Question

Use institutional theory to explain why firms would voluntarily disclose theiraccounting infromation?

Answer 1

The core aspect of institutional theory is based on roles of different systems in which companies operate. The different systems are social systems, political systems and economic systems. A company has to operate within the consideration of these systems and this helps companies to gain legitimacy as an entity within these systems.

A company’s voluntary disclosure policies are determined by the corporate governance mechanisms in place within a company. The corporate governance mechanisms are influenced and shaped to a significant effect and to a considerable effect by the different systems (like the social, political and economic systems) at play that affects the workings of a company. Organizational behaviors and strategies often do not have an economic basis and institutional theory focuses on the non-economic explanation of the behaviors of companies and organizations.

Many companies voluntary disclose their accounting information even if they are not legally required to do so. They do this because a system has been set in their industry for voluntary disclosures and many companies are going for voluntary disclosures. This enables the company or the organization to ensure that its image and its reputation is upheld as it adheres to the common established practices of the systems on which it operates.