Reputation costs: The impetus for voluntary derivative financial instrument reporting

The purpose of this study is to investigate managers' responses to derivative financial instrument disclosure requirements proposed by the Australian accounting standard setting bodies and the Australian Society of Corporate Treasurers (ASCT). Confronted with societal pressures to make derivative activities more transparent, managers responded in a manner that can be explained by legitimacy and institutional theories and the maintenance of the managers' and their firms' financial reporting reputations. Discretionary reporting is predicted to be positively related to the magnitude of reputation costs confronting managers and firms. While the desire for legitimacy is unobservable, financial reporting reputation is proxied by the following attributes-ASCT, auditor, and Group of 100 (G100) affiliations. With the exception of auditor affiliation, results from the analysis are consistent with the hypotheses. Alternative explanations of the results may be possible. However, the consistency and significance of the results implies that legitimacy and institutional theories provide a plausible explanation as to what impulse prompted managers' responses. (The plausible explanations provided are morally based [Louch (1966). Explanation and human action. Berkeley: University of California Press].) We are grateful to an anonymous referee for this insight into our explanation). Further research to investigate managers' reporting incentives is recommended.