Harmonisation of organisational human capital disclosure as a facilitator of foreign investment into a developing country

Abstract

This thesis examines how the harmonisation of human capital information disclosure in the corporate annual reports of stock exchange listed organisations may facilitate foreign investments into a developing country. Harmonisation is a process for developing a set of standards, practices and frameworks for reporting that are aligned with the aim of increasing compatibility of such disclosure frameworks, whilst maintaining some form of flexibility. The need to undertake this study has been motivated by the minimal and fragmented disclosure of human capital information in corporate annual reports. Such limited and uneven reporting creates asymmetric information problems with foreign investors. As such, this thesis seeks to understand how the harmonised disclosure of human capital information could assist in reducing information asymmetry problems faced by foreign investors as they make investment decisions into a developing country.

Influenced by the interpretive paradigm, the study followed the qualitative approach to research where the basic interpretive qualitative research design has been employed. Data was collected in two phases. The first phase of the study made a comparison of the human capital information voluntarily disclosed in the corporate annual reports of selected Zimbabwean Stock Exchange listed organisations in the service sector, and the information required by foreign investors investing into that sector. This was done to understand if there were any information gaps between the providers and users of corporate information. Document analysis of 14 corporate annual reports drawn from organisations in the service sector of Zimbabwe’s banking, insurance, tourism and hospitality and telecommunications industries was done using a pre-defined human capital disclosure checklist. Document analysis was done to understand the disclosure practices of the organisations. The same human capital disclosure checklist used on document analysis was also sent to 15 foreign investors into these sectors, to infer their human capital information requirements. Comparisons of findings from the two sources were made to establish whether there were information disparities. The findings from this first phase of the study informed some of the questions posed in the second phase of the study.

The second phase of the thesis reports the results of a qualitative study from interviews. This phase was aimed at understanding if the harmonised disclosure of human capital information in corporate annual reports could facilitate foreign investments through the reduction of information asymmetry problems. Specifically, the interviews were meant to ascertain if the harmonisation of human capital information disclosure could facilitate signalling and screening as a way to reduce information asymmetry problems with foreign investors. The perceptions of both preparers and users of corporate information were sought from the participating organisations and foreign investors in the selected service industry sectors. A total of thirty-five interviews were conducted with human resources managers, finance directors and foreign investors.

The evidence from the study revealed that the harmonisation of organisational human capital information disclosure in corporate annual reports assists in the reduction of information asymmetry problems. Such reduction in information asymmetry problems facilitates effective decision-making by foreign investors, who are one group of the corporate information users. The major conclusions from the study are that first, there is human capital information asymmetry between preparers of corporate annual reports and foreign investors as users of corporate annual reports. Second, the asymmetric information related to human capital information causes moral hazard and adverse selection problems. Third, harmonised human capital information disclosure facilitates signalling by enhancing signal fit, signal diffusion and reducing signal erosion. Fourth, harmonisation of human capital information disclosure facilitates screening by creating a separating mechanism between good and bad organisations. Fifth, the adequate and harmonised disclosure of relevant human capital information reduces information asymmetry problems. Sixth, the signalling environment affects the signal strength of human capital information. Finally, the reduction of human capital information asymmetry problems leads to improved investment decisionmaking by foreign investors, prompting them to invest into the country.

The main contribution of this study lies in providing a systematic, theoretically informed proposal for the harmonisation of human capital information disclosure in corporate annual reports though the development of a theoretical model. The model explores how the harmonised disclosure of human capital information support signalling and screening as ways to enhance foreign investment by reducing information asymmetry problems. The study also makes methodological, empirical and practical contributions. Further research is recommended to empirically test the theoretical model and move the model towards the development of normative theory.