Risk Research Articles

Spillover effect of digital transformation along the supply chain: From the perspective of suppliers’ audit fees

This research contributes to understanding the spillover effect of customer digital transformation along the supply chain. We take a supply chain relationship perspective to explore the influence of customers’ digital transformation on suppliers’ audit fees and find a significant reduction in such fees when customers undergo digital transformation. An economic mechanism analysis reveals that this transformation reduces audit fees by lowering the risks and costs encountered by auditors. This is achieved by mitigating suppliers’ business risks and improving earnings quality. Heterogeneity analysis reveals that the impact of customers’ digital transformation on suppliers’ audit fees is more pronounced when the supply chain is geographically distant, suppliers with more specific investments and with high levels of market competition.

Assessment of Women’s Participation in Fish Processing in Ekiti State, Nigeria

This research examined the involvement of women in various stages of fish processing in Ekiti State, Nigeria. A sampling method was used to select 90 women fish processors, and data was collected through structured interviews. The data was analyzed using descriptive statistics, such as frequencies, percentages, and means, along with charts. Additionally, probit regression analysis was conducted to identify socio-economic factors influencing women's participation in fish processing. The findings revealed that, on average, women involved in fish processing were 38.5 years old, with 57% being married and 28.4% being single. A majority (61.7%) had received formal education, and nearly all (91%) were members of cooperative societies. The study found that women were primarily engaged in scaling, gutting, and sticking (87%), with 60% using the hot smoking method. Most processing equipment was locally fabricated, with 15% using drum ovens, 25% using metal sheets, 45% using clay ovens, and 40% using kilns. The majority (85%) used firewood as a fuel source, and 89% packaged their fish in baskets and paper. The probit regression analysis indicated that age, education, access to credit, and access to markets were positively and significantly related to women's participation in fish processing. Marital status and experience in fish processing were also positively related but not significantly. The study concluded that women utilized various methods, equipment, and energy sources in fish processing. Based on the findings, recommendations were made, including assisting women in forming cooperative societies to enhance their business management skills, prioritizing women in accessing credit and loans, and stabilizing fish product prices to mitigate business risks among women processors.

How to Make Long-Term Investments in a Stock Market? A Generic Strategy for Investors

Against the backdrop of increasingly fierce industrial competition nowadays, firms tend to have substantive business risk and/or information risk, increasing the estimation risk and limit of arbitrage for investors in their short-term investments in a stock market. It is thus important for investors to hold a long-term horizon for at least part of their investments in the stock market. This paper aims to introduce a long-term investment strategy that is practically feasible and potentially valuable to investors. To this end, we first develop a parsimonious model in which we identify the major determinants of a firm’s value. This model is used to select high-value firms from each industry for further fundamental analysis and valuation. We next expatiate on how to perform strategy analysis, accounting analysis, financial analysis, and prospective analysis, and therein apply the residual operating income valuation model, in the best possible manner to further value the selected firms and their long-term investment potential. Lastly, we expound the strategy of forming and adjusting a long-term investment portfolio in a way that potentially maximizes long-term portfolio return.

Climate change disclosure performance and audit fees: evidence from Australia

Purpose This study aims to examine the relationship between climate change disclosure performance (CCDP) and audit pricing. The moderating effect of corporate governance characteristics on that relationship is also investigated. Design/methodology/approach Using a sample of top 300 Australian Securities Exchange listed non-financial firms over the period 2008–2019, this study investigates the association between CCDP and audit fees. The findings are robust to a difference-in-difference test thereby alleviating potential endogeneity concerns. Findings CCDP is found to be significantly positively related to external auditor fees. Research limitations/implications The findings show some important implications for firm management, regulators, investors and auditors. This study presents empirical evidence that climate change, as a factor of external risk, influences audit fees. Practical implications Firms with governance structures characterized by larger more independent boards, larger audit committees and audit committees with a higher level of independence significantly moderate the relationship between CCDP and audit fees. Social implications Investors’ demand for firm transparency and disclosure of information regarding the risks of climate change, effects and opportunities has increased significantly over the past decade, as these factors could have a significant effect on valuation and investment decisions. Originality/value Importantly, stakeholders need to be aware of the costs of climate change, the quantification of climate change impacts and how firms address climate change in their business risk management processes. This study quantifies the impact of CCDP on auditor risk assessments via audit fees.

European Integration, Opportunities and Risks of Business and Agriculture in Albania

The Integration Process of Albania in the European Union started in 1993 and is considered a long road with many challenges. The signing of the Stabilization-Association Agreement in 2006 is the most important moment of this process, including the harmonization of legislation, to prepare the final EU membership process. This article analyses business opportunities and risks, mainly those of the agri-food sector on its way to the EU. In this framework, trade agreements with the EU and Free Trade Agreements (CEFTA) have influenced the liberalization of trade for agri-food products, intensifying and increasing the level of trade with Europe and the countries of the region. This article also deals with the identification of comparative advantages for the agri-industry sector, where facing the regulated European market, not only challenges are analyzed, but also serious limitations, increasing the need for a structural change in trade relations. In the focus of this paper, are the economic and regional strategies, as well as the progress of the business and agri-food processes, also addressing the trade flows of Albania with the countries of the region and the EU. The analysis of this paper consists of three main premises: 1) in the framework of European integration, costs and benefits in terms of economy and business are more visible in the medium and long term; 2) the integration in the medium term brings a higher economic growth for the countries that aspire to join the EU; and 3) the European integration makes the economy more efficient, bringing about an increase in the ratio of investments, in relation to income, through the reduction of risk with a tendency to increase capital and income per capita (European Commission Report, 2023). The analysis of empirical data shows that the results are not as convincing as expected, thus confirming other previous studies by experts in the field. The main conclusion of this paper is that the integration process has influenced reforms and economic policies in terms of formal and content, both in terms of costs and benefits. In substantive terms, the data analysis shows that the process of European integration has served as a strong impetus for the development of institutions in the country, inter-institutional coordination, the establishment of new institutions, the improvement of human resources, local markets, and the increase of absorptive capacities of funds from the EU. On the other hand, it is concluded that in specific areas of domestic business, such as agri-industry, the effects of EU integration are either not felt yet or are minimal.

Lending business models and FinTechs efficiency

The aim of the study is to analyse which managerial issues can be considered the main efficiency drivers for all Italian FinTechs engaged in lending. We measure their efficiency in the period 2020–2022 via Stochastic Data Envelopment Analysis. The main determinants seem to be ROA and cost-to-income ratio; this means that the ability to control both the business risk level and costs is crucial for FinTechs’ managers and other players interested in M&A deals in this industry. The results are useful for FinTechs, other financial players, regulators and supervisors in defining homogeneous rules in the lending sector.

Organization capital and modified audit opinion

PurposeThis study aims to explore the effects of intellectual capital (IC) on the occurrence of a modified audit opinion decision. The authors expect that high IC intensive firms are positively associated with the occurrence of a modified audit opinion since they are associated with an increased business risk and are more likely to exhibit issues concerning their financial health and stability.Design/methodology/approachUsing a data sample of 423 listed firms from Greece, Italy, Spain and Portugal over a 10-year period, the authors estimated a logistic regression model to examine the effects of IC on the probability that a modified audit opinion is issued. The authors used organizational capital as a measure of a firm’s intensity on IC.FindingsEmpirical findings indicate a significant and positive relationship between the IC and the likelihood of a firm receiving a modified audit opinion decision.Originality/valueThis study expands prior literature by exploring the predictive ability of IC on the likelihood of a firm receiving a modified audit opinion decision.

Can Fintech mitigate business risks?--Evidence from the Chinese market

Fintech is an important supplement to the traditional financial system, and its development is a good medicine to alleviate the financing constraints and business risks of enterprises. Based on the data of listed enterprises from 2004 to 2021, this paper adopts the method of panel linear regression to explore the impact of the level of Fintech development on the operating difficulties of local enterprises. The results show that increasing the level of Fintech development can effectively reduce the business risks faced by enterprises, and the conclusion still holds after a series of robustness tests such as adding control variables, replacing explanatory variables, multiple fixed effects, and changing the time interval. The mechanism analysis shows that the level of Fintech will affect the business risk of enterprises by changing the book-to-market ratio, and the heterogeneity analysis shows that the impact of Fintech on the business risk of private enterprises as well as non-Big 4 audited enterprises is more significant. The policy implication of this paper is that the government should actively guide, support and regulate the development of Fintech in different regions to provide policy support and guarantee for enterprises to reduce their business risks. However, attention should also be paid to balancing the relationship between innovation and risk management, data security and privacy protection to ensure the sustainable development of Fintech.

Linking physical climate risk with mandatory business risk disclosure requirements

Mandatory disclosure of physical climate risks to businesses is planned or being implemented in many countries. This raises the question, how viable is it to link increasing physical climate risk, expressed as extreme events, to an individual business. We demonstrate how the characteristics of increasing frequency, magnitude and duration of extreme events impact a hypothetical business supply chain using the analogy of a spider’s web, where an extreme event impacting a strand of the web (supply/market line) impacts the efficiency of the web (supply chain). We demonstrate that our hypothetical business, located in the centre of the web, can be unaffected by a very large number of extreme events, or be severely impacted by a small number of events, depending on exactly where the event occurs and the properties of the event. This implies that a business cannot assess physical climate risk based on a change in the frequency of events; the business needs to know the precise location of the events, as well as the magnitude and duration of each event. This information is not available and is unlikely to ever be available from climate model projections. Therefore, individual businesses required to disclose future physical climate risk are very unlikely to be able to provide useful quantitative assessments. We recommend that a business-specific storyline approach to future risk is used where multiple lines of evidence are woven into a risk assessment, including climate projections. Generic top–down prescriptions of future scenarios are very likely to lead to misrepresentation of risk and very poor outcomes for business, investors or financial regulators seeking to build resilience to future climate change.

Capital Asset Pricing Model (CAPM) 2.0: Account of Business and Financial Risk

The famous Capital Asset Pricing Model (CAPM), widely used in practice, takes into account only the business risk associated with investments in a specific company [not the entire market (or industry)]. In practice, most listing companies use debt financing and operate at a non-zero leverage level. This means that the financial risk associated with the use of debt financing, along with business risk, must be taken into account. The purpose of this paper is to simultaneously account for business and financial risk. We combined the CAPM theory and the Modigliani-Miller (MM) theory, which is the perpetual limit of the BFO (Brusov-Filatova-Orekhova) theory. The article shows that R. Hamada’s attempt to take into account both business and financial risks has proved unsustainable, and the formulas he obtained, widely used in practice, are incorrect. The paper outlines the correct formulae that made it possible to generalize CAPM for the first time, taking into account both business and financial risk. The application of the new CAPM 2.0 model to a number of companies is considered and the difference between the results obtained within the framework of CAPM 2.0 and CAPM is demonstrated. CAPM is one of the main models [along with APT (arbitrage pricing theory) and WACC] within the income approach to business valuation. This significantly increases the value of the developed CAPM 2.0 approach, which can significantly improve the accuracy of the assessment.

Audit market concentration in an emerging economy

The aimed of this study is to ascertain the relationship between audit attributes and audit quality in an emerging economy. The study deliberately cover the post-Enron era and postaudit reforms era decipher the activities of audit after the demise of Enron. This study used selected quoted firms in Nigeria for a period of sixteen (16) years, 2006 – 2021. The models were built based on a study of extant literature, GOA and audit reforms. Ordinary least square econometric technique was employed to analyze data extracted from a secondary source. The outcomes of this study revealed that Audit client size has positive relationship with audit quality. The result further revealed that audit client complexity has negative relationship with audit quality. Finally, the result revealed that audit client business risk has no significant relationship with taudit quality. This study recommended that Alternative appointment processes for auditors, e.g. involving shareholder panels, or appointment by regulator.

Factors determining people’s use of renewable energy

Although awareness and preference for renewable energy is increasing, users still pay higher prices for renewable energy than for fossil fuels. Therefore, assessing renewable energy demand is necessary to find new opportunities and drivers from buyers in the upcoming flexible and competitive energy market in the context of social and environmental responsibility to enhance consumer market. A clear trend is taking place among electricity users and small-scale electricity generation investors. The development of decentralization in global power production and distribution is also quite similar to this trend. Although many of these studies have noted this trend, there are still limitations that have not been further clarified. One thing to note is that when people invest in renewable energy to make a profit, there may be some risks due to the incomplete legal and technical framework. For example, investors can ignore strict infrastructure standards, use cheap, low quality products or the ability to reduce subsidies and replace them with more market prices; Or they can aim to make a profit immediately. Therefore, people must pay attention and understand their intention to use renewable energy. This reduces business risk by supporting the development of financial and investment solutions for citizens. At the same time, setting standards and establishing a comprehensive communication plan will provide the basis and tools for the sustainable and effective development of renewable energy by the people.

SWOT Analysis in Business Risk Awareness in MSMEs

SWOT Analysis in Business Risk Awareness in MSMEs

PENGARUH PROFITABILITAS, UKURAN PERUSAHAAN, DAN RISIKO BISNIS TERHADAP STRUKTUR MODAL

The purpose of this research is aims to analyze the effect of profitability, firm size, and business risk on the capital structure of manufacturing companies listed on the Indonesia Stock Exchange (IDX) in 2018 - 2020. The sample used in this research was 69 companies, selected by purposive sampling method and processed using the eviews 12 program. The result of the analysis shown that the profitability variable had no significant and positive effect on capital structure, the firm size variable had a significant and positive effect on capital structure, and the last variable, namely business risk, has no significant and negative effect on capital structure.

DETERMINANTS OF CAPITAL STRUCTURE IN INDONESIAN COMPANIES FROM 2011 – 2022

<p>The purpose of this study is to examine the variables influencing capital structure in Indonesian businesses. The dependent factors in this case are the debt to asset ratio (DAR) and the debt-to-equity ratio (DER), while the independent variables are profitability, growth potential, size, dividend policy, liquidity, and business risk. All industries in Indonesia are represented in the research sample, except for the banking industry. The panel regression analytical method is used. Furthermore, Random Forest's variable importance analysis is used in this work. The outcome demonstrated that dividends, tangibility, profitability, and liquidity are important components of both DAR and DER models. Strong tangible assets raise both DAR and DER, but favorable profitability and liquidity typically lower them. Additionally, businesses that pay out larger dividends typically have smaller debt loads. Therefore, businesses should concentrate on sustaining strong profitability as it is closely related to sales. To guarantee continuous liquidity, which enables businesses to fulfill both short- and long-term obligations, care must be taken while paying out dividends.</p>

Public enforcement and corporate maturity mismatch

AbstractThe root of corporate maturity mismatch in developing economies may dwell in the fact that weak contract enforcement capacities suppress financial intermediates' willingness to supply long‐term credit. This study examines the impact of improvements in the legal enforcement environment on corporate maturity mismatch, focusing on the unique setting of China's free trade zones. Using data from non‐financial listed companies between 2010 and 2021, the study investigates how the establishment of FTZs, which signifies an improvement in contract enforcement efficiency, influences firms' financing decisions and maturity mismatch. We find that improvements in the contract enforcement environment significantly discipline the behavior of raising short‐term debt for long‐term investments. The effect is more pronounced for small‐to‐medium‐sized enterprises and non‐state‐owned enterprises, suggesting that such improvements alleviate ownership and size discrimination faced by firms. Mechanism test reveals that access to long‐term loans is the core mechanism. Besides, improvements in public enforcement reduce business risk and enhance firm performance. Strengthening the legal enforcement environment serves as a critical determinant to mitigate corporate maturity mismatch and foster sustained economic development.

Managing Inherent IT Business Risk against Cyber Threats: a Decision Analysis Case Study of an Oil and Gas Company

XYZ, an anonymized oil and gas company, aims to enhance cyber resilience by strategically managing inherent risk profiles in cybersecurity, aligned with business needs and stakeholder expectations. This research addresses challenges including Information Security Control determination, proficiency improvement in risk management, and ISMS preparedness. Additionally, it tackles procurement strategy for Security Operations Control across XYZ Group, operating under PSC Gross Split, Cost Recovery, and Non-PSC statuses. Utilizing diverse frameworks such as problem tree analysis, stakeholders’ power-interest matrix, MITRE ATT&CK, NIST 800-53, COBIT 2019, ISO 27005:2022, KAMI 5.0, and SMART, data analysis includes risk documents, interviews, and cyber-attack data. The research establishes effective IS Control for risk mitigation, readiness for Information Security Management System ISMS implementation, strategic programs enhancing risk management capability, and refined Security Operations Control procurement. These outcomes, incorporated into a collaborative contract structure, significantly mitigate cyber threats and potential impacts, such as disruptions to operations, revenue reduction, increased costs, data theft, and non-compliance.

Leveraging natural capital accounting to support businesses with nature-related risk assessments and disclosures.

Nature loss threatens businesses, the global economy and financial stability. Understanding and addressing these risks for business will require credible measurement approaches and data. This paper explores how natural capital accounting (NCA) can support business data and information needs related to nature, including disclosures aligned with the Taskforce on Nature-related Financial Disclosures recommendations. As businesses seek to measure, manage and disclose their nature-related risks and opportunities, they will need well-organized, consistent and high-quality information regarding their dependencies and impacts on nature, which few businesses currently collect or track in-house. NCA may be useful for these purposes but has not been widely used or applied by businesses. National NCA guided by the U.N. System of Environmental-Economic Accounting may provide: (i) a useful framework for businesses in conceptualizing, organizing and managing nature-related data and statistics; and (ii) data and information that can directly support business disclosures, corporate NCA and other business applications. This paper explores these opportunities as well as synergies between national and corporate natural capital accounts. In addition, the paper discusses key barriers to advancing the wider use and benefits of NCA for business, including: awareness of NCA, data access, business capabilities related to NCA, spatial and temporal scales of data, audit and assurance considerations, potential risks, and costs and incentives. This article is part of the theme issue 'Bringing nature into decision-making'.

Does media coverage of firms' environment, social, and governance (ESG) incidents affect analyst coverage and forecasts? A risk perspective

We examine whether and how media coverage of firms' environment, social, and governance (ESG) incidents is associated with analyst coverage and forecasts. We propound that the risks of firms could either increase or decrease as a result of media-covered ESG incidents, depending on the firms' actions on the media coverage, and thus its impact on analyst coverage and forecasts would vary. Based on a sample of U.S. listed companies, we find evidence that the level of analyst coverage is negatively associated with a firm's ESG incidents covered by the media. This association is more pronounced for firms with more intense industrial product market competition, more severe ESG scandals, or coverage by less sophisticated analysts. We also find that the firms' ESG incidents covered by the media would lead to higher levels of forecast error and dispersion. Our mediation analysis further reveals that business risk and information risk tend to be higher for firms covered by the media for having been involved in ESG incidents, thereby explaining why the analysts' coverage and forecasts for these firms are adversely affected. Overall, our results highlight the importance of curbing corporate social irresponsibility and improving analyst performance in forecasting.

The Dynamics of Social, Economic, and Cultural Changes and the Role of Institutions in Supporting Agribusiness Development in The Oil Palm Plantation Area

The purpose of this research is to reveal the dynamics of social, economic, and cultural changes in agribusiness institutions in oil palm development locations. Then reveal the role of each agribusiness institution in the location of oil palm development. Using a qualitative approach to build a post-positivism approach. The research location is limited to the community (in this case farmers), consisting of independent farmers and plasma farmers. The results of the study found that there were changes in demographic patterns around oil palm plantations that other researchers had not uncovered (the findings of this study), namely social stratification, patterns of indirect (easier) interactions, and improved health status. The role of institutions in supporting agriculture is very vital in accommodating the interests of farmers. The farmer groups formed are capable of acting as learning vehicles, production units, and collaboration vehicles. In terms of increasing the capacity of farmers, extension agents also play an important role in supporting farming. Specifically, Cooperatives do not only partner, providing production, transportation, and Marketing Facilities, besides that there is risk management. Risk management covered by cooperatives is engineering business, financial, social, and legal risk management.