The Valuation Relevance of Voluntary Disclosures: A Comparative Analysis of the Disclosure Behaviour of Major Pharmaceutical Companies in Sweden and the UK

In order to enhance our understanding of the content and context of voluntary disclosures, the disclosure behaviour of a sample of Swedish and UK pharmaceutical companies is investigated in this paper. The investigation has been guided by a fundamental ("residual income") valuation model, based on accounting concepts and conservative measurement principles, in order to focus on voluntary disclosures which are expected to be valuation relevant. The empirical survey has been confined to three Swedish and three UK major pharmaceutical companies, whose annual financial reports have been studied during the ten year period 1984-93. The results show that pharmaceutical companies in both countries have provided substantial voluntary disclosures being relevant for the assessment of competitive advantages, especially with regard to research and development activities. Disclosures concerning dividend policy, future business growth and the prediction of net income, were more prevalent among the Swedish companies, indicating that these companies might have been more concerned about their relations to stock market investors. With regard to the valuation impact of accounting measurement biases - cost matching bias of expenses and measurement bias of assets in particular - voluntary disclosures in the financial reports were rare for all but one Swedish company.