion and
analysis and the information found in
other business reporting, only half the
available points is awarded.
The Botosan samples exclude
firms in reorganization under Chapter
11 of U.S. bankruptcy law, considering that it may differ from the norm.
Undoubtedly, the list does not include
essential disclosure for financially distressed firms, for instance, discontinued operations or disposal impact on
current or future results, economic risk
and climate, business and financial
risk, inflation and currency transla-

Wijantini—Voluntary Disclosure in the Annual Reports...

tions, debt covenants, and liquidity
issues (Webb 2002). The advantage of
the index is that it can be applied to
firms of any size. Her study is carefully designed to avoid introducing a
size bias through the following procedures. First, it scores consistently for
single-segment and multi-segment
firms. Second, multiple points are not
awarded for multiple references to the
same disclosure item. The disclosure
index is purposely limited to items
which any size of firm could disclose
voluntarily.
Webb (2002) examines the quality of voluntary disclosures contained
in the MDA section of the annual reports of firms facing financial distress.
She views MDA as a credible voluntary disclosure, since the management
voluntarily and considerably provides
a reasonably concise narrative for the
company’s stakeholders, and the auditors must inspect it to ensure that it is
consistent with information obtained
during the audit. The contents of her
index are based on the U.S.’s SEC
1989 guidelines, a practitioner checklist provided and validated by Hook
and Moon (1991, 1993), and internal
guidelines developed by large auditing firms. Her index consists of 46
items and comprises the general business, the results of operations, capital
resources, and liquidity issues.
The Webb index has certain advantages. First, it is particularly designed for distressed firms. Second, it
takes into account divestment or disposal disclosure as items to be consid-

ered in calculating the index. Lasfer et
al. (1996) provide us with evidence
that sell-off announcements significantly affect the stock market in both
financially distressed and healthy
firms. In other words, the disposal
disclosure is important for investors.
Third, the index is thoroughly validated by the Botosan Index and AIMR
Reports for 1993-94. However, the list
considers only the contents of the
MDA. It assumes the MDA to be sufficiently credible to represent the voluntary disclosure in the annual reports.
The other shortcoming of the index is
that it does not take into account the
corporate strategy, for instance, the
actions taken to achieve corporate objectives, and it also lacks projected
employee information and competitor
analysis.
In Indonesian case, the publicly
listed companies generally provide low
disclosure under the MDA section,
whereas the Indonesian Capital Market Supervisory Agency (hereafter,
CMSA) provides guidelines for MDA
presentation. Herwidayatmo (2000)
claims that the Indonesian regulatory
framework is quite satisfactory but
lacks law enforcement. This
demotivates companies from following the guidelines and regulations.
Alternatively, other credible sources
of information can be found in the
messages of the Board of Commissioners, messages of the Board of Directors, and the notes to financial statements.

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After considering the advantages
of these two studies, the present study
provides a list of potential voluntary
disclosure items by combining items
and approaches from both. It mostly
hinges on Webb’s index (2002) but
considers Botosan’s procedures (1997)
by designing company purposes and
comprehensive items from companies
of all sizes to measure disclosure quality in annual reports. Moreover, in
order to compile the Indonesian voluntary disclosure item list, the combined items will be compared to the
Indonesian mandatory requirements.
In detail, this study applies 112
potential items of voluntary disclosure
developed by Botosan (1997) and
Webb (2002). Subsequent stages are
implied for measuring the voluntary
disclosure in financially distressed
firms. A list of voluntary disclosure
items identified by Botosan (1997)
and Webb (2002) is used as an initial
framework. Then the items on the list
are checked to see whether the identified items are mandatory. The result of
the procedure is a list of voluntary
disclosure items in Indonesia. Third,
from the time before a company is
classified as financially distressed to a
year after the onset of distress, its annual reports are investigated. An
unweighted scoring system is therefore applied. One point is awarded for
disclosed items, zero otherwise. All
scoring procedures refer to the Indonesian voluntary disclosure checklist.
A voluntary disclosure score is defined as the ratio of the total items
disclosed to the maximum possible
352

items score applicable to the firm.
Therefore the disclosure score (DS) is
calculated as follows (Equation 1):
The scores for items disclosed

DS=

Maximum possible scores

(1)

To investigate whether being financially distressed prompts firms to
increase disclosure, the study employs
a few non-financially distressed firms
in the same industry classification as
financially distressed firms (Datastream code), fiscal year-end and exchange listing as control firms. We
identify control firms by the following
criteria. First, the firms in the same
industry must have positive interest
coverage ratio in the examined years.
Subsequently, the notes to the financial statements should confirm that the
firms are not in debt-restructuring programs. 13 control firms are found out
of the 28 financially distressed firms.
However, they represent 65 percent of
the industry in the financially distressed
samples.

Research Design
To test the first hypothesis (H1),
this study employs the Mann-Whitney
U-test and t-test for 2 independent
samples at a year before, during, and
after the onset of distress, in addition
to multiple regressions which apply a
dummy variable representing the financial distress condition. In order to
control external factors which may
increase disclosure level, the study
applies normal firms as control firms.
We use non-financially distressed firms

Wijantini—Voluntary Disclosure in the Annual Reports...

covered by Datastream (2003) which
are in the same industry as some of our
sample firms at the time of the onset of
distress. Author uses Datastream classification because their classification
scheme is well-known and widely accepted.
Ideally, this study applies all normal firms listed on the JSX as control
samples, which consequently needs
the total disclosure scores of all normal firms from 1996 to 2001. However, the scoring processes for all normal firms in the sample period are
lengthy to complete. Further, prior
studies found a relation between industry type and the disclosure level
where the extent of information may
differ among industries (Cooke 1991;
1992; among others). For these reasons, this study utilizes a few normal
firms as control firms that are in the
same industry classification as the financially distressed firms.
The possible external factor which
may affect the level of disclosure is the
expected mandatory disclosure required by IMF and the World Bank.
During the Asian crisis, both institutions were heavily involved in assisting the Indonesian government to relieve the distress. One of their sound
suggestions was to apply good corporate governance in Indonesian companies. Accordingly, many firms anticipated this by increasing disclosure
along with other good corporate governance practices, namely, hiring independent directors or commissioners
and adopting good internal auditor
systems before they became compul-

sory. Hence, both the advent of distress and external factors may have
boosted disclosure level during the
sample period.
The following multiple regression
Equation 2 is used to test the hypotheses stated above:
DSt= 0 + 1 DISTRESSt + 2 LSIZEt +
3VARt + 4 LEVt + t

(2)

DSt is disclosure score at the onset
of distress year, DISTRESS t is a
dummy variable taking the value of 1
for financially distressed firms and 0
otherwise, LSIZEt is log of total assets
at the onset of the distress year, VARt
is standard deviation of return on assets over the preceding ten years or
starting from the initial public offering
year to the onset of the distress year,
LEVt is total debt divided by total
capital at the onset of the distress year.

The Validity and Reliability of
the Index
The validity of our index is measured by three approaches: content,
contextual and internal validities. The
proposed index is a combined index of
Botosan’s (1997) and Webb’s (2002)
indices; each of which has been thoroughly checked for validity and reliability. For instance, it claims to have
content validity since Webb’s index is
based on authoritative literature and
practitioner guidelines provided and
validated by Hooks and Moon (1991,
1993) and a review of internal guidelines developed by a large auditing
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firm. It also possesses contextual validity since it is correlated significantly
(p < 0.05) with one well known measure of disclosure quality (Botosan
Index). Webb randomly chooses to
score her sample by using Botosan’s
(1997) index and compares her index
score to the Botosan score. Her index
shows the Pearson correlation coefficient of 0.307 (p = 0.046), Spearman
Rho of 0.36 (p = 0.023) against the
Botosan Index.
Botosan (1997) assesses the validity and reliability of her index in the
following ways. First, she uses internal validity by examining the correlation between the score and firms’ characteristics found in previous research
to be related to disclosure level. She
uses Lang and Lundholm (1993) as the
benchmark, since it provides the most
comprehensive analysis of the determinants of disclosure level to date.
The result shows that, except for several of the profitability measures, all
the rank order correlation statistics are
significant in the same direction across
their samples. In summary, her score is
significantly correlated with firm size,
the earnings/returns correlation, the
variance of stock returns, return on
equity, and abnormal returns for the
previous year and the security issuance variable. In general, the results of
the correlation analysis provide evidence that the Botosan Index is a valid
measure of disclosure level.
In terms of reliability, the author
of the Botosan Index applies rank order correlation between the components of the disclosure index, the num354

ber of Wall Street Journal articles written about the firm, and the number of
financial analysts following the firm.
The result shows that each of the components of the disclosure index is positively correlated with each of the remaining components, the total disclosure score, and two other proxies.
In addition to the fact that the
basic indices which we use to construct our index have already been
checked for validity and reliability, the
combined index will be assessed for
validity and reliability once more in
the following ways:
The internal validity is examined
by producing the multivariate analysis
between disclosure score and firms’
characteristics in Indonesia. The regression results illustrate that the disclosure score is a valid measure. The
sign of the coefficients of LSIZE and
VAR are positive (Table 1 – panel A).
They are consistent with those reported
by Botosan in Panel B.
To check the reliability of the index, we reclassify our index categories
into Utama’s (Botosan’s) Index. The
combination of general corporate information, corporate strategy, and competitor information in our index will be
classified in the background information in Utama’s (Botosan’s). Financial
review category is matched with a
summary of historical/financial results.
Information about director/management, employee information, and key
nonfinancial information are combined
into the key nonfinancial statistics in
Utama’s study. Research and Development and projected information are

Wijantini—Voluntary Disclosure in the Annual Reports...

Table 1.Comparison of Full Regression of Disclosure Score on Firm Characteristics
Panel A: Current Sample Results
LSIZE
(+)
Coefficient 0.031
t-statistic
3.819 ***
Adj. R2
39.5%
N
42

VAR
(+)

LEV
(+)

DISTRESS
(+)

0.135
1.386

-0.083
-1.627

0.074
2.543 **

Panel B: Botosan Resultsa
MVAL
(+)
Coefficient 0.602
t-statistic
8.43 ***
Adj. R2
36.9%
N
169

CORR STDEV
(-)
(+)
0.069
1.07

ROE
(-)

ARET
(+)

OFF
(+)

INSIDE
(-)

0.157
0.061
2.12 ** 0.85

-0.104
-1.61

0.045
0.99

-0.125
-1.89 *

* Statistically significant at the 10 percent level, two-tail test.
**Statistically significant at the 5 percent level, two-tail test.
*** Statistically significant at the 1 percent level, two-tail test.
The current sample size is 42 consists of 29 financially distressed and 13 non-financially distressed firms.
LSIZE is the log of total assets at the onset of distress, VAR is standard deviation of return on assets over the
preceding ten years or starting from the initial public offering year to the year of the distress onset, LEV is total
debt divided by total capital at the onset of distress, DISTRESS is a dummy variable taking the value of 1 for
financially distressed firms and 0 otherwise. MVAL is the market value of equity at the beginning of 1990;
CORR is the correlation between quarterly market-adjusted stock returns and quarterly earnings computed for
the five years preceding fiscal year 1990. STDEV is the standard deviation of the residuals from the market
model estimation of beta computed using at least twenty-four of the sixty monthly return observations in the
five-year period ending May 31, 1991. ROE is the after tax rate of return on common equity computed for fiscal
year 1990, ARET is the annual market-adjusted stock return for 1990. OFF is a dummy variable set equal to
one if the firm filed a debt or equity registration statement during 1990, 1991 or 1992 and zero otherwise and
INSIDE is the number of shares held by officers, directors and 10 percent principal stockholders reported in
the December 1990 edition of Spectrum 6, divided by the number of common shares outstanding.
a

Source: Botosan (1995: 45)

classified as projected information.
Finally, management discussion and
analysis is in the same title category.
There are three categories which do
not fit any Botosan classification. Ac-

quisitions and Disposals, Capital Resources, Liquidity Information Categories are excluded from reclassification, since the items are mainly derived from Webb’s Index (2002) and
355

Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

Table 2. Comparison Between Disclosure Score of Financially distressed
Firms after Reclassifying into Botosan’s Categories and Utama’s
(2003)
Utama (2003) applies Botosan’s Index to measure the disclosure score of a sample of Indonesian publicly listed
companies. The percentage score is the actual score divided by the maximum score in each category times 100
percent. S before is the disclosure score a year before the onset of distress, S is the disclosure score at the onset
of distress and S after is disclosure score at a year after the onset of distress. Overall score is the average score
of all categories. Value in parentheses is the rank of the category. The highest rank value [1] indicates the most
disclosed category while the lowest rank value [5] shows the least disclosed category.

Actual Score / Maximum Score (%)
Description

S before

1. Background information
48.2 [2]
2. Summary of financial performance 92.3 [1]
3. Nonfinancial information
19.2 [4]
4. Projected information
3.3 [5]
5. Management discussion and analysis 24.8 [3]
Overall score

do not fit any Botosan categories. Table
2 provides the comparisons of the score
with Utama (2003)’s. They are similar
in many ways. The most often disclosed information is the summary of
financial performance, and the least
disclosed category is the projected information. The overall scores are
around 40 percent both in our score
and Utama’s.

Results and Discussion
In order to provide a systematic
way of linking the specific research
objectives and the results of the study,
this below subsection is organized as
follows: each subsection will initially
state each specific research objective,

356

37.56

S

S after

Utama’s

48 [2]
96 [1]
18.9 [4]
8.1 [5]
31.3 [3]

52.7 [2]
100 [1]
22.8 [4]
4.3 [5]
31.9 [3]

44.25 [3]
84.9 [1]
17.7 [4]
4.4 [5]
55.7 [2]

40.46

42.34

41.9

then it will present the summary of the
results, and finally, it will be discussed.
Voluntary Disclosure Level of
Financially Distressed Firms in Indonesia. The first specific research
objective of the study is to measure
voluntary disclosure level in the annual reports of financially distressed
companies in Indonesia. The study
demonstrates that Indonesian financially distressed firms make voluntary
disclosures in their annual reports. The
disclosure score range is between three
percent and 49 percent with the mean
and median scores of 25 percent and
26 percent, respectively, at the onset of
distress. The percentage score is calculated from the disclosure formula in
Equation 1 times 100 percent.

Wijantini—Voluntary Disclosure in the Annual Reports...

Types of Voluntary Information
Disclosed by Financially Distressed
and Control Firms in Indonesia. The
second specific research objective of
the study is to investigate the types of
voluntary information which financially distressed firms in Indonesia
disclose in their annual report. The
most disclosed item is in the financial
review category, namely, the asset turnover or sufficient information to compute asset turnover (i.e., sales and total
assets). Only one firm in the samples
did not disclose this information. General corporate information category is
in the second most disclosed categories. The information regarding major
products, segments or subsidiaries,
specific details about products, specific characteristics of principal markets, and the description of facilities
are in this group of voluntary items.
Competitor and employee information are both in the third rank. The
competitor analysis disclosure emerges
either in positive or negative signs. For
instance, Charoen Pokphand revealed,
“During the year 1998, the agribusiness
industry was characterized by reduced
competition ….”(Charoen Pokphand
Annual Report 1998, p. 5) while Modern Photo mentioned, “1998 was
marked by very strong competition in
the photographic products business in
the domestic market. Nevertheless, in
the mid of these very difficult circumstances, the company still maintained
its position as the market leader” (Modern Photo Annual Report 1998: 11).
Most employee information points to
human resources development, such

as “The company has always tried to
pay attention to human resources development. Employees’ welfare has
also become one of the company’s
priorities” (Apac Annual Report 1998:
18). Corporate strategy are in the fourth
rank, followed by Management Discussion and Analysis, Information
about Directors/Management, Capital
Resources, Acquisitions and Disposals, Non-Financial Information, Projected Information, Liquidity, and
Research and Development Information.
Panels B and C reveal the categories of voluntary disclosure at the onset of distress and a year afterwards.
The ranks of disclosure categories are
similar to those in panel A. The three
least disclosed categories are Projected
Information, Liquidity, and Research
and Development. This supports
Utama’s finding (2003) that projected
information is the least disclosed item
in annual reports of Indonesian publicly listed companies.
The rank values of voluntary disclosure types in control firms show
similarity to those of the distressed
firms. It may be pointed out that while
a distressed firm may have more detailed information than does a nondistressed firm, it does not disclose
different categories of information.
Some disclosures are difficult for Indonesian firms to provide, such as projected information, research and development, and liquidity. In developing countries such as Indonesia, firms
have many barriers to forecasting.
Unavailability of industry data, incon357

Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

sistent government policy, and other
political factors are common factors in
this regard. In addition, with high economic uncertainty during the crisis,
most firms are unable to provide forecasts. The low score in Research and
Development and Liquidity categories may reflect the unwillingness of
the firm to publicize confidential information.

Voluntary Disclosure and the
Tested Variables. The third specific
research objective of the study is to test
four hypotheses. Panel A in Table 3
presents the Mann-Whitney U- and ttests (Panel B) for two independent
samples comparing the level of information between 29 financially distressed and 13 non-financially distressed firms at a year before, during,

Table 3. Comparing Voluntary Disclosure Between Financially Distressed
and Non-financially Distressed Firms
DS is the sum of the total points awarded in each of the thirteen disclosure categories. DISTRESS indicates
financially distressed firms while NONDISTRESS indicates non-financially distressed firms. The negative Zstatistics indicate that the rank sums are lower than their expected values. The Null Hypothesis is DS
DISTRESS does not tend to be more than DS NONDISTRESS. *** Significant at the 1 percent level; **
Significant at the 5 percent level; * Significant at the 10 percent level.

Panel A: The Mann-Whitney U Tests Between 2 Groups
Year

Group*

n

Mean
Ranks

Sum of Ranks
Rank

Z

p-value
(1-tailed)

Before

0
1

13
29

16.38
23.79

213
690

-1.812

0.035 **

Onset

0
1

12
28

12.33
24.00

148
672

-2.896

0.002 ***

After

0
1

29
13

10.88
26.26

141
761

-3.761

0.000 ***

Panel B: The Two Sample t-Tests

*

Year

Group*

n

t

p-value (1-tailed )

Before

1
0

29
13

1.812

0.039 **

Onset

1
0

28
12

3.123

0.001 ***

After

1
0

29
13

4.584

0.000 ***

Grouping Variable: GROUP 1 for financially distressed firms, 0 for non-financially distressed
firms.

358

Wijantini—Voluntary Disclosure in the Annual Reports...

and after the onset of distress. The
results present significant evidence that
financially distressed firms disclose
more than do non-financially distressed
firms. However, the results indicate
that the financially distressed firms
disclose more than do the non-financially distressed firms before they become distressed. With p-values of test

results tend to be significantly stronger, namely, at the onset of distress and
a year after the onset of distress, it
provides weak evidence that financial
distress increases voluntary disclosure.
The two sample t-tests in Panel B
reveal the same results as those in the
Mann-Whitney test.

Table. 4.Descriptive Statistics and Pearson [Spearman] Correlation Coefficients for Variables
Disclosure Score (DS) is the sum of the total points awarded in each of the thirteen disclosure
categories. LSIZE is the log of total assets in each related year, VAR is the standard deviation of
return on assets over the preceding ten years or starting from the initial public offering year for each
related year, LEV is the total debt divided by total capital in each related year, DISTRESS is a
dummy variable taking the value of 1 for financially distressed firms and 0 otherwise. Panel A
consists of 42 firms with DS at a year before the onset of distress. Panel B consists of 40 firms with
DS at the onset of distress. Panel C consists of 42 firms with DS at a year after the onset of distress.
Panel D consists of 29 financially distressed firms only at a year before the onset of distress. Panel
E consists of 28 financially distressed firms only at the onset of distress. Panel F consists of 29
financially distressed firms only at a year after the onset of distress. Spearman coefficients are in
parentheses. *** Significant at the 1 percent level; ** Significant at the 5 percent level; * Significant
at the 10 percent level.
Panel A: Sample of 29 Distressed and 13 Non-distressed Firms a Year Before the
Onset of Distress
Item

DS

VAR

LEV

DISTRESS

LSIZE

DS before

1.000
[1.000]
0.117
[-0.134]
0.010
[-0.086]
0.275*
[0.282*]
0.234
[0.260*]

1.000
[1.000]
0.646***
[0.278*]
0.090
[-0.117]
-0.194
[-0.305**]

1.000
[1.000]
0.476***
[0.533***]
0.122
[0.135]

1.000
[1.000]
0.323**
[0.308**]

1.000
[1.000]

0.206
0.073

0.053
0.107

0.654
0.360

0.690
0.468

19.837
1.260

VAR
LEV
DISTRESS
LSIZE
Mean
St. Dev

359

Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3
Panel B: Sample of 28 Financially Distressed and 12 Non-financially Distressed
Firms at the Onset of Distress
Item

DS

DS
VAR
LEV
DISTRESS
LSIZE
Mean
St. Dev

0.104
0.289*
[0.210]
0.451***
[0.463***]
0.545***
[0.467***]
0.225
0.078

VAR

LEV

DISTRESS

LSIZE

1.000
[1.000]
1.000
[0.068]
0.198
[0.197]
0.160
[0.095]
-0.166
[-0.122]
0.076
0.108

[1.000]
1.000
[1.000]
0.689***
[0.604***]
0.446***
[0.410***]
0.730
0.285

1.000
[1.000]
0.333**
[0.335**]
0.700
0.464

1.000
[1.000]
20.081
1.390

Panel C: Sample of 29 Financially Distressed and 13 Non-financially Distressed
Firms a Year After the Onset of Distress
Item

DS

VAR

LEV

DISTRESS

LSIZE

DS after

1.000
[1.000]
0.132
[0.168]
0.416***
[0.513***]
0.586***
[0.587***]
0.452***
[0.394**]

1.000
[1.000]
0.316**
[0.423***]
0.204
[0.303**]
-0.210
[-0.144]

1.000
[1.000]
0.573***
[0.618***]
0.428***
[0.436***]

1.000
[1.000]
0.325**
[0.337**]

1.000
[1.000]

0.219
0.069

0.090
0.089

0.726
0.402

0.690
0.468

20.190
1.379

VAR
LEV
DISTRESS
LSIZE
Mean
St. Dev

Correlation Analyses
Table 4 provides Pearson and
Spearman Rho correlation coefficients
between variables included in the regression analysis discussed below. All
panels present Pearson and Spearman
360

Rho correlation for variables in a year
before, during, and after the onset of
distress. In general, the correlation
between disclosure score (DS) and
DISTRESS is significant. The tests
also reveal positive correlations between VAR and LEV, LEV and DIS-

Wijantini—Voluntary Disclosure in the Annual Reports...

TRESS, LSIZE and DISTRESS. The
last rows present the means and standard deviations of the variables at various years.

Regression Analysis
Table 5 reports the regression of
disclosure scores on firm characteristics at various times. Regression (1)
applies samples consisting of financially distressed and control firms a
year before the onset of distress. Regression (1) reveals that financially
distressed firms disclose more than do
non-financially distressed firms
(p=0.0356). It is consistent with MannWhitney and t-test results. Accordingly, the result supports the first hypothesis. The regression also presents
evidence that VAR is a significant
factor affecting the level of disclosure
score with p-value of 0.0366. It is
consistent with the third hypothesis.
Regression (2) presents evidence
that financially distressed firms disclose more than do non-financially
distressed firms (p-value = 0.0156).
The regression also presents consistent evidence that LSIZE is a significant factor that affects the level of
disclosure score with p-value of 0.0005.
Therefore, they are consistent with the
first and the second hypotheses.
Regression (3) applies samples
consisting of financially distressed and
control firms a year after the onset of
distress. Regression (3) also reveals
that financially distressed firms disclose more than do non-financially

distressed firms (p= 0.0036). The result supports the first hypothesis and is
consistent with Mann-Whitney and ttest results. The regression also presents evidence that LSIZE is a positive
factor that affects the level of disclosure score with p-value of 0.0307.
The results of regression (1), (2)
and (3) show significant positive signs
of the DISTRESS coefficient which
indicates that financially distressed
firms may disclose more than may
non-financially distressed firms. We
conclude that the multivariate analysis
also gives evidence that the level of
voluntary disclosure in financially distressed firms in higher than that in nonfinancially distressed firms. However,
they do not provide evidence that the
advent of financial distress triggers
financially distressed firms to disclose
more.
Regression (4), (5 and (6) apply
the samples of financially distressed
firms in a year before, during, and after
the onset of distress. Again, they show
that the size of the firm is a significant
variable relating to disclosure level.
Most of the regression estimates
show that the size of the firm is a
significant variable relating to the disclosure level. Positive signs indicate
that greater size is associated with
higher disclosure level. Further, the
coefficient of performance variability
(VAR) is positive as expected, but not
economically significant in all regressions. These results provide no significant support for the adverse selection
argument.

361

Gadjah Mada International Journal of Business, September - December 2006, Vol. 8, No. 3

Table 5. Regressions of Disclosure Score on Firm Characteristics
The table presents the results of linear regressions of Disclosure Score (DS) on firm characteristics.
LSIZE is the log of total assets, VAR is the standard deviation of return on assets over the preceding
ten years or starting from the initial public offering year until estimated year, LEV is total debt
divided by total capital and DISTRESS is a dummy variable taking the value of 1 for financially
distressed firms and 0 otherwise.. The sample size for Regression (1) is 42, consists of 29 financially
distressed and 13 non-distressed control firms at a year before the onset of distress, for Regression
(2) is 40, consists of 28 financially distressed and 12 non-distressed control firms at the onset of
distress, for Regressions (3) is 42, consist of 29 financially distressed and 13 non-distressed control
firms at a year after the onset of distress. Regression (4) consists of 29 financially distressed firms
at a year before the onset of distress. Regression (5) consists of 28 financially distressed firms at the
onset of distress. Regression (6) consists of 29 financially distressed firms at a year after the onset
of distress. p-values are in parentheses.

Intercept
LSIZE (+)
VAR (+)
LEV (+)
DISTRESS (+)
Adj. R2
F ratio
AR
Normality Chi^2(2)
Xi^2
RESET

(1)

(2)

(3)

(4)

(5)

(6)

-0.083
[0.6434]
0.015
[0.1172]
0.313**
[0.0366]
-0.102**
[0.0368]
0.061**
[0.0356]
0.14
2.553*
[0.0551]
1.3596
[0.2700]
12.7***
[0.0018]
0.373
[0.9100]
0.193
[0.6629]

-0.413**
[0.0123]
0.031***
[0.0005]
0.135
[0.1744]
-0.083
[0.1126]
0.074**
[0.0156]
0.38
6.872***
[0.0003]
4.8342**
[0.0144]
7.860**
[0.0196]
1.817
[0.1247]
0.169
[0.6834]

-0.173
[0.2426]
0.016**
[0.0307]
0.092
[0.4107]
-0.006
[0.8183]
0.069***
[0.0036]
0.38
7.021***
[0.0003]
0.110
[0.8961]
3.457
[0.1775]
0.686
[0.6827]
0.729
[0.3988]

0.065
[0.7913]
0.010
[0.4116]
0.316
[0.1464]
-0.099
[0.2631]

-0.247
[0.2310]
0.022*
[0.0531]
0.106
[0.3482]
-0.028
[0.7596]

-0.163
[0.2426]
0.018**
[0.0172]
0.185*
[0.0814]
0.012
[0.6702]

0.02
7.021***
[0.0003]
0.714
[0.5001]
6.005**
[0.0497]
0.177
[0.9935]
0.075
[0.7862]

0.16
2.2815
[0.1049]
2.555
[0.1005]
4.202
[0.1223]
1.472
[0.2461]
1.399
[0.2488]

0.25
3.6474**
[0.0262]
0.247
[0.7829]
0.943
[0.6238]
0.645
[0.6931]
0.350
[0.0559]

*** Significant at the 1 percent level; ** Significant at the 5 percent level; * Significant
at the 10 percent level

362

Wijantini—Voluntary Disclosure in the Annual Reports...

Conclusions
This paper investigates several
issues related to voluntary disclosure
by financially distressed firms in Indonesia and offers a combined index for
measuring voluntary disclosure there.
It is basically developed from
Botosan’s (1997) and Webb’s (2002)
indices. After comparing the index with
previous studies, we show that the
proposed index and score are valid and
reliable. The average and median of
disclosure score are 25 percent and 26
percent, respectively, at the onset of
distress. The total possible scores are
77 measures of 13 different items of
information in the annual reports. The
most disclosed items are in the cat-

egory of financial highlights and general corporate information whereas the
three least disclosed items concern
projections, liquidity, and research and
development. Moreover, the results of
this study reveal that the level of voluntary disclosure in financially distressed firms is higher than that in nonfinancially distressed firms. The MannWhitney U nonparametric test, t-test,
and regression analysis are applied for
various years. Consistent with findings in previous studies, the size of the
firm appears to be a positive variable
significantly affecting the disclosure
level (Susanto 1992; Utama 2003; Firth
1979; Cooke 1989; 1991; Hossain et
al. 1995; Ferguson et al. 2002, among
others).

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