Determinants of financial instruments risk disclosure: An empirical analysis in the banking sector

Annamaria Zampella,Marco Maffei,Alessandra Allini,Luca Ferri

doi:10.22495/cocv17i2art2

Annamaria Zampella, Marco Maffei + Show 2 more

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https://doi.org/10.22495/cocv17i2art2

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Abstract

This study investigates the effects of firm and country factors, considered as determinants of the financial instruments risk disclosure (FIRD) proxied by IFRS 7 in the European banking system. We select 582 banks-year observations based on the largest five European economies (France, Germany, Italy, Spain and the UK) as provided by the International Monetary Fund (IMF). Our analysis covers a period of 8 years (2007-2014) and adopts an OLS model. Results show that both firm (the type of auditor, board size and profitability) and country factors (financing environment, regulatory environment, and organizational status) affect FIRD. Limitations for this paper could relate to country selection, as well as on the breadth of the sample. Nevertheless, these aspects could unveil possible areas of future inquiry. The contribution of the study is twofold. It enriches the literature about firm and country determinants on financial instruments risk disclosure, as combined rather than single-standing variables. Yet, it draws the attention of banks’ management and investors on what the crucial factors to reach an optimal level of FIRD are and gain the confidence of capital markets, reducing information asymmetries. This is the first empirical investigation on the determinants of FIRD, using IFRS 7, in the European banking sector that adopts firm and country factors in a combined effort.

Highlights

The aim of this study is to investigate firm and country factors affecting Financial Instruments Risk Disclosure (FIRD) in the European banking sector on the basis of the mandatory information requested by the International Financial Reporting Standard no. 7 (IFRS 7)
Our results show that the presence of a Big Four audit firm, board size, and country factors exert a positive effect on FIRD in the European banking sector
This paper investigates the effect of country and firm factors on FIRD required by IFRS 7 in the European banking sector

Summary

Introduction

The aim of this study is to investigate firm and country factors affecting Financial Instruments Risk Disclosure (FIRD) in the European banking sector on the basis of the mandatory information requested by the International Financial Reporting Standard no. 7 (IFRS 7).IFRS 7 attempts to enhance transparency in the banking system (Bischof, 2009), on the ground that an increase in financial risk disclosure is likely to reduce instability (Oliveira, Lima Rodrigues, & Craig, 2011) and enhance performance through information disclosure (Wakaisuka-Isingoma, 2018). The aim of this study is to investigate firm and country factors affecting Financial Instruments Risk Disclosure (FIRD) in the European banking sector on the basis of the mandatory information requested by the International Financial Reporting Standard no. IFRS 7 attempts to enhance transparency in the banking system (Bischof, 2009), on the ground that an increase in financial risk disclosure is likely to reduce instability (Oliveira, Lima Rodrigues, & Craig, 2011) and enhance performance through information disclosure (Wakaisuka-Isingoma, 2018). Coluccia, Fontana, Graziano, Rossi, & Solimene, 2017; Anandarajan, Francis, Hasan, & John, 2011; Linsley & Lawrence, 2007; Linsley & Shrives, 2006), practitioners and regulation bodies (i.e. ICAEW, 2011; KPMG, 2009, 2008; Ernst & Young, 2008; PWC, 2008) warn that banks often failed in disclosing clearly the magnitude of risk of financial instruments, and the underlying economics of financial investments Scholars (i.e. Coluccia, Fontana, Graziano, Rossi, & Solimene, 2017; Anandarajan, Francis, Hasan, & John, 2011; Linsley & Lawrence, 2007; Linsley & Shrives, 2006), practitioners and regulation bodies (i.e. ICAEW, 2011; KPMG, 2009, 2008; Ernst & Young, 2008; PWC, 2008) warn that banks often failed in disclosing clearly the magnitude of risk of financial instruments, and the underlying economics of financial investments (i.e. Maffei, Aria, Fiondella, Spanò, & Zagaria, 2014; Paaple & Speklè, 2012; Magnan & Markarian, 2011; Beretta & Bozzolan, 2004; Cabedo & Tirado, 2004)

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