Impact of risk disclosure on the volatility, liquidity and performance of the UK and Canadian insurance companies

Abstract

PurposeThis paper aims to investigate the impact of risk disclosure practices (voluntary, mandatory and risk disclosure index) on stock return volatility, market liquidity and financial performance for insurance companies in the UK and Canada, before and after the International Financial Reporting Standards (IFRS) adoption.Design/methodology/approachThe panel data analysis covers 14 insurance companies in the UK and 12 in Canada over a six-year period, three years before and three years after the implementation of IFRS. The authors collected risk disclosure data manually from the annual reports and analyzed it through QSR NVivo software for each country. The other variables are secondary data collected from Thomson Reuters Eikon and Datastream.FindingsThe results reveal that mandatory risk disclosure practices positively influence stock return volatility for UK insurers but not Canadian ones. Moreover, both mandatory and voluntary risk disclosures increase market liquidity for UK insurers. The outcomes also show a negative influence of risk disclosure practices on financial performance for both the UK and Canadian insurers. The adoption of IFRS enhances the impact of risk disclosure practices in both countries on market liquidity and financial performance.Research limitations/implicationsThe findings rationalize the impact of risk disclosure practices on volatility, liquidity and financial performance of UK and Canada insurers, and the effect of IFRS in triggering those results.Practical implicationsThe findings highlight the diverse effects of voluntary and mandatory risk disclosure practices in enhancing market discipline and mitigating information asymmetry problems to investors. Regulators and policymakers could rely on the findings to amend and develop disclosure standards more frequently to assure their effectiveness. The authors also offer insights to managers to determine the levels of mandatory and voluntary disclosure practices and disclosure strategies to gain their stakeholders’ confidence.Originality/valueThis study contributes to the literature of risk disclosure in the insurance industry for both the UK and Canada where scarce studies are conducted. It also offers interesting implementations to investors, managers and policymakers.