Internal Control Disclosure and Agency Costs – Evidence from Swiss listed non-financial Companies

von Stefan Hunziker, Projektleiter sowie Dozent am Institut für Finanzdienstleistungen Zug IFZ

An internal control system (ICS) is generally considered as a management tool that serves as a means to achieve performance and profitability targets, and enhances the reliability of financial reporting. Voluntary reporting on internal control may be viewed as a monitoring function to reduce agency costs caused by divergent interests between management and shareholders. Yet, there is no empirical research on the association between voluntary disclosure on internal control and agency costs in Swiss companies.

This paper explores internal control disclosures within a sample of 91 Swiss listed non-financial company annual reports by developing an internal control disclosure index. The main conclusion of the study is that four companyspecific characteristics derived from agency theory do significantly explain the variability in the level of voluntary disclosure on internal control, i.e. management ownership, blockholder ownership, board size and leverage. Overall, agency cost theory seems to be a powerful theory to explain voluntary disclosure strategies of Swiss companies.

Read more in the IFZ Working Paper No. 0024/2014 – click here to download