Disclosure Quality and its Impact on Financial Reporting Quality, Audit Quality, and Investors’ Perceptions of the Quality of Financial Reporting: A Literature Review

Abstract

The purpose of this paper is to review the most recent empirical studies on corporate disclosures, in the aim of examining the link between disclosure quality (DQ) and financial reporting quality, audit quality, and investors’ perceptions of the quality of financial reporting and providing recommendations for future research on this topic. Seventy-eight empirical studies, published in several relevant journals from 2003 onwards (i.e. one year after the commencement of the SOX 2002), have been categorized and analyzed in order to identify the link between the aforementioned variables. The analysis has revealed that the Sarbanes Oxley Act (2002) has significantly increased management awareness of the importance of accounting disclosures. In general, the majority of the studies which have been reviewed have identified the presence of a positive correlation between four aforementioned variables. These findings lend credence to the belief that these variables may well be classified as dependent since they are complementary. Finally, the review presents a discussion of the limitations of the studies and provides useful recommendations for future research on this topic.