Development of a risk disclosure index and its application in an Indian context

Abstract

PurposeThis paper aims to gauge the quality of risk disclosure in 3,872 annual reports of Indian corporates, using a risk disclosure index (RDI) developed to capture both quality and quantity of risk disclosures.Design/methodology/approachFocussing on 69 risk items, the paper uses manual textual analysis and scores risk items using an ordinal scale, as opposed to the general practice of using a dichotomous scale.FindingsThe average risk index is low, but greater in the post-recession period than in the pre-recession period. Most disclosures are qualitative, both backward and forward-looking, and exhibit a negative tone. In addition, company age and industry sector have a significant impact on disclosure levels.Research limitations/implicationsThe choice and weighting of semantic qualities used to construct RDIs used in disclosure studies are inherently subjective. This exploratory study uses univariate analysis and does not explore the reasons for poor disclosure.Practical implicationsIn addition to its usefulness for investors and companies’ management, the findings of non-compliance with certain mandatory provisions and a low average RDI is particularly relevant for policymakers and regulatory bodies.Originality/valueDevelopment of a summary measure/RDI that is novel in its differential weighting of the semantic qualities pertaining to quantification, time-orientation and tone. Further, it serves as an exploratory study about risk disclosure practices in the Indian context that reveals notable differences from findings of previous risk disclosure research. Moreover, the study examines the relationship between firms’ age and risk disclosure levels, a largely ignored aspect in disclosure research.