Non-financial Risk Research Articles

Understanding customer’s post-M&A intentions and behaviors: the role of the family business brand and previous reputation of the acquiring firm

Purpose Mergers and acquisitions (M&As) are a critical time for organizations and their consumers. For the company, there are many financial and non-financial risks. For customers, it requires deciding whether or not to continue the relationship that they had with the previous firm. This paper explores the extent to which communicating the family business (FB) brand, and the previous reputation of the acquirer affects customer perceptions and intentions after an M&A event.Design/methodology/approach Data for this study were collected from 159 Italian participants. We used a 2 (Communication of FB brand: Yes vs. No) by 3 (Reputation: positive, neutral, negative) between subjects’ experiment to test how the communication of the FB brand and the reputation of the acquirer affected perceived trustworthiness and service quality, and how this, in turn, influenced customer purchase intentions.Findings We find that communicating the FB brand does not influence consumer perceptions and intentions toward the acquired company. However, the previous reputation of the acquiring firm is critical in influencing consumer perceptions and intentions to buy.Originality/value Our study continues the growing research on M&A in family firms. It also increases our understanding of the boundary conditions of the FB brand effects, and the relevance that the previous reputation of a family firm can have in M&A scenarios. Finally, our study introduces the “Halo” and “Velcro” effects into the FB literature.

Reporting Corporate Risk: An Empirical Inquiry into Listed Entities in the Saudi Capital Market

A capital market with greater transparency provides more accurate metrics for measuring corporate performance, which can be utilized to inform market participants’ decisions. Informed risk is crucial to corporate reporting transparency. This empirical study explores the extent to which firms in the Saudi capital market disclose risk information, whether financial or non-financial. A risk disclosure index (RDI) is constructed based on a rigorous literature review of previous studies, considering suggested items related to corporate risk that must be disclosed. The sample comprises 50 corporations, with five companies representing the energy sector, three representing the utility sector, and forty-two representing the materials sector. The findings reveal moderate financial risk disclosure (sample mean 56%) and low non-financial risk disclosure (sample mean 33%) in the Saudi capital market. In the energy sector, the disclosed financial and non-financial risks comprise 57% and 37%, respectively; in the utility sector, these proportions are 56% and 31%, while in the materials sector, they are 54% and 33%, respectively. Regulators should prioritize high-quality, transparent, and comparable risk information disclosure to attract direct foreign investment. To improve their risk disclosure, managers of firms can also employ the RDI to examine the extent of risk their companies face. This study is limited to the annual and board reports of companies in the three sectors.

A Bibliometric Review of the Relationship between Sustainability Accounting and Financial Risk

This study conducts a comprehensive bibliometric analysis of the field of sustainability accounting and financial risk management, examining thematic clusters, research trends, research opportunities, and author collaborations from 1990 to 2024. Through an extensive review of literature and citation data, key thematic areas such as integrated reporting, environmental risk, and the financial impact of ESG factors were identified. Temporal trend analysis revealed an increasing focus on transparency in sustainability disclosures and the integration of corporate social responsibility into corporate risk management. Opportunities for further research were highlighted in underexplored areas including green accounting and the incorporation of non-financial risks into financial sustainability frameworks. Additionally, an examination of author networks provided insight into the collaborative dynamics among leading scholars, identifying core research groups and potential areas for new interdisciplinary studies. This study provides a structured overview of the scholarly landscape, identifying pivotal trends and gaps, thereby setting a foundation for future academic inquiries and practical applications in sustainability and financial risk management.

The curvilinear relationship between governance structure and nonfinancial risk disclosure in Saudi Arabian firms: do ethical values matter?

Purpose The purpose of this paper is to examine the possibility of a curvilinear relationship between governance structure and nonfinancial risk disclosure. This paper also examines the moderating role of ethical values on the governance structure and nonfinancial risk disclosure relationship. Design/methodology/approach The sample of this paper contains 71 nonfinancial firms listed on the Saudi Stock Exchange from 2013 to 2020 (568 firm-year observations). The authors use OLS regressions to test the hypotheses. Findings The authors find there is a U-shaped relationship between governance structure and nonfinancial risk disclosure. Moreover, they show that ethical values moderate the relationship between governance structure and nonfinancial risk disclosure. Research limitations/implications The findings of this study offer implications for policy makers and firm managers in Saudi Arabia which there should periodically assess and adapt their governance frameworks due to potential fluctuations in the optimal level resulting from internal or external disruptions. Originality/value To the best of the authors’ knowledge, this is the first study in Saudi Arabia that provides new empirical evidence on the curvilinear relationship between governance structure and nonfinancial risk disclosure and the moderating role of ethical values on this relationship.

Everything, everywhere, all at once: The impossible mission of compliance officers

This paper explores how the increasing interconnectivity of risks and regulatory interests create new compliance challenges. The paper explains how this causes new challenges for effective compliance risk management, particularly with regard to the definition of compliance risk, which keeps on expanding, and to the growing complexity of determining compliance roles and responsibilities across the organisation. It also offers insights on how AI and technology are actively disrupting compliance operations. As a matter of illustration, the paper considers how non-financial risks such as conduct and environmental, social and governance create cross-enterprise complexities that may be shifting the compliance risk management paradigm. Finally, the conclusion gives practical advice on how the modern compliance officer can stay relevant in a changing world.

Risk and reward: unraveling the link between credit risk, governance and financial performance in banking industry

Purpose This study aims to investigate the moderating role of corporate governance (CG) on the relationship between credit risk (CRs) and financial performance (FP) of banks listed in the Palestine Securities’ Exchange (PEX) and Amman Securities’ Exchange (ASE). Design/methodology/approach This study used a hypothesis-testing research design to collect data from the annual reports of 21 banks listed on (PEX) and (ASE). Secondary data, annual reports and disclosures were used between from 2009 to 2019. Descriptive and inferential statistics were used, along with correlation analysis to evaluate linear relationships between variables. Data was collected based on panel data, the VIF was used to test multicollinearity and binary logistic regression was used to develop the research model. Findings The regression results showed the association between CR and firm performance depends on the measurement of each factor applied. The results showed mixed results between loans to total assets (LTA) and nonperforming loans to total loans (NPLs) with FP. LTA has a significant and positive effect on TOBINSQ and return on equity (ROE), but an insignificant and positive effect on return on assets (ROA). On the other hand, NPLs have a significant and negative effect on ROA, whereas NPLs have a weak and positive effect on TOBINSQ. However, there is an insignificant and positive effect of NPLs on ROE. Moreover, the results demonstrated that CG moderated the relationship between CRs and FP of banks. The practical contribution of this paper, for bank policymakers and authorities, the study’s implications are noteworthy. Understanding the varied impacts of different CR measures on FP can help regulators and policymakers design more tailored and effective risk management frameworks for banks. Research limitations/implications This study had limitations that future research might be able to address. First, the small size of the sample used in the study included 21 banks listed on the PEX and ASE. Likewise, the ASE and PEX are considered developing stock exchanges, so the results of this study may differ from those of other stock exchanges. Second, only CRs were considered in this study when examining the association between the profitability of Palestinian banks and ASE. Other studies can be undertaken on other nonfinancial risks, such as operational risk, to measure the differences between them and examine their effects on the profitability of Palestinian and Jordanian banks. Other studies might be performed to compare CRs and its impact on profitability in Palestinian and Jordanian banks with those in other Western and Eastern banks. Furthermore, in addition to TOBINSQ, ROA and ROE, researchers can use other financial indicators to measure profitability. This will contribute to substantiating the present study’s findings. Originality/value Although several studies have examined the relationship between CRs and FP in developed and developing countries, the results have been mixed. However, this study is one of the few studies that examined the moderating role of CG in association with CRs and FP, especially on Palestinian and Jordanian contexts. Finally, the findings offer policymakers and practitioners of Palestinian and Jordanian contexts.

The value of corporate social responsibility: evidence from the humidifier disinfectant scandal in Korea

ABSTRACT As a quasi-natural experiment, we examine the effects of corporate social responsibility (CSR) on firms’ stock performance amid a corporate scandal closely linked with environmental and social (ES) issues, the humidifier disinfectant scandal in Korea. We find that firms with higher ES ratings, especially those with higher social ratings, outperform firms with lower ES ratings during the product safety scandal. Our estimation shows that one standard deviation increase in a firm’s ES score translates into about 2.4% higher stock returns during the scandal period. Our findings reveal that ES performance is influential over a firm’s stock returns when investors pay high attention to CSR, suggesting that firms’ CSR investments mitigate their nonfinancial risk.

Ai in Fraud Detection: Evaluating the Efficacy of Artificial Intelligence in Preventing Financial Misconduct

AI is anticipated to enhance competitive advantages for financial organisations by increasing efficiency through cost reduction and productivity improvement, as well as by enhancing the quality of services and goods provided to consumers. AI applications in finance have the potential to create or exacerbate financial and non-financial risks, which could result in consumer and investor protection concerns like biassed, unfair, or discriminatory results, along with challenges related to data management and usage. The AI model's lack of transparency may lead to pro-cyclicality and systemic risk in markets, posing issues for financial supervision and internal governance frameworks that may not be in line with a technology-neutral regulatory approach. The primary objective of this research is to explore the effectiveness of Artificial Intelligence in preventing financial misconduct. This study extensively examines sophisticated methods for combating financial fraud, specifically evaluating the efficacy of Machine Learning and Artificial Intelligence. When examining the assessment metrics, this study utilized various metrics like accuracy, precision, recall, F1 score, and the ROC-AUC. The study found that Deep Learning techniques such as “Neural Networks, Convolutional Neural Networks, Recurrent Neural Networks /Long Short-Term Memory, and Auto encoders” achieved high precision and AUC-ROC scores in detecting financial fraud. Voting classifiers, stacking, random forests, and gradient boosting machines demonstrated durability and precision in the face of adversarial attacks, showcasing the strength of unity.

A conceptual framework for data-driven sustainable finance in green energy transition

As the world grapples with the urgent need for sustainable development, the transition towards green energy stands as a critical imperative. Financing this transition poses significant challenges, requiring innovative approaches that align financial objectives with environmental sustainability goals. This review presents a conceptual framework for leveraging data-driven techniques in sustainable finance to facilitate the transition towards green energy. The proposed framework integrates principles of sustainable finance with advanced data analytics to enhance decision-making processes across the financial ecosystem. At its core, the framework emphasizes the importance of harnessing vast datasets related to energy production, consumption, environmental impact, and financial performance. By leveraging machine learning algorithms and predictive modeling techniques, financial stakeholders can gain deeper insights into the risks and opportunities associated with green energy investments. Key components of the framework include data collection and aggregation, risk assessment, impact measurement, and investment optimization. Data sources range from traditional financial indicators to environmental metrics, social impact assessments, and geopolitical factors. Through comprehensive data analysis, financial institutions can assess the long-term viability and sustainability of green energy projects, while also evaluating potential social and environmental impacts. Risk assessment methodologies within the framework consider both financial risks, such as market volatility and regulatory uncertainty, and non-financial risks, such as climate change impacts and community resilience. By integrating these factors into risk models, investors can make more informed decisions that mitigate potential losses and maximize returns. Furthermore, impact measurement tools enable stakeholders to quantify the environmental and social benefits of green energy investments. By tracking metrics such as carbon emissions reduction, energy efficiency improvements, and job creation, investors can assess the contribution of their portfolios towards broader sustainability objectives. Finally, the framework incorporates investment optimization strategies that align financial goals with environmental objectives. Through portfolio diversification, asset allocation, and innovative financial instruments such as green bonds and impact investing funds, financial institutions can allocate capital more efficiently towards green energy projects. The conceptual framework presented herein offers a systematic approach to integrating data-driven methodologies into sustainable finance practices. By leveraging advanced analytics and comprehensive datasets, financial stakeholders can drive the transition towards green energy while simultaneously achieving financial returns and positive environmental outcomes.

Analysis of Selected Risks in the Futures and Options Markets and Their Management Strategies

The 2008 global financial crisis had profound impacts on the worlds financial system. Countries around the world intensified their regulation of financial markets, especially the derivatives market. This paper explores some financial risks, non-financial risks and risk management strategies in the futures and options markets through literature analysis, aiming to help market participants manage and reduce potential losses. These risks include liquidity, credit, market, operational, model, and Herstatt risks. This paper finds that although there are many risks in the futures and options markets, investors can still pursue profits and manage these risks effectively at the same time by applying some appropriate risk management strategies, such as hedging, using appropriate models, and utilizing real-time settlement systems. These strategies are significant for improving market stability and investor protection. Additionally, this paper emphasizes the importance of providing education for market participants and global regulatory cooperation to further maintain market integrity.

`Non-financial risk management: Emerging stronger after Covid-19` by Thomas Kaiser

`Non-financial risk management: Emerging stronger after Covid-19` by Thomas Kaiser

On the wicked problem of quantifying and managing non-financial risks and the role of digital technology in providing solutions

The management of operational risk in financial institutions has all the characteristics of a ‘wicked problem’. Certainly, the repeated efforts of the Bank of International Settlements, (BIS) Basel Committee on Banking Supervision (BCBS) to have banks control and mitigate their operational risks speak to the tractability of extant approaches to addressing them effectively. The original ‘Principles for the Sound Management of Operational Risk’1 and its recent revisions,2 the BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’3 and the ‘Principles for Operational Resilience’,4 collectively offer a sound foundation for addressing this enduring problem. Why then are solutions so elusive for banks to implement? This paper first outlines the institutional and social web of conditions and factors that contribute to the existence of this ‘wicked problem’. It then identifies how AI-based digital technologies can once and for all effectively address the problem of operational risk in large banks. Nevertheless, as powerful as today's digital technologies are, they require an organising vision, particularly if they are to contribute to the management of operational risk. This paper informs such a vision and identifies a comprehensive artificial intelligence-based digital architecture to realise it.

Are Artificial Intelligence and Machine Learning Shaping a New Risk Management Approach?

Digital revolution is influencing many economic sectors and for a few years banking sector is under a great transformation mainly due to the development and the use of new technologies. The most recent ones are artificial intelligence (AI) with the recourse to advanced algorithms. The main banking services, their offer, but above all, the customer relations have been significantly influenced by the this. The recourse to new channels, the monitoring of risks and the controls of frauds are only some of the applications of machine learning (ML). To manage the increase in financial and non-financial risks AI and ML seem to give a great help to banks. The survey conducted from December 2022 to May 2023 with a sample of Italian banks of different size, shows the level of awareness in the recourse to these technologies. Moreover, it aims to assess the maturity and the future perspectives in the adoption of AI in the financial system. The analysis is divided into different investigation areas that show how banks can mitigate the risks involved with the implementation of AI and how it affects the risk management process. The paper covers the gap in literature where AI and ML are mainly considered as separate tools to face specific banking projects; and Italian banks, even if with differences due to the size, are aware of the relevance of these new technologies. The research is a contribute to the discussion about the application of AI and ML in a holistic dimension.

Social Responsibility Actions in Financial Institutions: A Systematic Review

There are financial institutions that do not focus on social responsibility in their management, because they focus on non-priority aspects; for this reason, it is necessary to promote it within the organizations, identifying relevant aspects. This increases customer retention, as well as the loyalty of its collaborators, which promotes persistence in companies, has a solid reputation, creates confidence among customers and investors, alleviates risks related to environmental, social and governance factors and actively contributes to sustainable development and the development of society can promote ethical practice, transparency and the existence of a community. Financials, aim to give performance without exposing the utility of the whole in its interest, preserving self-sufficient utilities, while abiding by different rules and regularizations. Therefore, the objective of the systematic review is raised in describing what has been published in the scientific literature about social responsibility actions in financial institutions between the years 2015 to 2023. The methodology used was Prisma, a systematic guide used in studies to perform reviews and meta-analyses in a strict and transparent manner, it helped to improve the quality and consistency of systematic reviews, which, in turn, contributes to decisions based on reliable evidence, the results obtained were that 35% were obtained from the DIALNET database, 24% were published between 2018 and 2021, 35% of scientific articles were found in Colombia, these have English and Spanish as their language, while the sources of information used in our systematic review correspond to the following databases: Scopus, Scielo, Dialnet, Redalyc, EBSCO and Doaj. Finally, it is determined that social responsibility actions in financial entities are of utmost relevance for financial organizations, since they help to create a positive reputation, have a significant social impact, manage non-financial risks, comply with rules, and attract and have talented employees, these practices are useful not only for society as a whole, but also for the success and sustainability of a financial organization.

Non-Financial Risks of Introducing Information Systems into the Activities of Transport and Logistics Companies

Today, digital transformation is a priority vector for development of all economic sectors of the Russian Federation; at the same time, special attention in this context is paid to the transport and logistics sector due to its great importance for the country’s economy. The implementation of information systems that meet modern requirements, as well as with added functionality, is one of the key components of work in the field of digital transformation of transport.Most often, in this regard the attention is paid to financial and technological risks, while the influence of the human factor is considered rather superficially. Hence, the need to examine the risks that are primarily associated with employees of transport and logistics companies, as well as the impact of those risks on digital transformation in general and on the process of implementing information systems in particular, to suggest ways to minimise those risks in the context of modern corporate culture. JSC Russian Railways, as well as PJSC Aeroflot Russian Airlines, are considered as examples of companies that have already implemented advancement within the digital transformation vector.

Assessing the Maturity of Sustainable Business Model and Strategy Reporting under the CSRD Shadow

The present work is amongst the few that attempt to critically assess the maturity of Business Model (BM) and strategy disclosures of listed firms under the shadow of the new EU reporting directive, the Corporate Sustainability Reporting Directive (CSRD). The novel Practices Evaluation Approach (PEA), developed recently by the Project Task Force on Reporting of Non-Financial Risks and Opportunities (PTF-RNFRO), offers the evaluation framework for this assessment. The PEA delineates and evaluates the maturity of BM and strategy disclosures against qualitative characteristics and content elements drawn from well-accepted, financial and non-financial, reporting frameworks, standards and directives (including the CSRD). Therefore, the PEA provides the advantage of a contemporary and integrated/holistic assessment tool. Specifically, the following seven evaluation criteria are used for the assessment: clarity and comprehensiveness of the overall BM, strategy disclosure, disclosure of the BM’s potential across-time horizons and its dependencies, impacts on sustainability issues, material sustainability issues that are likely to affect the company’s performance, the BM’s exposure to sustainability risks and sustainability opportunities, and sustainability strategy, targets, KPIs and their monitoring and progress. The analysis covered 30 CSR/sustainability reports and connected documents of listed companies operating in 6 key sectors of the Greek economy, i.e., information technology, construction, tourism and transportation, cosmetics, banking and energy. The results of our analysis offer evidence that BM reporting is not holistically developed (i.e., critical components are missing), and the level of development varies across the examined sectors. Moreover, sustainability risks are more stressed, in relevance to opportunities, whilst positive (rather than negative) impacts are mainly disclosed. Also, the quantification of sustainability risks and opportunities does not appear frequently, whilst the interconnections between sustainability strategy and companies’ financial objectives is relatively restricted. The paper concludes by pointing out some critical hints useful for enhancing the maturity of BM and strategy disclosures.

A corporate risk assessment and reporting model in emerging economies

PurposeThe growing business complexity has caused many risks (e.g. operational, financial, reputational, cybersecurity, regulatory and compliance) that threaten companies' sustainability and have received attention from regulators, investors, and businesses. The authors present a model for assessing and reporting corporate risk by examining the indicators underlying corporate risk reporting.Design/methodology/approachA thorough review of the literature and semi-structured interviews with experts were conducted and the fuzzy Delphi technique was used to obtain consensus and screening of risks. The relationships between these risk indicators were recognized, weighted and prioritized by employing a hybrid Decision Making Trial and Evaluation Laboratory Model (DEMATEL) method integrated with Analytic Network Process (ANP) (DEMATEL-ANP [DANP]) approach. Finally, using the Iranian setting of corporate risk reporting, a model was developed to calculate the risk-reporting scores.FindingsThe results indicate that risk disclosure quality is more important than risk disclosures' textual properties and quantity. According to the experts, reporting the key risks that the company faces, management's approach to dealing with these risks and quantifying their impact are more important than the other indicators. The results also show that risk reporting in Iran lacks quantitative and specific information, and most risk disclosures are sticky.Research limitations/implicationsThe data have been prepared and analyzed according to the unique Iranian reporting environment, which should be considered when interpreting the results.Practical implicationsThe results of this research can be used by the regulators of the Stock Exchange Organizations (SEO) to evaluate corporate risk reports and rank companies. Results are also relevant to investors and policymakers to identify companies with poor risk disclosure and to take necessary measures to improve their reporting practices.Social implicationsThis paper contributes to the social and governance literature by presenting the importance of risk reporting in corporate disclosures.Originality/valueThe unique Iranian setting of corporate risk reporting furthers the understanding of risk reporting and thus provides education, policy, practice and research implications for other emerging economies like Iran. Many prior studies focus mainly on the quality of risk disclosure, and other aspects of corporate risk disclosure presented in the study have remained largely overlooked. The corporate risk reporting attributes identified in the study are relevant to the rise of non-financial risks, the textual and qualitative nature of risk reporting and textual risk disclosures.

Contingency perspective: company characteristics, risk management voluntary disclosure, and company performance

This study aims to examine the direct and indirect effect of firm characteristic on company performance through voluntary risk management disclosure based on contingency factors. This study uses secondary data with a content analysis approach to the acquisition of risk management disclosure data based on annual report from sample of companies listed on the Indonesia Stock Exchange in 2017-2019 after the IFRS convergence was implemented in Indonesia. Currently, the regulator only requires disclosures of financial risk management compared to non-financial risk disclosures. Therefore, this study is expected to provide empirical evidence regarding the importance of voluntary risk management disclosure on firm performance has contingent relationship with considering external factors, consists of (1) business uncertainty, and (2) dynamic environment. The implication of this research is expected to become a consideration for regulators and entities to disclose non-financial information in the company's annual report because it can affect company performance amidst the uncertain business environment in developing countries such as Indonesia

ENTERPRISE RISK MANAGEMENT DISCLOSURE AND CEO CHARACTERISTICS: AN EMPIRICAL STUDY OF GO PUBLIC COMPANIES IN INDONESIA

Organizations can use enterprise risk management disclosures to share financial and non-financial risk information with external stakeholders. Chief Executive Officer (CEO) has a key role in enterprise risk management. This study examines the relationship between Indonesian CEOs’ characteristics and enterprise risk management disclosure. Purposive sampling is the basis for the process of gathering samples from the population. The research was conducted in 2020 and consisted of 475 non-financial Indonesian companies that were listed on the Indonesian Stock Exchange. The findings of previously released annual reports may be found on the websites of both the Indonesia Stock Exchange and individual companies. These secondary sources were used to compile the study data. The ISO framework index 31000:2018 is utilized to evaluate the Enterprise risk management (ERM) disclosure. Eviews10’s implementation of multiple regression serves as the basis for the analysis. The findings indicate that CEO overconfidence and CEO tenure influence enterprise risk management disclosure, while CEO financial expertise and CEO gender did not have an effect on enterprise risk management disclosure. The innovation of this research is investigating CEOs’ characteristics by psychological characteristics, namely CEO overconfidence and measurement of ERM disclosure based on the ISO 31000:2018 framework which is the latest standard of risk management.

Water risk and financial analysts' information environment: Empirical evidence from China

AbstractWe examined the relationship between water risk and the information environment of financial analysts using data from Chinese listed companies from 2010 to 2020. We theorized that corporate water risk deteriorates analysts' information environment by affecting operational and financial uncertainty and corporate legitimacy. Specifically, we found that corporate water risk is associated with higher analyst forecast errors and analyst forecast dispersion and lower analyst following. This relationship weakens with corporate water information disclosure and strengthens with the environmental attention of local governments. Furthermore, we explored the impact of corporate water risk on financial risk and future financial performance and discovered that water risk increases corporate financial risk and reduces future earnings. This suggests that corporate nonfinancial risk may also include subtle financial risk, and current water risk has a certain predictive effect on future earnings, which is an interesting finding. Our results are robust to a range of tests, including instrumental variable, generalized method of moments estimates, propensity score matching, and alternative measures of analysts' information environment. Generally, our study provides insights into the complementary role of nonfinancial risks represented by water risk in understanding financial risk and has important implications for academia and practitioners in understanding the economic consequences of corporate water risk.