Risk Disclosure In Annual Reports Research Articles

Risk disclosures in annual reports and firms’ default risk

AbstractThis study examines how the length, content, and tone attributes of risk disclosures in a firm's 10‐K annual report relate to its default risk in the subsequent fiscal year. We find a significant association between specific attributes of risk disclosures and the default risk in the subsequent period. Using the 2008 financial crisis as a shock to firms’ risk environment, we further find that the documented association is more pronounced in the post‐financial crisis era. Our cross‐sectional analyses reveal that the documented relationship is particularly prominent for firms undergoing substantial shifts in default risk, facing significant financial distress, operating in industries with lower litigation risk, or subject to heightened scrutiny from external monitors. Overall, our findings suggest that risk disclosures in firms’ annual reports offer valuable insights for investors assessing financial distress and default risk.

Risk Disclosures in Annual Reports and Firms’ Default Risk

Risk Disclosures in Annual Reports and Firms’ Default Risk

Do companies' risk perceptions affect investor confidence? Evidence from textual risk disclosure in the tourism industry

Few studies have examined tourism risk perception from a company perspective, which can better reflect their real risk situation. Moreover, when companies' risk perception is captured, it can have an impact on investor confidence and lead to abnormal market volatility. Therefore, it is essential to investigate tourism companies' risk perceptions and their effect on investor confidence. For this purpose, we first identify 31 risk perceptions from textual risk disclosures in annual reports using text mining technology. We then construct a panel regression model to assess its influence on investor confidence. This study overcomes the barriers to tourism companies' risk perception identification and effect characterization in data acquisition and technology. This work can enrich the research on tourism risk perception and improve tourism companies' risk management efficiency. The findings suggest that tourism companies should increase their protection against liquidity risk and actively explore international markets to enhance investor confidence.

Peranan Dewan Komisaris Terhadap Risk Disclosure Pada Perbankan Umum Di Indonesia

Risk Disclosure in annual reports is needed for third parties to get a complete picture of the annual report and the company. One of those who play a role in the risk disclosure policy is the Board of Commissioners. This study aims to analyze the effect of the size of the Board of Commissioners, Independent Commissioners and Board of Commissioners Meetings on risk disclosure in public banking companies listed on the Indonesia Stock Exchange for the period 2017 – 2021. The research methodology used in this study is a quantitative method. Sampling using purposive sampling method. Valid data is 159 data from 35 general banking companies. Data were processed using multiple regression analysis using IBM SPSS version 25 software. The results showed that the size of the Board of Commissioners, Independent Commissioners, and Board of Commissioners Meetings had a positive effect on Risk Disclosure. The implication of this study is the role of shareholders in selecting and appointing members of the board of commissioners who have competency compatibility with the company's business so that they can provide clear information to stakeholders, as well as minimize the occurrence of information asymmetry between management and shareholders. In addition, investors can also use risk disclosure information to consider the company's business in the future.

Brexit disclosure – companies’ honest or bogus perceptions of risk?

Motivated by the recent FRC Brexit-risk reporting guidance, we investigate empirically how internationally diversified companies and those operating in industries with high/low exposure voluntarily responded to this. The paper also examines the pessimistic tone of risk disclosure in annual reports by employing Loughran and McDonald (2011)’s business dictionary capable of gauging various attributes of uncertainty. We find that while almost all FTSE 100 companies discuss this topic in their 2016 to 2019 annual reports, more international involvement results in a greater amount of information and fewer Brexit risk factors. This suggests that while internationally diversified companies respond to more pressure from regulatory requirements, they have already taken internal measures to minimize their exposure to Brexit and therefore, have downgraded their assessment of Brexit risks and uncertainties, and report it to investors accordingly. The results hold true regardless of the location of risk disclosures in the Strategic report and Financial Statements and notes. We also reveal evidence that there are some differential effects among industries depending on the exposure to the Brexit shock. Finally, our results show that internationalisation and industry exposure explain some variation in the negative tone of Brexit discussions. The increased risk reporting and negative tone may be driven by either an intentional bias or justifiably, by a lack of managerial information endowment (Dobler, 2008).

Does risk disclosure influence mergers and acquisitions? A textual analysis

ABSTRACT Using textual analysis and the data of China’s A-share listed companies from 2010 to 2020, this study examines how risk disclosure in annual reports influences subsequent mergers and acquisitions (M&A). The empirical results show that the risk disclosure tone of annual reports is positively associated with the probability of engaging in M&A deals and bid premium, but is negatively associated with long-term stock returns. Furthermore, the level of risk disclosure in annual reports exerts a negative impact on the probability of all-cash bids and bid premium, but positively associated with the long-term M&A performance, indicating that risk disclosure helps alleviate the information asymmetry between acquirers and targets. The empirical evidence highlights the value relevance of risk disclosure content in annual reports, and the importance in strengthening the supervision of qualitative information disclosure.

The determinants of financial risk disclosure in annual reports in emerging economies: Evidence from Egypt

This study aims at investigating the impact of firm and corporate governance determinants on the financial risk disclosure in annual reports. The researcher hypothesized that both the firm characteristics including size, profitability, and leverage and corporate governance characteristics including board size and audit firm size have significant effect on financial risk disclosure. Content analysis was used to analyze the data of 21 non-financial companies listed in Egyptian Stock Exchange during the period 2017-2019. The results of the study indicated that firm size has negative effect on the financial risk disclosure, while leverage and audit firm size positively significantly affect the financial risk disclosure. On the other side, both profitability and board size have no significant effect on the financial risk disclosure. However, this paper has contributed to the prior research by shedding the light on financial risk disclosure practices of Egyptian listed non-financial firms. Finally, the research recommends large Egyptian firms to increase their financial risk disclosure in annual reports to maintain the confidence of investors.

Not Just a Gender Numbers Game: How Board Gender Diversity Affects Corporate Risk Disclosure

This paper examines how board gender diversity affects corporate risk disclosure. We exploit an exogenous shock on firms’ risk environment created by the United Kingdom’s vote to leave the European Union (Brexit) and analyze related risk disclosure in annual reports of public firms in the UK. Using this unique setting, we mitigate concerns about omitted variables in concurrent studies. The findings suggest that board gender diversity is positively related to corporate risk disclosure. However, our results also indicate that the proportion of female directors needs to reach a critical mass to impact the risk disclosure decision. Moreover, we find lower bid–ask spreads immediately after the referendum date for those firms that disclosed Brexit-related risks in their annual reports prior to the vote. Collectively, our results are consistent with board gender diversity promoting the disclosure of decision-relevant information through improved board group dynamics.

Risk disclosures in annual reports: the role of nonfinancial companies listed on the Athens stock exchange

In recent years, risk has become one of the most important business issues. The aim of this paper is to analyze the obligations of all companies listed on the Athens stock exchange, not only to identify and manage business risks but also to inform investors regarding those risks. The identification and management of risks protects businesses and adds value to the shareholders and all interested parties. During previous years many organizations collapsed due to irregularities and fraud. Many stakeholders, such as shareholders, creditors, suppliers, customers, employees and governments, were adversely affected. The failure of these organizations was attributed to the inability of senior management and the inadequacy of their boards of directors to identify and inform the problems and risks that they faced in a timely manner. The effectiveness of management contributes to sound corporate-governance practices. This study analyzes the risks disclosed by all nonfinancial companies listed on the Athens stock exchange by undertaking content analysis of their annual reports during the period 2005–11.

Firm-Level Risk Disclosures: Effects on the Market Value of Firms during the Risk Materialization in the Case of the COVID-19 Crisis

How does the stock market react to risk disclosures in annual reports of firms? Various studies investigated the reactions to the information at the time of disclosure Still, there is little evidence about the differences between the market reaction to firms disclosing the risks and firms without disclosure when the risks indeed materialize By using the COVID-19 pandemic, we are able provide empirical evidence about the effect of a disclosed systematic risk on the stock market returns across a broad set of industries Our data consists of 3,433 annual reports from firms listed on US stock exchanges filed in 2019, from which only 652 firms (19%) disclosed the risk of a pandemic or epidemic We find a significant increase in the stock return volatility for disclosing firms during the pandemic Furthermore, the stock returns of disclosing firms fell significantly more at the start of the pandemic, but also increased more during the initial recovery phase than non-disclosing firms Additionally, our study indicates that the importance of the risk disclosure in annual reports decreases with a growing market value

Weather Risk Management in Energy Sector: The Polish Case

The energy sector is perceived as one of the most exposed sectors to the consequences of weather risk both directly (damages of its infrastructure) and indirectly (frictions to the energy supply–demand balance). The main aim of this paper is to provide an insight into the impact of weather risk on economic activity of companies operating in the energy sector in Poland. The empirical objective is to examine whether energy companies: (i) identify their relevant weather risk exposures; (ii) evaluate the impact of weather risk in the cost-revenues dimension; and (iii) implement weather risk management tools, in this case—weather derivatives. In a methodical context, this study relies on a unique research approach and derives from works that examine companies’ risk disclosures in annual reports, by applying textual content analysis. The results indicate that Polish energy companies recognize the impact of weather risk on their performance, also in the cost-revenues dimension. However, although the reported weather risk management methods were diversified, the examined companies did not use weather derivatives to hedge their weather risk exposures. In the overall dimension, the companies leading with the perception and management of weather risk were diversified regarding performance and market size.

Corporate Governance and Risk Disclosures: A Comparative Analysis Between Bangladeshi and Malaysian Islamic Banks

Corporate governance provides a fundamental framework to oversee corporate conduct and ensures transparency of institutions like banks. In case of Islamic banks, it adds additional importance as the profit sharing (with the depositors) system enhances the chance of agency problem for such institutions. Again, risks are inherent in institutions like Islamic banks, which necessitate the investors to get proper information about the risk encountered by the banks in which they invest. Thus, corporate governance and risk disclosures bear utmost importance. Since Malaysian banking industry has already experienced a favorable growth of Islamic banking and Bangladesh is observing a rapid growth of popularity of Islamic banking, a comparative study has been undertaken between Malaysian and Bangladeshi Islamic banks regarding corporate governance and risk disclosures in annual reports. Content analysis technique has been applied to facilitate the comparison. Both quantity and quality of risk reporting of the sample companies have been evaluated. A corporate governance disclosure index has been developed by following the guidelines provided by Bangladesh Security and Exchange Commission (BSEC) and the principles laid down in the ‘Guidelines on Corporate Governance for Licensed Islamic Banks in Malaysia’ to explore and compare the degree of good corporate governance and relevant disclosures in the annual reports. It is hypothesized that corporate governance and risk disclosure will vary between Malaysian and Bangladeshi Islamic Banks. It is also argued that the corporate risk disclosures will be positively associated with the quality of the firm’s corporate governance mechanisms. Results are generally supportive of hypotheses. At the end, implications for theory and practices are discussed in the study.

Does Regulatory Flexibility Affect Risk Disclosures in Annual Report?

Flexibility is often defined in terms of autonomy of actions, freedom of expression, balancing in competing opposites and agility in actions. Such flexibility assumes greater significance in the dynamic system in which business operates. In this mutually reinforcing system, Indian regulators have accorded flexibility to companies to decide the nature, type, tone and time orientation of risk disclosures (in annual reports) based on their competitive position. Accordingly, the paper strives to ascertain how this regulatory flexibility is leveraged by Indian companies. For the purpose, content analysis and textual analysis are employed on over 4000 annual reports of NIFTY500 companies, covering a period 10-year period from 2005 to 2015. In tune with agency theory, proprietary cost theory, duality theory and contingency theory, the findings indicate that companies that are in a better competitive position tend to make greater and more comprehensive risk disclosures. The results are robust at company level, industry level and sectoral level. Further, the results unambiguously reflect how this flexibility affected the strategic decision making during the time of global financial crisis. Amidst calls for increasing regulations, particularly in the domain of disclosures, these findings clearly highlight the need for regulatory flexibility in decisions that have strategic implications for firms.

Risk disclosure in annual reports and corporate investment efficiency

We calculate a risk disclosure index (RDI) from annual reports by applying textual analysis and study how it affects investment efficiency in firms. The results show that the higher the frequency of risk disclosure in sections of MD&A is, the higher the corporate investment efficiency will be. In further analysis, we find that the effect of risk disclosure on corporate investment efficiency is more prominent when the tone of MD&A is more positive, when there are more keywords about investment in MD&A and when investors have more demand of information or better ability of information processing. Our results support the convergence argument on risk disclosure, and our findings advance the literature of both risk disclosure and investment efficiency.

Supply Chain Risk and Risk Mitigation: Which Strategies Tackle Identified Risks Most Efficiently?

Firms face risks in their upstream and downstream supply chains. Although some operational strategies can fully or partially insulate a firm from the adverse effects of possible supply chain disruptions, implementing these strategies is costly. At the same time, firms face intense pressure on margins, forcing them to keep operating costs low. These conflicting goals require further investigation on whether and to what extent different operational strategies can mitigate several types of risk. This paper delineates and tests how operational strategies mitigate the exposure to supply chain risks with minimum negative influence on performance. To measure a firm’s exposure to supply chain risk, we analyzed corporate qualitative risk disclosures in annual reports (form 10-K) using an adapted latent Dirichlet allocation approach from computational linguistics. The results suggest that operational strategies mitigate the negative association between supply-related risk and performance, but not the negative association between demand-related risk and performance.

Do risk disclosures in annual reports improve analyst forecast accuracy?

Risk information disclosed in annual reports may have positive impacts on analyst earnings forecast by improving information quality, or may have negative impacts by increasing the risk perception of analysts. In this paper, we quantify risk information disclosures in annual reports using textual analysis, and examine the impact on analyst forecast accuracy. The results at firm-level show that (1) collectively analyst forecast accuracy increases with more risk disclosures; (2) this effect is more significant in the group of non-SOEs, higher auditing quality, higher earnings quality, or better corporate governance, suggesting that good internal and external governance mechanisms provide a guarantee for the information function of risk disclosures and for analyst forecast accuracy; (3) the conclusion are robust to firm inherent risks, and they are favourable for increasing forecast accuracy when disclosing risks higher than the inherent risks. The results at analyst individual-level show that (1) individually, analyst forecast accuracy increases with more risk disclosures; (2) this effect is more significant in the group of non-star, less industrial expertise and less follow experience. It suggests that the weak heterogeneity of risk disclosures in annual reports is favourable to increase analyst forecast accuracy in China. The conclusions support the information argument, and contribute to the emerging risk disclosure literature and the literature on analyst forecasts.

Supply Chain Risk and Risk Mitigation: Which Strategies Tackle Identified Risks Most Efficiently?

It is well-known that firms face risks in their upstream and downstream supply chains, and although operational strategies exist that can fully or partially decouple a firm from the adverse effects of possible supply chain disruptions, implementing these strategies is costly. At the same time, firms also face intense pressure on margins, forcing them to keep operating costs low. These conflicting goals require further investigation on whether and to what extent different types of risk can be mitigated by different operational strategies. Drawing on information processing theory, this paper presents a model that is developed and empirically tested to identify the operational strategies that mitigate the exposure to supply chain risk with minimum negative influence on performance. For the measurement of a firm's exposure to supply chain risk, an adapted latent Dirichlet allocation approach from computational linguistics is used to scrutinize corporate qualitative risk disclosures in annual reports (form 10-K). The results suggest that operational strategies mitigate the negative association between supply-related risk and performance, though they do not mitigate the negative association between demand-related risk and performance.

Do Risk Disclosures in Annual Reports Help Investors Access Firm Risks?

Do Risk Disclosures in Annual Reports Help Investors Access Firm Risks?

The Determinants of Risk Disclosure in the Indonesian Non-listed Banks

This study aims to explain the extent of risk disclosure of Indonesian non-listed banks' annual reports and to investigate the factors that drive non-listed banks to disclose risk information in their annual reports. This study provides a new method for measuring risk disclosure in the Indonesian context. We measure risk disclosure by the number of Indonesian risk-related keywords divided by total number of sentences in annual reports. The analysis shows that the total number of risk keywords, sentences and risk disclosure in annual reports has an upward trend. Bank size positively affects risk disclosure. This suggests that firm characteristics influence non-listed banks' risk disclosure.

The determinants of risk disclosure in the Indonesian non-listed banks

This study aims to explain the extent of risk disclosure of Indonesian non-listed banks' annual reports and to investigate the factors that drive non-listed banks to disclose risk information in their annual reports. This study provides a new method for measuring risk disclosure in the Indonesian context. We measure risk disclosure by the number of Indonesian risk-related keywords divided by total number of sentences in annual reports. The analysis shows that the total number of risk keywords, sentences and risk disclosure in annual reports has an upward trend. Bank size positively affects risk disclosure. This suggests that firm characteristics influence non-listed banks' risk disclosure.