Abstract
PurposeThis paper aims to assess the risk reporting practices extent to which firm’s and corporate governance characteristics explain risk-related disclosures (RRD) motivations across two European Latin countries (Portugal and Spain). Moreover, drawn on elements of agency, legitimacy, resources-based perspectives and institutional theory, this study also intends to assess whether the influence of corporate governance mechanisms on risk reporting is mediated by strategic/institutional legitimacy interests.Design/methodology/approachFrom a sample of 60 non-finance Portuguese and Spanish companies with securities traded on the Euronext Lisbon stock exchange market and on the Madrid stock exchange market, respectively, at December, 2011, the Corporate Governance reports and the “risk/risk management” sections of the Management reports included on consolidated annual reports for 2011 were manually content analysed, according to prior literature. Further, multiple linear regressions were used to assess the potential relationships between corporate governance mechanisms and risk reporting. The paper’s theoretical framework draws on elements of agency, legitimacy, resources-based perspectives and institutional theory. To understand the risk reporting practices of Portuguese and Spanish non-finance listed companies, the paper conducts a content analysis of 60 consolidated annual reports for 2011.FindingsResults indicate that visible companies, operating in a country with a weaker legal environment, and during periods of financial distress disclose more discretionary RRD, basically to contextualize their negative outcomes. Some corporate governance mechanisms were crucial to improve risk information.Originality/valueThe paper goes beyond prior literature work and assesses whether the theoretical framework grounded on agency, legitimacy, resources-based perspective and institutional theory is suitable in explaining RRD in an under-researched setting (European Latin countries, such as Portugal and Spain, with low agency costs and different corporate governance models). Moreover, the analysis embraces a wider and homogeneous range of internal and external corporate governance mechanisms and uses a period in which both countries were severely affected by a sovereign debt crisis with negative impacts on company’s liquidity and financial risks. A research setting like this has not been studied hitherto.
Highlights
From a sample of 60 non-finance Portuguese and Spanish companies with securities traded on the Euronext Lisbon stock exchange market and on the Madrid stock exchange market, respectively, at December, 2011, the Corporate Governance reports and the “risk/risk management” sections of the Management reports included on consolidated annual reports for 2011 were manually content analyzed, according to prior literature
The paper goes beyond prior literature work and assesses if the theoretical framework grounded on agency, legitimacy, resources-based perspective, and institutional theory is suitable in explaining risk-related disclosures (RRD) in an under-researched setting (European Latin countries, such as Portugal and Spain with low agency costs and different corporate governance models)
No single set of accounting and non-accounting regulations resulted in more extensive levels of RRD and in an improved quality (Woods et al, 2008; Oliveira et al, 2011; Greco, 2012), even after the turmoil caused by the global financial crisis (Ntim et al, 2013)
Summary
Some of the main attributes of risk-related disclosures (RRD) are its ability in reducing information asymmetries (Lajili and Zéghal, 2005; Dobler et al, 2011; Greco, 2012), in providing insights on companies’ risk exposures and risk management policies (Linsley and Shrives, 2006; Dobler, 2008), and in assessing company’s risk profile and future performance (Dobler et al, 2011; Greco, 2012). Carmona et al (2016) found that the board of directors independence, level of activity of the board, gender diversity, CEO duality, audit committee independence, type of external auditor, and the presence of institutional investors are associated with high RRD in the Combined Governance annual reports These prior researches only assessed: a) the connections between the internal mechanisms (scattered heterogeneously throughout the literature) of corporate governance and RRD; b) findings from Allini’s et al (2016) study only applies to listed state-owned enterprises; c) and Carmona’s et al (2016) findings result from an exploratory analysis of the combinatory effects among multiple corporate governance practices on risk disclosure, through the use of a fuzzy-set qualitative comparative analysis. Prior literature found a positive association between board diversity and voluntary disclosure (Barako and Brown, 2008) and risk reporting (Ntim et al, 2013; Allini et al, 2016; Singh, 2017)
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