Quality Of Risk Disclosures Research Articles

Climate risk disclosures and auditor expertise

Many jurisdictions are establishing requirements for corporations to disclose climate-related risks, and for those disclosures to be audited. One of the first jurisdictions to do so is Australia, where the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) issued a Joint Bulletin in 2018 stating that both preparers and auditors should consider the impact of climate risks on the company's financials. Utilising the Australian setting, this paper introduces a new measure of audit partner expertise, namely expertise in climate-related issues, and examines whether it is associated with the client company's climate risk reporting. We define audit partner expertise in climate-related issues based on their client portfolio composition in terms of greenhouse gas emissions. We find that the likelihood and quality of climate risk disclosures is higher when the audit partner has climate risk expertise, and this finding is driven by clients in industries with material climate risks.

Does mandatory IFRS adoption improve risk disclosure quality? Evidence from the European insurance industry

Purpose This study aims to investigate the effect of mandatory international financial reporting standards (IFRS) adoption on the risk disclosure quality by listed European insurers. Design/methodology/approach The study used a content analysis of the annual reports and consolidated accounts of 13 insurance companies listed in the European market between 2002 and 2007 based on two regulatory frameworks, Solvency and IFRS. Findings The results showed a significant effect of the mandatory adoption of IFRS and a clear improvement in the quality of risk disclosure. Moreover, risk disclosure is positively associated with the size of the company. Research limitations/implications The authors can consider the relatively limited size of the sample as a limitation of this study. Moreover, the manual content analysis used to be considered subjective. Practical implications The findings of this study provide useful insights to professional and regulatory bodies about the consequences of IFRS adoption to enhance transparency and particularly risk disclosure. Originality/value The research contributes to the existing literature. First, the authors have shown that companies are improving in the quality of risk disclosure even before 2005. Second, the authors have shown that the year 2005 is distinguished by a marked improvement in disclosure trends, with companies aligning themselves with coercive and mimetic regulatory forces. Third, the authors highlight the significant effect of mandatory IFRS adoption even in highly regulated industries, such as the insurance industry.

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.

Exploring the carbon emission reduction effects of corporate climate risk disclosure: Empirical evidence based on Chinese A-share listed enterprises

This study reexamines the need for Chinese enterprises to disclose climate risk information in the context of their significant contribution to climate change. The paper proposes climate risk disclosure indicators based on a sample of Chinese A-share listed companies from 2010 to 2020 and their annual reports. It explores the relationship and influencing mechanism between corporate climate risk disclosure and carbon emissions levels. The results of empirical research show that disclosing climate risk information reduces carbon emissions levels, and this mitigating effect is significantly enhanced by the moderating effects of executive environmental experience, investor attention, and government environmental supervision. Heterogeneity analysis further indicates that state-owned enterprises, those with a solid corporate green culture, or industries with high pollution emissions can better exert the carbon emission reduction effect of climate risk disclosure. In addition, physical climate risk disclosure is preferred in terms of short-term carbon emissions. In contrast, transformational climate risk disclosure is selected for long-term carbon reduction goals. Finally, empirical economic analysis indicates that high-quality climate risk disclosure can appropriately mitigate the negative impact of corporate carbon emissions on solvency and profitability compared to firms with lower disclosure levels, highlighting the importance of climate risk disclosure quality.

Equity pledge and debt financing of listed companies

This paper selects the relevant data of listed companies from 2015 to 2021 to study the relationship and influence mechanism between equity pledge behavior and debt financing cost of listed companies. It is found that controlling shareholders' equity pledge behavior affects the debt financing cost of listed companies, which makes the financing cost of listed companies increase; equity pledge mainly affects the debt financing cost through the two paths of control transfer risk and information disclosure quality, which makes the debt financing cost increase, and the profit appropriation motive does not constitute the path of equity pledge affecting the debt financing cost.

Debt maturity structure and the quality of risk disclosures

This paper investigates whether a firm's debt maturity structure affects the quality of its risk disclosures. Using a sample of U.S. public firms from 2005 to 2017, we provide robust evidence that a firm's exposure to refinancing risk, measured as the proportion of long-term debt that matures within one year, is positively correlated with the readability and specificity of risk disclosures. This relationship is stronger for firms that have greater concerns over refinancing risk and for firms operating in environments with lower proprietary disclosure costs. In addition, we show that high-quality risk disclosures can help firms mitigate refinancing risk by reducing the cost of future debt financing. Our study extends the current literature on risk disclosures and enhances the understanding of how refinancing risk shapes corporate disclosures.

Risk governance and risk disclosure quality: an empirical evidence

Purpose In recent time, stakeholders have called on corporate organizations to develop risk governance (RG) model that could strengthen effective risk disclosure quality (RDQ). Based on this premise, the purpose of this study is to examine the influence of RG on RD quality of 120 corporate organizations. Design/methodology/approach RG was measured by board risk committee size, board risk committee independence, board risk committee gender diversity, board risk committee expertise, board risk committee effectiveness, chief risk officer (CRO) presence and enterprise risk management (ERM) framework. This study has used both ordered logistic regression and probit regression to analyze the data set. Findings The number of members on the board risk committee, the proportion of women on that committee, the board expertise, the committee’s effectiveness, the presence of a CRO and the existence of an ERM framework were all found to have an impact on the quality of the risk information disclosed. Practical implications The study emphasizes the need for strong collaboration between the corporate board and external assurance in enhancing the quality of RD. Originality/value The findings contribute to growing literature in the area of RG and RD in Nigeria and by extension other sub-Saharan African countries.

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.

Risk Committee and Risk Disclosure Quality: Evidence from Listed Insurance Firms in Nigeria

Risk Committee and Risk Disclosure Quality: Evidence from Listed Insurance Firms in Nigeria

RISK COMMITTEE DEMOGRAPHIC TRAITS: A STUDY OF THE IMPACT OF EXPERTISE ON RISK DISCLOSURE QUALITY OF LISTED INSURANCE FIRMS IN NIGERIA

The study explored the effect of risk committee expertise on the risk disclosure quality (RDQ) of listed insurance firms in Nigeria from 2011-2021. Data was obtained from the financial statement and annual reports of seventeen listed insurance firms sampled out of a population of twenty-one firms. The dependent variable employed in the study was RDQ defined by the quantity of risk disclosure sentences while risk committee expertise was employed as the independent variable of the study. The ratio of the number of Directors with expertise in Accounting, Finance, and Risk Management in the committee to the total number of Directors in the committee serves as a proxy for the independent variable. Descriptive statistics, correlation analysis, and GLS regression were used to analyse the data collected. To ascertain the suitability of the data for regression analysis and the robustness of the regression results, post estimation and pre-estimation tests were performed. The result of GLS regression conducted indicated that Risk Committee expertise has a significant positive impact on RDQ. Consequently, the current study recommends that in order to improve the quality of risk disclosure in listed insurance firms, the financial reporting council of Nigeria (FRCN) and other regulatory authorities, such as the national insurance commission (NAICOM), should mandate the establishment of risk committees composed of members experienced and knowledgeable in finance, accounting, risk management, and disclosure in their corporate governance codes. This result has practical implications as it underscores the fact that the knowledge and skill of the risk committee drives improved risk disclosure. In addition, the result further influences the efforts of regulatory authorities in their attempt to develop resilient corporate governance codes that guarantees qualitative risk disclosure.

Association between risk disclosure and (in) existence of corporate reputation of publicly traded companies in Brazil

Purpose - To analyze the possible association between non-financial risk disclosure and the (in) existence of reputation in the most prominent Brazilian publicly traded companies considering the legitimacy theory. Design/methodology/approach - The sample assembles 118 corporations listed on B3 and 345 reference forms from 2006 to 2018. In the analysis of corporate reputation, the presence or absence on ISE and, or ICO2 from B3 was considered. For non-financial risk disclosure, a factor checklist containing 31 risks was taken, categorized under operational, damage, integrity, and strategic risks, from the analysis of Reference Forms. A tree regression, a multiple correspondence analysis, and a T-test of the difference between means were used for data analysis. Findings - There is scientific evidence that the companies with reputations demonstrate non-financial risk disclosure superior to the others. This behavior is confirmed in the subcategories of integrity and strategic risks. Moreover, risk factors in the subcategory of integrity risks were crucial to non-financial risk disclosure. Originality/value - This research paves the way to deepen the early debate surrounding risk disclosure and corporate reputation, especially regarding the quality of non-financial risk disclosure.

Management Characteristics, Risk Disclosure Quality and Liquidity: A Practical Evidence from the Egyptian Business Environment

Management Characteristics, Risk Disclosure Quality and Liquidity: A Practical Evidence from the Egyptian Business Environment

The disclosure of tax risk in the financial reports of public companies

Purpose: The purpose of the article is to analyze the scope and quality of tax risk disclosures in financial reports. With this objective, the following research question was formulated: In what areas and in what detail do listed companies in Poland disclose information about tax risk? The subject of tax risk disclosures was raised due to numerous changes to fiscal regulations introduced in recent years aimed at tightening the tax system. In the common opinion of entrepreneurs, the structure and content of the new regulations are ambiguous, raise many doubts, and impose on taxpayers a wide scope of reporting to tax authorities. In conjunction with the imposition of additional penal and fiscal sanctions, it leads to an increase in tax risk. Methodology/approach: A literature review was conducted, and legal acts were analyzed. Also, qualitative empirical research of the content of financial reports was carried out using the original simplified disclosure index. Findings: The results of the survey indicate large disproportions between companies in the scope of disclosed information, and the lack of consistency between various aspects of disclosures. It is also disturbing that the only conducted fiscal inspections help draw attention to this area of business risk. Originality/value: The issue of tax risk disclosure has not been analyzed by Polish researchers so far; thus, this article fills a research gap. The results of the research ex-pand the existing knowledge about disclosures in financial reports. They are also of prac-tical importance both for the companies and their stakeholders.

An empirical examination of board-related and firm-specific drivers on risk disclosure by listed firms in Kenya: a mixed-methods approach

PurposeThis study aims to examine the effect of board-related and firm-specific drivers on quality of risk disclosure (RD) by listed firms in Kenya.Design/methodology/approachThis study uses explanatory sequential mixed-method. The quantitative approach uses content analysis to measure quality of RD and panel data regression to examine the effect of board-related and firm-specific factors on quality of RD. The results of regression analysis are informed by qualitative analysis through interviews with preparers of the annual report.FindingsThe results reveal that quality of RD is low but greater in the post-regulation than in the pre-regulation period. Additionally, the results of regression and interview analysis show that board-related (board independence and board gender diversity) and firm-specific factors (firm size and leverage) positively influence the quality of RD.Research limitations/implicationsThis study focused on listed non-financial firms; this may affect the generalisation of the findings among financial firms.Practical implicationsThe findings highlight the effectiveness of the Companies Act in improving RD practice in Kenya. However, the low-quality RD suggests that more consideration should be taken to review the current regulations. This study also suggests that board independence, board gender diversity, leverage and firm size are attributes that require regulatory focus to enhance quality of RD.Social implicationsThis study contributes to the ongoing discussions about RD to improve worldwide.Originality/valueThis paper adds to the limited studies investigating RD and drivers using mixed methods in developing countries. Specifically, this study develops a novel measure of RD and examines its drivers (board-related and firm-specific) using agency and institutional theories.

Corporate governance reforms and risk disclosure quality: evidence from an emerging economy

PurposeThe purpose of this paper is to examine the impact of corporate governance (hereafter, CG) reforms on the risk disclosure quality in an emerging economy, namely Pakistan. The authors also investigate the impact of CG reforms on the relationship between CG practices and risk disclosure quality.Design/methodology/approachThe authors use a manual content analysis method to a sample of non-financial companies listed on the PSX-100 index for 2009–2015, to examine the impact of CG reforms on risk disclosure quality. The authors use pooled ordinary least squares and the system GMM estimations to test the research hypotheses.FindingsThe authors find that CG reforms have a positive impact on risk disclosure quality. The results indicate that certain CG practices such as CEO duality and board independence are associated with risk disclosure quality. Interestingly, the findings also highlight the effectiveness of CG reforms by showing that the revised code positively moderates the CG practices and risk disclosure relationship.Practical implicationsThe findings of the study have policy implications for regulatory bodies of emerging economies trying to strengthen the CG structures and to introduce risk disclosure regulations to cater the information need of stakeholders.Originality/valueThe authors provide new empirical evidence for the impact of CG reforms on risk disclosure quality using a unique setting of an emerging economy, namely Pakistan.

Board Characteristics and Risk Disclosure Quality by Integrated Reporters : Evidence from Indian Banks

This study aimed to analyze the influence of board characteristics on the quality of risk disclosures in integrated annual reports of banks in India. Integrated reports support organizations in controlling risks, identifying opportunities, connecting risks with business policies, developing business models, and contributing to the value creation process. In February 2017, the Securities and Exchange Board of India (SEBI) recommended the adoption of an integrated reporting (IR) framework by the top 500 companies in India on a voluntary basis from 2017–18. Considering the relevance of integrated reporting and its underlying benefits to various stakeholders, banks have primarily adopted the IR framework and started publishing their annual reports in line with the IR principles. Using content analysis on the sample of 30 banks listed on the National Stock Exchange (NSE) in India, the efficacy of risk disclosures, the outlook orientation (past, present, and future), approaches to risk (positive, neutral, and negative) were investigated, and the influence of attributes of board of directors on the quality of risk disclosure was examined. On examining 4,183 sentences concerning risk disclosures by Indian banks, the results showed a positive relationship between board size, diversity, independence, meetings, and education background in accounting/finance with risk disclosure quality (RDQ). Also, it was found that integrated reporters tended to disclose more risks and suggested ways to mitigate those risks compared to non-adopters.

Disclosure of Information in Risk Reporting in the Context of the Sustainable Development Concept

In the context of the global financial crisis and pandemic, issues related to risk management are of paramount importance, which requires the creation of an effective risk management system and disclosure of information regarding risks in the reporting of commercial organizations, focused on the information needs of stakeholders. This article is aimed at studying the existing practice of disclosing information regarding risks in the financial and non-financial statements of Russian companies. The study is based on the analysis of the current practice of disclosure of information regarding risks in Russia and abroad. Using the analysis of risk disclosure in 210 Russian commercial organizations, the study was aimed, foremost, at identifying factors influencing the format and quality of risk disclosure in financial and non-financial reporting, and secondly, at summarizing the practices of risk disclosure in integrated reporting in Russian organizations and the benefits of using integrated reporting. In this sense, the article contributes to the existing literature as an innovative study that determines the directions of development of the methodology for disclosing information regarding risks in integrated reporting in order to improve its quality and information content in accordance with the Concept of value Creation by the organization in combination with the Concept of Sustainable Development. For stakeholders, this study emphasizes the fact that, in the context of the risk disclosure format used, the quality of this information depends on a number of factors (organizational, technological, legal, cultural, economic). The study could be useful for managers and decision makers whose aim is to implement the Concept of Sustainable Development and the achievement of Sustainable Development Goals.

Climate Change Risk Disclosure in Europe: The Role of Cultural-Cognitive, Regulative, and Normative Factors

ABSTRACT Climate change is a key issue faced by the contemporary world. Through the lens of neoinstitutionalism and the normativity concept, this study examines whether cultural, regulative, and normative dimensions affect the quality of climate change risk disclosures. This paper uses a sample of 653 European companies and measures the quality of their disclosures based on Carbon Disclosure Project (CDP) ratings. The results show that the quality of such disclosures is associated with cultural and normative dimensions, but substantive legitimacy is found to be influenced by all the examined institutional factors. The interactions between the examined cultural and normative dimensions are shown to be (not) important for firms that operated in weaker (stronger) regulative contexts prior to Directive 2014/95/EU. This study provides a better understanding of the challenges related to climate change reporting and the role of institutional differences in the process of achieving normativity in cross-national contexts such as that of the European Union.

Firm performance and cost of equity capital: the moderating role of narrative risk disclosure quality in Egypt

This paper aims to examine the moderating effect of the narrative risk disclosure quality on the association between firm performance and the cost of equity capital in the Egyptian setting. Manual content analysis and factorial principal component techniques are used to quantify the quality dimensions of the narrative risk disclosures. The weighted average cost of equity is used to estimate the firms’ costs of equity. A cross-sectional analysis was conducted over three years (2018–2020) for a sample of 73 non-financial firms listed on the Egyptian Stock Exchange (EGX100). Multiple OLS regression models are employed to test the hypotheses. The results reveal a negative association between firm performance and the cost of equity and, while such association strengthened when adding the narrative risk disclosure quality as a moderator variable. This suggests that risk disclosure is important to stockholders’ investment decision-making in the Egyptian context. Based on the dearth of literature related to the economic reverberations of narrative risk disclosure quality in emerging economies, this study contributes to the risk reporting literature by providing evidence on the moderating effect of the narrative risk disclosure quality and its reverberations on the firm’s cost of equity capital in one of the emerging economies as Egypt. With regard to the findings of this study, we expect to contribute to the practice and theory by providing new and different insights about the moderating effect of narrative risk disclosure on the association between firm performance and cost of equity capital.

Corporate risk reporting about Brexit as political communication

How can we account for differences in the extent of risk disclosure among companies? The paper expands the existing explanations by claiming that corporate risk reporting is not just financial but also political communication. The presented empirical analysis of how corporations disclose Brexit-related uncertainties suggests that risk reporting is a part of a company’s holistic conversation with multiple audiences in society (e.g. politicians, regulators, journalists and customers) and might have well-targeted but also unforeseen effects on each of them. The quantity and quality of risk disclosure can be explained – among other factors – by the extent to which companies want to participate in public discourse and wish their opinions on a particular political issue, such as Brexit, to be heard. In other words, risk reporting is a part of ‘the politics of expectations’ which should be investigated in its own right.