Operational Risk Disclosure 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.

Ownership Structure and Corporate Risk Disclosure in Emerging Countries

The study examines the impact of ownership structure on corporate risk disclosure in African emerging countries. The sample includes 42 firms that are listed on the Johannesburg Stock Exchange and the Nigerian Stock Exchange. The data for the independent variables were taken from the Bloomberg data stream, whereas the data for the dependent variable were taken from annual reports retrieved from the website of the sample companies. The study’s time period runs from 2014 to 2018. Regression and content analysis were employed as the analytical tools. We perform text analysis on company annual reports to ascertain the risks that companies disclose, and regression analysis was used to establish the extent to which ownership structure influenced corporate risk disclosure. The result shows that strategic and environmental risk disclosures are dominated by operational risk disclosure. It has become a convention for the firms to divulge considerable positive, past, non-monetary information rather than negative, future and monetary risk information. Moreover, it is discovered that the decision to improve risk disclosure is largely influenced by company size and profitability. In contrast, firms are reluctant to unveil risk information provided the shares of the company are not concentrated in the hands of few individuals. Nonetheless, company risk disclosure practice is unaffected by institutional investors, government, foreigners, insider ownership and leverage. It can be concluded that the enterprises operating in emerging African markets have made improvements totheir risk disclosure practices. However, there is still room for further improvement. Monetary, future, and negative risk information are the most important risk disclosures that various stakeholder groups, such as investors, demand to see. Hence, there is a need for regulation that can compel corporations to publish the most pertinent risk information. Even though risk disclosure is voluntary in these two African emerging countries, ownership structure is one of significant predictors of corporate risk disclosure.

The Operational Risk Disclosure Threshold Effect in the Earnings Management–Sustainability Firm Performance Nexus in Saudi Arabia: A Dynamic Panel Threshold Regression Model

Although the relationship between earnings management and firm performance has been well explored in the literature, sustainable performance has not yet been examined. Furthermore, the literature has not addressed the issue of nonlinearity between earnings management and firm performance. Therefore, this paper aims to examine the potential nonlinear relationship between earnings management and sustainable firm performance in Saudi Arabia using a sample of 70 listed firms over the 2015–2022 period. Specifically, it investigates the operational risk disclosure threshold effect in the earning management–sustainable firm performance nexus. To do so, the dynamic panel threshold regression model (DPTR) is performed. The result proves that there is a threshold effect of operational risk disclosure in the relationship between earning management and sustainable firm performance. Specifically, the threshold values of operational risk disclosure for the three models are estimated at 6 between the low- and the high-operational-risk-disclosure regimes. In the lower regime, firm performance decreases when earning management increases; however, in the higher regime, firm performance increases when earning management increases. These outcomes support the predictions of agency and positive accounting theories.

Operational risk disclosure quality and national culture: Evidence from the E.U. Banking industry

In this study, we analyze the association between national culture and voluntary operational risk disclosure quality in the European Union banking industry. Complementarily, we assess whether the potential impact of culture differs between global banks and banks with low levels of internationalization. Finally, we consider the impact of the formal institutional environment. Our sample covers 15 countries, and we construct a disclosure score based on hand-collected data. Three main results were obtained. First, banks in societies that score higher on individualism or long-term orientation and lower on uncertainty avoidance or power distance have better disclosures. Second, in global banks, where executive board members interact with stakeholders from different cultures, these associations are absent. Finally, contextual factors also affect the association between culture and disclosure, but this substitution effect is weaker than the one we document for globalization. Our results are robust to instrumental variables estimation, the use of the GLOBE project’s cultural dimensions, and a subsample analysis of civil code law countries.

The effects of corporate governance on operational risk disclosure in Indonesian Islamic Banking

This study aims to examine the influence of corporate governance on operational risk disclosure in Indonesian Islamic Bank. The corporate governance variables examined in this study are institutional ownership, board of commissioners, audit committee and Sharia Supervisory Board (SSB). The study was conducted on all Sharia banks (13 banks) for the 2014-2018 period using multiple regression method. The results of the study showed that institutional ownership had a significant positive effect on the disclosure of operational risk, and the findings of this study support the hypothesis. However, the board of commissioners, audit committee, and SSB had no effect on the disclosure of operational risk. The results of the study indicated that the hypotheses only partially supported, implying that there are still opportunities to conduct other studies to identify the determinants of operational risk disclosure in Islamic banks. In addition, this study is expected to be able to contribute to measure operational risk disclosures by considering banking regulations in Indonesia.

Corporate Governance and Risk Disclosure in Emerging Countries

The study examines the influence of corporate governance attributes on the corporate risk disclosure in the emerging countries. Board size, non-executive directors, independent directors, board diversity and CEO-duality are the important board of director’s composition that is considered as corporate governance variables for this study. The study focuses on South Africa and Nigeria as these countries are among major players in the African emerging market. The sample comprises 42 financial and non-financial firms listed in Nigerian Stock Exchange and Johannesburg Stock Exchange. The data was drawn from 192 annual reports for the year 2014–2018. The analytical tools employed are manual content analysis and regression. The empirical results show that operational risk disclosure outweighs environmental and strategic risk disclosure. Meanwhile, past information, non-monetary and good news are considered less relevant, however dominatefuture, monetary and bad news which are more valuable to diverse stakeholders. Moreover, in considering the important factors that impact on the risk confession, that board size, independent director and diversity have greater influence in driving the risk disclosure upward. Nevertheless, non-executive director and CEO-Duality are statistically insignificant in determining the movement of risk information to divulge. The persistence of contemporary corporate risk practice jampacked with irrelevant information might promote greater agency cost. The implication for the current practice might increase investors’ uncertainty which in turn would raise the company cost of capital. This issue could be addressed by regulating risk disclosure in emerging countries instead of allowing corporate managers to report risk related information at their discretion. Corporate manager are also encourage to appreciate all the potential risk disclosure drivers in the African emerging countries.

Corporate Governance and Operational Risk Disclosure: Evidence from Shariah-Compliant Companies in Malaysia

This study aimed to examine the level of operational risk disclosure among Shariah-compliant companies in Malaysia. The relationship between corporate governance characteristics and operational risk disclosure was also examined by focusing on board characteristics, i.e. independent directors, audit committee meetings, Muslim directors, women directors and education levels of the directors. The sample comprised of 285 Shariah-compliant companies listed in the ACE Market of Bursa Malaysia for the financial years 2014 to 2018. The study used content analysis to assess operational risk disclosure. The information disclosure was scored using an adapted disclosure index. Findings revealed that the disclosure of operational risk information in Shariah-compliant companies was at a moderate level, specifically not more than sixty per cent. More importantly, the analysis showed a positive significant relationship between a woman director and operational risk disclosure. However, a negative significant relationship was found between Muslim directors and operational risk disclosure. Other independent variables were found to have no relationship with the operational risk disclosure. The findings may provide future researchers and regulators with references for assessing the level of operational risk disclosure among public listed companies in Malaysia and are expected to deliver some improvement in examining other characteristics to strengthen the governance practices in Malaysia. Keywords: operational risk disclosure, women director, Muslim director, Shariah-compliant companies

Organisational Characteristics, Corporate Governance and Corporate Risk Disclosure: An Overview

Certain attributes of corporate governance behaviour have been identified in academic research as major factors correlating with corporate risk disclosure amongst listed companies. This is in spite of the fact, however, that much of the empirical research in the area reveals mixed results.
 This study analyses corporate risk disclosure practice involving listed companies and investigates whether such diverse results are attributable to regulation, jurisdiction, operating industry, business environment, or the methodologies employed. We use risk disclosure, corporate governance and organisational characteristics keywords to search the relevant studies on which 46 empirical research papers were sampled, and employ a meta-analysis procedure to evaluate the findings of the previous empirical research.
 Our analyses reveal that firm size is the major organisational-specific characteristic affected by moderators, and board size and institutional investors are the major corporate governance variables that affect moderators. On the analysis of the nature of disclosure, financial risk information is higher for companies operating in the banking sector, while operational risk disclosure is higher for non-financial companies. Additionally, the study finds that the data generating procedure, time interval, diversity of sample and size, and the statistical technique employed are among the major factors that influence discrepancies among the prior studies.
 Such variables complicate stakeholders’ effort to comprehend the main factors that influence companies to unveil their risks profile. We propose that the current data collection process is labour intensive and time consuming, and promote the selection of smaller sample sizes compared to most of the existing research. It may be the case that constraints can be overcome through research that employs an automated procedure for analysis of textual data.

How do banking analysts behave around unanticipated news? Evidence from operational risk event announcements

We study earnings per share (EPS) forecast revision and accuracy of banking analysts around operational risk event announcements in U.S. banks. We find that first announcements of operational risk events are more informative than their settlement announcements. Optimistic banking analysts revise their forecasts downward more aggressively around operational risk disclosures, thereby improving forecast accuracy. Career concerns of banking analysts cause an upward bias in forecast revision and deterioration in forecast accuracy only if the potential employer is a systemically important bank (SIB). We find consistent evidence linking competition among banking analysts with optimistic and inaccurate forecasts, which is consistent with analysts seeking to use inflated forecasts to curry favour and attract businesses to their brokerage house around the time of operational risk disclosures. Global settlement has no favourable impact on analyst forecast accuracy around operational risk event announcements. We find evidence supporting a materiality threshold of $10 million for the informativeness of operational risk event announcements in SIBs. Overall, our results shed light on optimism bias in banking analyst behaviour upon the arrival of unanticipated news.

Risk governance, market competition and operational risk disclosure quality: a study of the ASEAN-5 banking sector

This paper investigates the impact of risk governance and market competition on banks' operational risk disclosure (ORD) quality (total and voluntary) in the Association of Southeast Asian Nations (ASEAN-5) banking sector. Using 285 firm-year observations encompassing the period 2010–14 for risk governance indexes, we investigate the moderating effects of market competition, relative to total risk governance practices, on banks' ORD quality. The results of our panel data analysis show that there is a substitution effect of competition, which could reduce the adverse consequences of weak risk governance practices. However, governance factors – such as the chief risk officer's (CRO's) role and independence, and the risk communication system – decrease voluntary ORD quality. These findings have implications for the role of the financial regulator in using market competition as an effective mechanism to replace banks' weak risk governance, thus encouraging banks to improve their ORD quality. This study contributes to existing knowledge by providing new empirical insights into ongoing debates about the complementary or substitutionary role of competition policies and corporate governance practices.

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.

Internal Control Information and Communication Effect on Operational Risk of Quoted Banks in Nigeria

Operational risk disclosure is expected to close the gap in communication between banking management and its stakeholders especially lenders and investors. The objective of this study is to investigate the effect of internal control information and communication on operational risk of quoted banks in Nigeria. 16 selected quoted banks in the Nigerian stock exchange from 2013-2017 were studied based on the 2012 banking reform on corporate governance by the then CBN governor Sanusi Lamido Sanusi’s “Project Alpha Initiative” (PAI). Data were collected from banks published annual reports, CBN statistical bulletin, NDIC report, CBN fact book, company website and banks’ Pillar III disclosure report for the relevant years sampled for analysis. The analysis carried out included pooled OLS regression, fixed and random effect and Hausman tests to determine the most suitable model for result interpretation. This was conducted with the aid of E-View 7 software. It was concluded that information and communication (FDB, FDF, and TLG) has a significantly positive effect on operational risk (OPR) and can help in curbing operational risk loses in the banking sector. It was recommended that there should be timely information communication in the banking sector of Nigeria, time lag between sending and receiving information should be minimized to the barest minimum and full disclosure in the financial statement should be embraced to help investors make investment decisions as well as inform the judgment of financial statement users

The effects of risk factor disclosure on analysts’ earnings forecasts: evidence from Chinese IPOs

ABSTRACT Using Chinese IPO firms, we examine the impact of risk information disclosure on the properties of financial analysts’ earnings forecasts. We construct a disclosure index by manually reading the disclosures of risk factors in IPO prospectuses. We find that high-quality risk factor disclosure is associated with lower earnings forecast bias, less dispersion, and more timely forecasts. Separating total risk factors into five different types, we show that analysts have better ability to process financial risk and operational risk disclosure compared to the other three types (technology-related risk, market risk, and macroeconomic risk). Cross-sectional tests reveal that the positive effect of risk disclosure is mainly concentrated in firms with greater information transparency (e.g., larger firms, firms with higher profitability, and firms with lower performance volatility). We further rule out other potential explanations (e.g., the effect of analyst sentiment) and conduct additional robustness tests. Our study has broad implications for firms in emerging economies.

The moderating role of Shariah supervisory board on the relationship between board effectiveness, operational risk transparency and bank performance

PurposeThe purpose of this study is to determine the effect of board effectiveness (BE) on financial performance and operational risk (OR) disclosure and the interaction effect of a bank’s Sharia Supervisory Board quality (SSB) with religious and ethical principles.Design/methodology/approachThe data were collected from the annual financial reports of 25 Islamic banks (IBs) in the Gulf Cooperation Council countries over 2008-2017. The OR disclosure, the SSB quality and BE were measured using self-developed indices. The Tawhidi string relation methodology was used to establish the circular causal model. The moderating effect of the SSB quality on the performance, OR disclosure and board structure relationship was examined using the hierarchical regression analysis.FindingsThe main finding of this study is related to the positive moderating effect of SSB quality on the relationship between performance, OR disclosure and BE. This result seems to indicate that at a high level of SSB quality, even when the performance increase the IBs engage in complying with OR disclosure to inform the stakeholders on the real situation of the bank.Practical implicationsThe finding of this research would be of great support to stakeholders and policymakers to make more pressure on IBs to improve the quality of their SSB structure and show more compliance with the governance recommendations. As an extension to this research, further study can examine other Islamic governance mechanisms such as Sharīʿah-compliant banks.Originality/valueThe present study provides a new addition to the prior literature by investigating the relationship between performance, BE, OR disclosure and the interaction effect of SSB quality. From an Islamic ethical, this research can also contribute to the growing discussion on SSB quality and performance.

Difference between the determinants of operational risk reporting in Islamic and conventional banks: evidence from Saudi Arabia

In this study, the author investigates the operational risk reporting practices of Islamic banking institutions (IBIs) and conventional banks (CBs) in Saudi Arabia. Moreover, the paper explores the joint effect of banking characteristics, corporate governance and credit rating on the informational content of operational risk disclosure (OpRiskDISC). The paper uses content analysis to collect OpRiskDISC data from annual reports during the period 2008–15. The results for each bank type show that the enhanced OpRiskDISC in IBIs is negatively associated with the number of bank branches, the financial stability of the bank, board meeting frequency, the proportion of independent members and credit rating. The results for CBs demonstrate that a bank’s size and financial stability are positively associated with OpRiskDISC. Conversely, the OpRiskDISC level is negatively affected by board meeting frequency and the number of bank branches. For the overall sample, the empirical results show that bank size, compliance with Sharia requirements and board size have a positive, significant effect on OpRiskDISC, while the number of bank branches and the proportion of independent members on the board have a negative, significant relationship with the disclosure level.

How do Banking Analysts behave around Unanticipated News? Evidence from Operational Risk Event Announcements

We study earnings per share (EPS) forecast revision and accuracy of banking analysts around operational risk event announcements in U.S. banks. We find that first announcements of operational risk events are more informative than their settlement announcements. Optimistic banking analysts revise their forecasts downward more aggressively around operational risk disclosures, thereby improving forecast accuracy. Career concerns of banking analysts cause an upward bias in forecast revision and deterioration in forecast accuracy only if the potential employer is a systemically important bank (SIB). We find consistent evidence linking competition among banking analysts with optimistic and inaccurate forecasts, which is consistent with analysts seeking to use inflated forecasts to curry favour and attract businesses to their brokerage house around the time of operational risk disclosures. Global settlement has no favourable impact on analyst forecast accuracy around operational risk event announcements. We find evidence supporting a materiality threshold of $10 million for the informativeness of operational risk event announcements in SIBs. Overall, our results shed light on optimism bias in banking analyst behaviour upon the arrival of unanticipated news.

Readability of Operational Risk Disclosures of Banks

Abstract Operational risk has been acknowledged as a major source of material failures in financial firms. Despite the increased concern of financial institutions and their stakeholders on this topic, the literature that deals specifically with the operational risk disclosure in the banking system is scarce. The present research investigates the readability in transparency reports of Romanian banks, and focuses in particular on the operational risk disclosures. The sample consists of 13 commercial banks operating in Romania in 2017. A concise transparency report is characterized by clarity in the expression of concepts, usage of as few words as possible, limited use of technical terms and avoidance of highly generic disclosures. Drawing upon prior research, we expect that banks with lower levels of performance are foggier (i.e. less concise) in order to improve the image resulting from their transparency reports. Additionally, it is expected that the longer an entity has been established, the higher the quality of disclosures, thus the transparency reports of older banks are more concise compared to the recently established banks. Moreover, we posit that larger banks are more likely to provide more readable reports. The research is part of the larger debate related to disclosure and its various impacts on both the recipient and the giver of information. The main contribution is the innovative approach consisting in the textual analysis of transparency risk reports. To the best of our knowledge, we are not aware of any study that examined conciseness in the setting of operational risk disclosure by banks.

Analysis of operational risk disclosure level: a study in commercial banks based on Brazilian regulations

Este estudo busca analisar o nivel de divulgacao do risco operacional em bancos com carteira comercial, baseado na regulamentacao brasileira. Trata-se de uma pesquisa descritiva, com abordagem qualitativa e quantitativa. A amostra contemplou 30 bancos selecionados a partir do Relatorio ‘Dados Selecionados de Entidades Supervisionadas – IF.data’ divulgado pelo Banco Central do Brasil para data-base dezembro de 2015. Coletaram-se dados semestrais nos relatorios de risco disponibilizados pelos bancos da amostra, de julho de 2014 a dezembro de 2015. Trataram-se dados empregando analise de conteudo, considerando 20 subcategorias distribuidas em 4 categorias baseadas em regulamentacao do Conselho Monetario Nacional e do Banco Central do Brasil. Utilizaram-se estatisticas descritiva e inferencial nas analises dos dados. Os resultados indicaram diferencas significativas entre o percentual de subcategorias presentes em cada uma das categorias. Adicionalmente, verificaram-se diferencas entre o percentual de subcategorias presentes quando agrupadas por categoria. No 2o semestre de 2014 e nos 1o e 2o semestres de 2015 foram divulgadas, 58,50% 59,50% e 60,00% do total de subcategorias analisadas, respectivamente. O estudo contribui para reflexoes de partes interessadas sobre estrategias de divulgacao do risco operacional adotadas por bancos no Pais.

Sharia supervisory boards, governance structures and operational risk disclosures: Evidence from Islamic banks in MENA countries

This paper examines the impact of Sharia supervisory board (SSB) and governance structures on the extent of operational risk disclosures (ORDs), using a sample of 63 Islamic banks from 10 (i.e., Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, and the UAE) countries in the Middle East and North Africa (MENA) region for the fiscal years 2006 to 2013. Drawing on Sharia compliance, Islamic banking and corporate governance literature, our findings are as follows. We find that SSB, block ownership, board independence, and country-level governance quality are statistically significant and positively associated with ORDs. Our results are robust when controlling for several bank- and country-level variables. Our study has implications for policy-makers and regulators in the MENA region with respect to the development and implementation of SSB and governance mechanisms that can improve operational risk disclosures. Finally, the findings highlight the need to enhance current understanding of SSB structures and governance mechanisms that can best help Islamic banks towards engaging in effective compliance with recent governance and accounting reforms.

Evidence of Market Discipline Through Operational Risk Disclosures in Commercial Banking Sector of Pakistan

This study investigates the evidence of existence of market discipline through Operational risk disclosures under Basle Accord-II among commercial banks of Pakistan during years 2006 to 2014. Content Analysis of operational risk disclosure words is conducted to ascertain extent of market discipline. The findings indicate that the banks have growing awareness about operational risk and its disclosures. The results reveal that most of disclosures are narrative and of voluntary nature, showing existence of market discipline over study period. The results have given useful implications for risk managers to exploit risk information as risk management tool and for regulators as to how market discipline may be used in supervisory review.