This study
systematically examines the levels of disclosure (i.e. the availability of
firm-specific information to those outside publicly traded firms, measured by
disclosure indices) in the annual reports of firms from the Baltic states of
Estonia, Latvia and Lithuania, and compares the results with a sample of Nordic
firms. The Baltic and Nordic regions are members of the EU and have had the
same accounting regulations and stock market structure since 2005. In order to
focus on and isolate the effect of regulation change on disclosure as reliably
as possible, the time period used in this paper is 2004 and 2006, i.e. one year
before and one year after the mandatory adoption of the IFRS. NASDAQ OMX owns
and operates (with similar trading and quotation mechanisms) the stock
exchanges that list all of our sample firms. The countries in our sample also
have similar corporate governance regulations and recommendations for their
listed firms. These similarities enable us to analyze whether other
institutional and economic related factors, i.e. remaining matters that rule,
regulate and monitor firms’ legal duties and the role of stock markets in an
economy, and the principal societal differences in the sample countries,
influence firms’ disclosure practices. We find that the level of financial
reporting disclosure in annual reports is lower for Baltic firms than for
Nordic firms, both before and after the introduction of the EU mandated
International Financial Reporting Standards (IFRS) in 2005. However, the
regulated financial reporting disclosure of Estonian firms matches that of
their Nordic counterparts. This outcome is in line with the early proactivity
and long-range strategy of regulators in Estonia aligning Estonia’s GAAP with
the IAS/IFRS. Our results support the conclusion that disclosure practices are
affected by factors beyond the IFRS and the similarity between the regions’
market trading and quotation mechanisms. This study provides evidence that systematic
and strong-enough regulatory actions influence disclosure practices. We also
hope that the disclosure indices described in this paper will help managers
recognize the potential and richness of financial reporting disclosure as a
communication tool.