Risk Committee, Firm Life Cycle, and Market Risk Disclosures

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study investigates whether the existence of a separate risk committee and risk committee characteristics are associated with market risk disclosures. It also tests whether the role of a risk committee in affecting market risk disclosures varies for different firm life cycle stages.Research Findings/InsightsUsing 677 firm‐year observations of financial firms from Gulf Cooperation Council (GCC) countries during the years 2007–2011, we find that firms with a separate risk committee are associated with greater market risk disclosures, an effect that is more pronounced for mature‐stage firms. Furthermore, findings suggest that risk committee qualifications and size have a significant positive impact on market risk disclosures.Theoretical/Academic ImplicationsThis study complements the corporate governance literature by incorporating agency theory, legitimacy theory, stakeholder theory, and the resource‐based theory to provide more robust evidence of the impact of a separate risk committee and the firm life cycle on market risk disclosures. Our results support the monitoring effect of a separate risk committee and suggest that a separate risk committee can improve “firm‐level corporate governance” in the GCC countries characterized by a poor informational environment.Practitioner/Policy ImplicationsFindings from this study provide evidence that the existence, qualifications, and size of risk committees may be used as a channel to improve the disclosure level, suggesting a policy prescription for regulators and policymakers. Investors may also find these results useful in forming their own expectations about firm‐level risk disclosures.