Does Risk Disclosure Reporting Quality Reduce Credit Risk?

Abstract

This study aims to measure the degree of corporate risk disclosure and examines its impact on credit risk of banks listed on the UAE financial markets: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2007-2013. The results of the content analysis show low degree of the overall risk disclosure index and all the sub-risk categories except the financial risk disclosure for all, Islamic and conventional UAE banks and the market risk disclosure for Islamic banks. The effect of the degree of the risk disclosure on credit risk is examined by applying the robust Generalized Method of Moment System Estimation (GMM) to dynamic panel data. The results of the GMM show that the higher the disclosure of strategic risk, operational risk, and damage risk, the higher the credit risk for all UAE listed banks. In terms of comparison, the results also show significant differences in credit risk, strategic risk disclosure, firm’s damage risk disclosure, and risk management disclosure between conventional and Islamic banks.