Market Risk Disclosures Research Articles

Corporate risk disclosure in response to heightened entry threat: Evidence from a quasi-natural experiment in China

Using the deregulation of market entry barriers in China as a quasi-natural experiment, this study examines how increased entry threats affect incumbent firms' risk disclosure. We find that firms respond by increasing their market-related risk disclosures. This effect is stronger among firms facing higher economic uncertainty, lower financial constraints, greater product market competition, and higher information transparency. Mechanism analysis shows that increased risk disclosure weakens the link between deregulation of market entry barriers and new firm entry, suggesting that such disclosures can effectively deter potential competitors. Moreover, while market reactions to market risk disclosures are neutral, they are negative for operational and financial risk disclosures. Our findings suggest that firms strategically disclose market risks to mitigate entry threats, thus enhancing their resilience and adaptability in dynamic markets.

Does CSR governance matters for corporate value creation: exploring the nexus between corporate sustainability governance and investment efficiency of acquirers in Pakistan.

This study examines the potential effects of corporate sustainability governance on the investment efficiency of asset acquirers. Using secondary data gathered from the annual reports of sample firms and the global reporting initiatives data repository from 1991-2021, the study results indicate that the provision of sustainable governance better facilitates the efficient allocation of capital and acquirer's value creation. Subject to the individual effects, we find that the economic sustainability disclosure, social sustainability disclosure, and environmental sustainability disclosure have positive and significant effect on the investment efficiency of acquirers that increases the competitiveness of a company's investment. Outcomes further revealed that market risk disclosure and shareholder activism have a strong moderating impact on the relationship between sustainability governance and acquirers efficiency, which significantly complements the acquirer's value. The study findings put forward policy directions that the enforcement of persistent sustainability governance practices has more potential to maximize acquirer's investment.

The Association of the Qualitative Informativeness of Market Risk Disclosures With Stock Liquidity

The SEC’s 2016 Concept Release summarizes the ongoing debate regarding the usefulness of market risk disclosures and calls for additional discussion. We respond to the SEC’s call and investigate market risk disclosures. Using textual analysis, we evaluate and classify the qualitative content of market risk disclosures and expect that more informative disclosures are associated with improved liquidity, consistent with disclosure theory. We find that informative textual contents of market risk disclosures are associated with higher liquidity levels and lower liquidity uncertainty (i.e., an improved investors’ information environment). Our study is relevant to the ongoing discussion regarding the usefulness of market risk disclosures, calls for more detailed regulatory guidance for market risk disclosures, and contributes to the literature on stock liquidity and risk factor disclosures.

Market Risk Disclosure: A Study on Systemic Banks in Indonesia

This study was conducted to determine the extent to which the disclosure of market risk, especially the risk of the market carried out by banks in Indonesia. Observation of the disclosure in this study using method by Scannella and Polizzi (2018) which carried out quantitative and qualitative assessment. This study focuses on four banks in Indonesia that have a systemic impact and have Islamic subsidiaries. The year of observation is for three years from 2018 to 2020. The results showed that that in general using checklist provided by Scannella and Polizzi, (2018) the results show insufficient image of market risk disclosure among Indonesian large banks. For instance, graphical information about Value at Risk (VaR), back testing, and also stress testing. Furthermore, information about expected shortfall need to be more expanded.

RISK DISCLOSURE ON ACCOUNTING AND FINANCIAL REPORTING STANDARDS: CONTENT ANALYSIS OF BORSA İSTANBUL (BIST) MANUFACTURING SECTOR

Muhasebe sisteminin ürettiği bilgiler ve veriler, ekonomide ve sektörde yaşanan değişimlerin yanı sıra, işletme içinde alınan kararların şirket yapısı ve faaliyet sonuçları üzerine etkilerini de yansıtmaktadır. Şirketlerin piyasada karşılaştıkları riskler finansal bilgi kullanıcıları için önem arz etmektedir. Bu konuda uluslararası muhasebe uygulamasına yönelik oluşturulan standartlar da, kamuoyuna açıklanacak bilgilerde şirketlerin maruz kaldıkları riskleri içermesi gerektiğini belirtmektedir. Bu çalışmanın amacı, Türkiye’de finansal tablolarını uluslararası muhasebe standartlarına göre düzenleyen şirketlerin risk açıklamalarını analiz etmek ve muhasebe verileri ile risk arasındaki ilişkiye ışık tutmaktır. Bu kapsamda BİST İmalat sektöründe yer alan şirketlerin 2020 yılına ilişkin risk açıklamaları, içerik yönünden analize tabi tutulmuştur. Analiz soncunda, TFRS 9 da yer alan türev ürünler ile riskten korunma muhasebesinin finansal tablolardaki durumu ile TFRS 7’de yer alan finansal araçlardan kaynaklanan risk çeşitleri ile ilgili veriler ortaya konulmuştur. Buna göre, şirketlerin %32’sinin türev araç kullandığı, %20’sinin riskten korunma muhasebesi uyguladığı belirlenmiştir. Ayrıca şirketlerin, 2020 yılına ilişkin kredi, likidite, piyasa ve diğer risk açıklamalarına ilişkin, nitel ve nicel açıklama verileri de analiz edilmiştir. Dipnotlarda finansal araçlardan kaynaklanan riskler bölümünde, en çok verinin yabancı para riski ile ilgili olduğu saptanmıştır. Kredi riski açıklamaları yapan şirketlerin %50’sinin vade analizi yapmadığı görülmüştür. Son olarak faiz oranı riski, diğer fiyat riski ve sermaye riskine yönelik açıklamalar da, içerik yönünden analiz edilmiştir.

Do ownership structures affect risk disclosure in Islamic banks? International evidence

PurposePrevious works assessing the determinants of banks’ risk disclosure in emerging economies focused on one aspect of risk reporting such as market risk disclosure or operational risk disclosure. While banks’ transparency about other major risk types (e.g. capital adequacy, liquidity risk…) is important for both market discipline and for their financial stability, no previous research has tried to discuss their determinants for Islamic banks. This paper aims to fill the gap by assessing the effects of deposits structure and ownership concentration on risk disclosure for Islamic banks.Design/methodology/approachThe authors based on a sample of 71 Islamic banks operating in 12 emerging economies and observed over the period 2009–2014. The authors used a risk disclosure index covering nine dimensions, and the authors used both generalized least squares (GLS) regression and generalized method of moments (GMMs) as econometric tools.FindingsThe findings suggests that the level of risk disclosure is lower for Islamic banks with higher ownership concentration, leveraged bank, listed banks and Islamic banks. However, risk disclosure is higher for Islamic banks with higher concentration of profit sharing investment account (PSIA) and higher foreign ownership, large Islamic banks, aged banks, Islamic banks operating in country with higher country transparency index, positively correlated to gross domestic products and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) adoption. By disaggregating total risk disclosure into the nine sub-categories, the authors are able to specify, also, the components of risk disclosure impacted by various determinants.Research limitations/implicationsThis paper’s findings are subject, also, to a number of limitations. First, there was manual scoring of annual reports (subjectivity). Second, while some items might have higher information content or be more useful than others for users of Islamic banks’ annual reports, no weighting is assigned to items. Third, the research focuses exclusively on the 12 countries and excludes the other Middle East, Southeast Asia and Far East countries where ownership structure and deposits structure might affect risk disclosure differently.Originality/valueThe findings suggest many policy implications. First, regulators have to improve corporate governance mechanisms in Islamic banking system through the optimization of ownership structure (dispersed ownership) to promote transparency and disclosure. Second, regulators and policymakers should revise guidelines in the main purpose to protect PSIAs holders (considered as minor shareholders without voting power) through promoting disclosure and transparency. Third, the findings can be useful for many international supervisory bodies such as the IFSB and AAOIFI to evaluate transparency and disclosure standards.

An empirical investigation into market risk disclosure: is there room to improve for Italian banks?

PurposeThis paper aims to examine the market risk disclosure practices of large Italian banks. The contribution provides insights on the way banks should provide information about market risk. The problem related to the asymmetric information between banks from one side, and investors and stakeholders on the other, represents a crucial issue that requires further considerations by scholars and regulators.Design/methodology/approachThis contribution adopts a mixed methodological approach to analyse both qualitative and quantitative profiles of market risk disclosure in banking. This paper analyses the most important documents Italian banks are required to prepare for risk disclosure purposes, namely the management commentary, the Basel Pillar 3 disclosure report and the notes.FindingsThe results show that banks do not fully exploit the potentialities of management commentary and Pillar 3 disclosure report. Various areas of information overlapping between the different financial reports worsen the overall comprehensibility and relevance of bank risk reporting.Practical implicationsThe reduction of the information overlapping, the careful choice of the location of the information and more appropriate use of the management commentary to provide qualitative information about market risk strategies represent crucial areas of improvement banks and regulators should take into account.Originality/valueProviding an in-depth analysis of the market risk disclosure practices of a sample of large Italian banks, this paper detects the main drawbacks of their market risk reporting and provides useful recommendations to improve it.

Does SEC FRR No. 48 disclosure communicate risk management effectiveness?

We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 5.34 percent decrease in cash flow volatility. Given the significant impact of cash flow volatility on firm value and capital investment, our results highlight the importance of market risk disclosures and should be of interest to investors and analysts.

Evaluasi Kualitas Pengungkapan Value at Risk Perbankan Indonesia

Market risk measurement of bank investment portfolios is a still problem not only among practitioners, but also among academicians. The accuracy and quality of market risk disclosures are important issues because transparency of the bank risk level encourages market control in the form of market discipline and it also improve the quality of risk management carried out internally by the bank. This research measures the quality of Value at Risk disclosures carried out by Indonesian banks. The accuracy of Value at Risk in this research is measured from the Value at Risk component which contains information of yield volatility of bank trading treasury activities. To measure Value at Risk disclosure, this research runs various methods of Value at Risk measurement. This research shows Historical Simulation is a Value at Risk method that is most widely used by Indonesia banks. The empirical test results show that the Value at Risk parametric method using asymmetric volatility have better quality than the Value at Risk Historical Simulation method. This research shows that Value at Risk as measured by Historical Simulation method contains the least information of bank trading treasury yields.
 Keywords: value at risk; disclosure; market risk; volatility

Market Risk Reporting by the World's Top Banks: Evidence on the Diversity of Reporting Practice and the Implications for Accounting Harmonisation

The increasing adoption of international accounting standards and global convergence of accounting regulations is frequently heralded as serving to reduce diversity in financial reporting practice. In a process said to be driven in large part by the interests of international business and global financial markets, one might expect the greatest degree of convergence to be found amongst the world’s largest multinational financial corporations. This paper challenges such claims and presumptions. Its content analysis of longitudinal data for the period 2000-2006 reveals substantial, on going diversity in the market risk disclosure practices, both numerical and narrative, of the world’s top-25 banks. The significance of such findings is reinforced by the sheer scale of the banking sector’s risk exposures that have been subsequently revealed in the current global financial crisis. The variations in disclosure practices documented in the paper apply both across and within national boundaries, leading to a firm conclusion that, at least in terms of market risk reporting, progress towards international harmonisation remains rather more apparent than real.

Does SEC FRR No. 48 Disclosure Communicate Risk Management Effectiveness?

We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 4.4 percent decrease in cash flow volatility. We also document that this association is moderated by managers’ intention to manage risk. Given the significant impact of cash flow volatility on firm value and capital investment, our results highlight the importance of market risk disclosures and should be of interest to investors and analysts.

Market risk disclosures, corporate governance structure and political connections: evidence from GCC firms

ABSTRACTThis paper investigates the joint effect of political connections, in the form of the royal family member on board, and corporate governance on the market risk disclosures of the Gulf Cooperation Council (GCC) financial firms from 2007 to 2011. Previous research suggest that politically connected firms reduce the level of transparency in the GCC. However, we find that better corporate governance improves transparency and can be used as an effective tool in curbing the potentially adverse impact of politically connected board members on firms’ transparency. Our results have important implications for policy makers and can be generalized to other emerging markets.

Market risk disclosures and corporate governance structure: Evidence from GCC financial firms

In this study, we examine the relationship between corporate governance and the disclosure of market risk among financial firms from the Gulf Cooperation Council (GCC) region between 2007 and 2011. Using a comprehensive measure of the disclosure of market risk, our regression results suggest that the level of market risk disclosure is positively and significantly associated with the strength of a firm’s corporate governance structure. Economically, the regression coefficient implies that a 3.25% increase in market risk disclosures is associated with a one standard deviation change in the strength of corporate governance. In addition, when we decompose our corporate governance index into its constituent items, we find that directors’ independence and the dual roles of the CEO and chairman of the board reduce the extent and quality of market risk disclosures. Our results are robust to alternative specifications and endogeneity tests.

Does Risk Disclosure Reporting Quality Reduce Credit Risk?

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.

Market Risk Disclosures and Board Gender Diversity in Gulf Cooperation Council (GCC) Firms

AbstractWe investigate the impact of board gender diversity on corporate risk reporting for Gulf Cooperation Council (GCC) financial firms. Recent developments and improvements of corporate governance in the GCC markets suggest that firms in the GCC have become more transparent with less information asymmetry. However, we find that the presence of female directors in the boards of financial institutions suppresses the positive association between corporate governance and market risk disclosures for the period between 2007 and 2011. These findings suggest that culture and conservatism nature of GCC societies persist in the GCC business environment. Our results are robust to alternative specifications and endogeneity tests.

Market risk disclosure in banking: an empirical analysis on four global systemically important European banks

Market risk reporting in banking has assumed such importance during the last decade. The purpose of this paper is to provide a methodology to evaluate the qualitative and quantitative profiles of the market risk disclosure in banking. We propose a hybrid methodology to assess whether or not banks are able to provide a satisfactory degree of information about the market risks they are exposed to. In this paper, we conduct an empirical research of market risk disclosure on a sample of four global systemically important European banks. The paper provides evidences that banks differ in their market risk reporting models, even though they are subject to similar regulatory requirements and accounting standards. The paper also generates some useful insights for further research.

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

AbstractThis study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.

Discretion in Mandatory Market Risk Disclosures and Investment Efficiency: Evidence from GCC Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.

Risk Committee, Firm Life Cycle, and Market Risk Disclosures

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.

Disaggregation, auditor conservatism and implied cost of equity capital: An international evidence from the GCC

This research investigates the association between discretionary disaggregation in mandatory risk disclosures, auditor conservatism and the implied cost of equity capital. Based on a sample of financial firms from the six Gulf Cooperation Council (GCC) countries in the period 2007–2011, we find that the implied cost of equity capital is significantly negatively associated with discretionary disaggregation in mandatory market risk disclosures after controlling for firm-specific characteristics and country-specific institutional factors. Furthermore, the interaction between auditor conservatism and disaggregation in firms’ mandatory risk disclosures is negatively associated with the implied cost of equity capital, suggesting that the firm disclosing more disaggregation in mandatory risk disclosure enjoys greater reduction in the implied cost of equity capital when audited by a conservative auditor. These findings are robust when subjected to a series of sensitivity tests. Collectively, these results demonstrate that more discretionary disaggregation in risk disclosures provides more private information to investors.