ETD system

Electronic theses and dissertations repository


Tesi etd-01282019-142159

Thesis type
Tesi di dottorato di ricerca
The value relevance of mandatory non-financial disclosure: The case of business model reporting
Settore scientifico disciplinare
Corso di studi
tutor Prof. Giunta, Francesco
Parole chiave
  • Non-financial disclosure
  • Value relevance
  • Business model
  • Narrative reporting
Data inizio appello
Data di rilascio
Riassunto analitico
In recent years, the concept of business model (BM) has gained popularity in the accounting field. The BM illustrates the process of value creation, value delivery and value capture that characterizes a business, and how it uses its resources to generate value (Nielsen, 2010). For this reason, BM is seen by many scholars as a tool that allows companies to contextualize other information disclosed (Bukh, 2003; Holland, 2004; Nielsen, 2010).
For these reasons, standard setters, regulators and professional bodies have begun paying attention to the inclusion of BM information in the annual report. After a recommendation for voluntary disclosure in the Corporate Governance Code from 2010, the disclosure of information about the BM in the annual report became mandatory in the UK in 2013 and the European Directive 2014/95/EU requires all large European companies to: “a brief description of the undertaking's business model” (p. 4).
Despite these regulations recognize the role of BM in financial reporting, they do not provide a clear and detailed definition of BM. In the UK, the Financial Reporting Council (FRC) published a Guidance on the Strategic Report to help companies comply with non-financial disclosure requirements. The Guidance recommends that the description of BM “should set out how it generates or preserves value over the longer term, and how it captures that value” (FRC, 2014, Guidance on the Strategic Report, paragraph 7.12). In a similar way, the EU Guidelines on non-financial reporting state “(…) business model describes how it generates and preserves value through its products or services over the longer term.” (EU, 2017, paragraph 4.1-a.).
While the BM concept has the potential to provide investors with valuable information about the value generation process, the loose regulatory requirements could fail to achieve this purpose, as companies may choose to disclose generic and boilerplate information about BM (Bini et al., 2016). Previous studies on non-financial regulation show evidence of the fact that, in presence of broad and generic references to the items that have to be disclosed, companies may perceive those requirements as a mere complying exercise and disclose irrelevant information (e.g. Nielsen et al., 2017a).
Non-financial disclosure regulation requires standard setters to find the right amount information companies should disclose in order to fulfill the informative purpose and, at the same time, not imposing too stringent requirements. The latter one-size-fits-all requirement would have a counter-productive or unintended effects of not providing the necessary space for the disclosure activities to capture the peculiarities of each individual company. Further, requiring companies to disclosure sensitive strategic information carries the risk of creating disclosure disincentives.
Against this backdrop, this research investigates companies’ BM disclosure practices under a mandatory disclosure regime and assesses if BM disclosure in the annual report has an incremental value for investors.
In order to assess BM disclosure, content analysis has been applied to the annual reports of a sample of UK listed companies that operate in different industries. Only a few studies have investigated BM disclosure. All those studies rely on a BM framework to define a list of aspects that characterize BM a priori, and then search for descriptions of those elements in the annual reports (e.g. Bini et al., 2016; Mechelli et al., 2017; Bini et al., 2018).
A limitation of this kind of approach is represented by the fact that BM is company-specific and it describes how a particular company gains its distinct competitive advantage. Thus, not all the elements that are part of a framework can have the same importance for a particular company.
To overcome this limitation, the companies have been analyzed and classified according to the taxonomy developed by Taran et al. (2016). The use of Business Model QUANT database allows to identify the main value drivers (cfr. Amit and Zott, 2001) of a company value creation process on the basis of its configuration.
BM disclosure assessment takes into account the configuration of a company and assesses BM disclosure on the basis of the specific drivers that characterize that configuration. Similarly to other studies that investigate the value relevance of non-financial information, the model developed by Ohlson (1995) has been used to examine the value relevance of BM disclosure.
The results of this research indicate that the number of value drivers communicated by companies is low. This results in a BM disclosure that is not value relevant, as our findings show.
The main reasons behind poor BM and non-financial disclosure could be the costs that companies have to bear when they choose to make proprietary information available to the public. A poor BM disclosure, which does not shed light on the value drivers of a business, may also be a sign of the fact that companies are not aware of the concept of BM and they don’t know how to structure BM disclosure.
Overall, these findings strongly question the effectiveness of regulations that impose companies to disclose their BM. First, the wide discretion companies have in disclosing BM may lead companies to give a poor representation of their value creation process. In order to be compliant, companies do not have to provide extensive information about BM. Second, a clear definition of what the BM is and how companies should disclose it is not provided. Thus companies could not be aware of the meaning of BM. Third, the regulations that deal with BM do not impose sanctions to non-compliant companies. Therefore, companies are not incentivized to disclose proprietary information.
This study contributes to the research on mandatory non-financial (and BM) disclosure. A new method to assess BM disclosure is proposed. The method is not based on a standardized list of items, but takes into account the particular BM configuration of a company. Thanks to this method it is possible to verify if companies disclose information about the value drivers that should be the most important for each particular configuration. This method could be applied by future studies in the investigation of BM disclosure – e.g. to identify the most relevant non-financial KPIs on the basis of their link to the value drivers that characterize the BM configuration of a company.
The investigation of the value relevance of BM disclosure contributes to test the impact that the inclusion of a description of BM in the annual report has on financial markets.
The results of our study can be of interest for many subjects, from academic scholars interested in the measurement of non-financial and BM disclosure, to practitioners and standard setters, who are involved in the ongoing non-financial (and BM) disclosure regulation process.