Voluntary Risk Disclosure Research Articles

The disclosure perspective of firm‐specific political risk measure from conference calls

AbstractHassan et al. (2019) quantified firm‐specific political risk during corporate conference calls. We argue that this metric captures voluntary risk disclosure by firms rather than just their level of political risk. Studying the impact of political risk disclosure (PRD) on stock price crash risk (SPCR) allows us to test how well their score captures firm‐specific risk or disclosure. Consistent with our disclosure perspective, we document that PRD significantly reduces SPCR. Our cross‐sectional analyses further indicate that the negative effect of PRD on SPCR is more pronounced for firms with poor monitoring and governance and those with more opaque information environments.

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.

Does Voluntary Climate Risk Disclosure Mitigate or Induce Perceived Information Uncertainty? Evidence from CDP’s Effect on Bid-Ask Spreads

Does Voluntary Climate Risk Disclosure Mitigate or Induce Perceived Information Uncertainty? Evidence from CDP’s Effect on Bid-Ask Spreads

Is voluntary risk disclosure informative? The role of UK firm-level governance

PurposeThe study investigates how firm-level governance (FL_G) affects the disclosure of voluntary risk information. Likewise, it explores the influence of FL_G on the informativeness of voluntary risk disclosure (VRD). Specifically, it examines how FL_G shapes the nexus between VRD and firm value.Design/methodology/approachIt uses a sample of non-financial firms from the FTSE350 index listed on the London Stock Exchange between 2010 and 2018. The authors utilise an automated textual analysis technique to code the VRD in the annual reports of these firms. The firm value, adjusted for the industry median, is a proxy for investor response to VRD.FindingsThe results suggest that UK firms with significant board independence and larger audit committees disclose more risk information voluntarily. Nevertheless, firms with larger boards of directors and higher managerial ownership disseminate less voluntary risk information. Besides, VRD contains relevant information that enhances investors' valuation of UK firms. These results are more pronounced in firms with higher independent directors, lower managerial ownership and large audit committees.Practical implicationsThe study rationalises the ongoing debate on the effect of FL_G on VRD. The findings are helpful to UK policy-setters in reconsidering the guidelines that regulate UK VRD and to the UK investors in considering risk disclosure in their price decisions and thus enhancing their corporate valuations.Originality/valueIt contributes to the risk reporting literature in the UK by presenting the first evidence on the effect of a comprehensive set of FL_G on VRD. Besides, it enriches the existing research by shedding light on the role of FL_G on the informativeness of discretionary risk information in the UK.

The Relationship Between the Risk Disclosure and Risk Management Committee on Banks Value: Empirical Evidence From Jordan

Purpose: Government levels may better fulfill the expanding expectations for public service governance, performance management, and accountability with the use of risk management backed by an integrated management accounting and control system. To explain how the risk management committee and risk disclosure affect bank value, this paper draws on agency theory and signaling theory, by using the market to book ratio (MTBR) to measure bank value. Theoretical Framework: This article explains how the characteristics of risk management committees (RMCC) (size, independence, qualifications, meetings, executive membership, expertise, and dual membership) and voluntary risk disclosure influence each other on the value of Jordanian banks from 2014-2021. Design/methodology/approach: The descriptive statistics of risk disclosure practices were calculated by the study sample using data from 18 banks collected between 2014 and 2021. The study variables' observations have an unbalanced distribution as well. 120 observations across all study variables are included in this paper. To calculate the bank value in this study, we use the Market to Book Ratio (MTBR). The regression analysis employed the multiple regression model. Findings: The results indicate that risk management committee qualifications in accounting or finance significantly negatively affect bank value, while other variables have a significant impact on the value of Jordanian banks, such as risk management committee expertise, risk management committee dual membership with the compensation committee, risk management committee independence, and executive membership in the composition of the risk management committee. Originality/value: This paper provides new empirical evidence in financial and accounting literature regarding the effect of the RMCC characteristics on Jordanian banks' value. Also, The main contribution of the paper is the discovery that the influence of an RMCC tends to encourage more disclosure of risk management to minimize risks.

Impact of risk disclosure on the volatility, liquidity and performance of the UK and Canadian insurance companies

PurposeThis paper aims to investigate the impact of risk disclosure practices (voluntary, mandatory and risk disclosure index) on stock return volatility, market liquidity and financial performance for insurance companies in the UK and Canada, before and after the International Financial Reporting Standards (IFRS) adoption.Design/methodology/approachThe panel data analysis covers 14 insurance companies in the UK and 12 in Canada over a six-year period, three years before and three years after the implementation of IFRS. The authors collected risk disclosure data manually from the annual reports and analyzed it through QSR NVivo software for each country. The other variables are secondary data collected from Thomson Reuters Eikon and Datastream.FindingsThe results reveal that mandatory risk disclosure practices positively influence stock return volatility for UK insurers but not Canadian ones. Moreover, both mandatory and voluntary risk disclosures increase market liquidity for UK insurers. The outcomes also show a negative influence of risk disclosure practices on financial performance for both the UK and Canadian insurers. The adoption of IFRS enhances the impact of risk disclosure practices in both countries on market liquidity and financial performance.Research limitations/implicationsThe findings rationalize the impact of risk disclosure practices on volatility, liquidity and financial performance of UK and Canada insurers, and the effect of IFRS in triggering those results.Practical implicationsThe findings highlight the diverse effects of voluntary and mandatory risk disclosure practices in enhancing market discipline and mitigating information asymmetry problems to investors. Regulators and policymakers could rely on the findings to amend and develop disclosure standards more frequently to assure their effectiveness. The authors also offer insights to managers to determine the levels of mandatory and voluntary disclosure practices and disclosure strategies to gain their stakeholders’ confidence.Originality/valueThis study contributes to the literature of risk disclosure in the insurance industry for both the UK and Canada where scarce studies are conducted. It also offers interesting implementations to investors, managers and policymakers.

Pushing a balloon: does corporate risk disclosure matter for investment efficiency?

PurposeThis study aims to examine the effect of corporate risk disclosure on investment efficiency. This study also seeks to contribute to existing literature of corporate risk disclosure by investigating voluntary and mandatory risk disclosure and its effect on the investment efficiency.Design/methodology/approachThis study used two measures of corporate risk disclosure, level and quantity of corporate risk disclosure. A content analysis approach is adopted for non-financial Malaysian firms over the period 2010–2018.FindingsThe empirical results show that level of corporate risk disclosure leads toward efficient investment, whereas quantity of corporate risk disclosure causes inefficient investment when firms disclose more voluntary risks. Further, categorizing corporate risk disclosure into mandatory and voluntary risk disclosure, this study finds that voluntary risk disclosure tends to have higher investment inefficiency, while no evidence was found for mandatory risk disclosure.Originality/valueThis paper contributes to narrow stream of research investigating corporate risk disclosure through level and quantity contributing to the understanding of the level and quantity of risk disclosure in determining organizational investment efficiency.

Determinants and Consequences of Risk Disclosure: Evidence from Chinese Stock Markets during the COVID-19 Pandemic

ABSTRACT This study examines the determinants and consequences of firms’ disclosures related to the COVID-19 pandemic in annual financial reports in China. First, we find that firms with high growth opportunity or low stock liquidity tended to disclose COVID-19 pandemic information to mitigate information asymmetry. Second, our results show that voluntary risk disclosure significantly decreased stock risks due to the reduction of information asymmetry. We further find that stock price crash risks decreased for firms that reported risk information compared with those that did not. Our results suggest that detailed voluntary risk disclosure is needed to mitigate stock risks, especially in extreme situations.

Risk Disclosure and Corporate Cash Holdings

In this paper, we extend corporate disclosure and corporate cash holdings literature by testing whether corporate voluntary risk disclosure affects corporate cash holdings for a sample of Tunisian non-financial listed companies. As a measure of risk disclosure, we use manual content analysis to count the number of risk-related sentences in the narrative sections of corporate annual reports. As a measure of corporate cash holdings, we use the ratio of cash and cash equivalent over the total assets. Using a sample of 140 firm-year observations for the period of 2008–2013, we find that corporate risk disclosure has a negative impact on corporate cash holdings. Our results are consistent with agency, legitimacy and impression management theories. Our paper adds to the existing literature by being the first empirical evidence for the impact of risk disclosure on cash holdings. Our findings offer policy implications relevant for the current debate on the reliability of narrative risk disclosure and whether managers inform or obfuscate stakeholders by disclosing more risk-related information in their annual report narratives.

The Trade-Off Between Mandatory and Voluntary Disclosure: Evidence From Oil Companies’ Risk Reporting

Theoretical propositions suggest that mandatory and voluntary disclosures are related. Empirical studies focusing on this relationship provide mixed evidence as they found that mandatory and voluntary disclosures are either complements or substitutes. Relying on a proprietary, hand-collected database about the risk disclosure of oil companies, we find that voluntary risk disclosure increases with the level of mandatory risk disclosure up to a threshold above which companies reduce their voluntary disclosures. We also find that this relationship depends on the firm-level uncertainty, and it is sharpened in the presence of high exposure to liquidity risk. Overall, our results contribute to the debate on whether and on which level disclosure should be regulated. JEL Classification: M41, G14

Board Composition and Voluntary Risk Disclosure During Uncertainty

This study examines the relationship between board composition and voluntary risk disclosure during uncertainty for a sample of United Kingdom-listed companies. A strand of the disclosure literature focusing on the impact of the board on corporate disclosure argues that board composition influences the extent and quality of corporate disclosure, but such literature has largely used data from stable periods and rarely on risk disclosure. Instead, using agency theory, we examine the impact of board composition on risk disclosure during corporate uncertainty for a sample of UK-listed companies for the period 2006–2015. We used content analysis to derive our measure of risk disclosure and measure board composition based on its size, independence, meeting frequency, and gender diversity. Our regression analyses controlled for the extent of firms’ agency costs, firm risk level, and the impact of mandatory risk disclosure regulation, among other control variables. Consistent with our hypotheses, we find that board size and board independence are positively associated with firms’ risk disclosure during uncertainty, but board meeting frequency and gender diversity seem inconsequential for risk disclosure. Firms’ risk disclosure is positively associated with risk level and mandatory risk disclosure. Our results are robust to alternative model specifications and endogeneity concerns. We highlight the implications of our findings for management practice and regulations.

Voluntary Risk Disclosures of Islamic Financial Institutions: The Role of AAOIFI Standards Implementation

The implementation of the Accounting and Auditing Organization for Islamic Financial Institutions standards (AAOIFI) can improve the risk disclosure practices of Islamic financial institutions (IFIs) that eventually will reduce information asymmetry and improve the legitimacy. However, its role in the presence of Risk Management Committee (RMC) and Sharia Supervisory Board (SSB) with voluntary risk disclosure (VRD) has not been investigated before. Therefore, this study investigates the role of AAOIFI standards implementation on the relationship between RMC and SSB effectiveness with VRD. The sample consists of 167 firm-year observations of IFIs listed on Saudi Arabian Stock Exchange (TADAWUL) from 2013 to 2017. Data of the study are collected from IFIs annual reports. Agency and signalling theories explain the effect of RMC and SSB on VRD. Additionally, legitimacy theory predicts the moderating role of AAOIFI standards. The results show that the effectiveness of RMC and SSB have a positive effect on the level of VRD. However, the AAOIFI standards implementation does not strengthen the relationship between RMC and SSB effectiveness with the level of VRD. This insignificant finding could be due to the non-mandatory nature of AAOIFI standards implementation in Saudi Arabia. The results of the study enhance the current understanding of the importance of effective RMC and SSB to improve the risk reporting that can reduce information asymmetry and strengthen legitimacy amongst IFIs. The findings are also useful to regulatory bodies and policymakers to develop the policies and regulations that could influence the disclosure and transparent reporting by listed companies. Keywords: Voluntary risk disclosure; Risk Management Committee; Sharia Supervisory Board; AAOIFI; Saudi Arabia

Voluntary risk disclosure and values of FTSE350 firms: the role of an industry-based litigation risk

Voluntary risk disclosure and values of FTSE350 firms: the role of an industry-based litigation risk

Voluntary risk disclosure and values of FTSE350 firms: The role of an industry-based litigation risk

There is conflicting research on whether litigation risk affects voluntary disclosure positively or negatively. This study thus aims to examine how litigation risk affects the voluntary disclosure ...

The Trade-Off between Mandatory and Voluntary Disclosure: Evidence from Oil Companies’ Risk Reporting

Theoretical propositions suggest that mandatory and voluntary disclosures are related. Empirical studies focusing on this relationship provide mixed evidence as they found that mandatory and voluntary disclosure are either complements or substitutes. Relying on a proprietary, hand-collected database about the risk disclosure of oil companies, we find that voluntary risk disclosure increases with the level of mandatory risk disclosure up to a threshold above which companies reduce their voluntary disclosures. We also find that this relationship depends on the firm-level uncertainty, and it is sharpened in presence of high exposure to liquidity risk. Overall, our results contribute to the debate on whether and on which level disclosure should be regulated.

The impact of board diversity and voluntary risk disclosure on financial outcomes. A case for the manufacturing industry

Purpose The purpose of this paper is to analyse how board diversity affects firm financial outcomes through the way in which this diversity helps to improve voluntary disclosures. Design/methodology/approach The partial least squares (PLS) technique is used, and a sample of the manufacturing firms listed in Standard and Poor’s 500 for 2009 is studied. In relation to board diversity, two specific characteristics are considered, namely, gender diversity and ethnic diversity. Content analysis techniques are used to measure risk disclosures. Findings The results show that there is a positive association between board diversity and firms’ financial outcomes, which is explained by disclosing risk information. Research limitations/implications The results indicate that the effect of boards of directors on firm outcoumes is influenced by the board involvement in specific strategies, thereby providing encouraging opportunities for future research. Practical implications These findings have implications both for companies, when selecting board members, and for policymakers, when establishing requirements concerning board composition. Moreover, the evidence highlights the role of disseminating risk information, which has direct implications for managers and regulators, who may better understand the value-relevance of risk disclosures. Originality/value The use of PLS technique is one of the novelties of this paper. The novelty of this approach provides fresh insights into the literature, highlighting that the effect of boards on firm outcomes may be mediated by director involvement in specific disclosure strategies.

Corporate Governance Attributes, Corporate Risk Disclosure and Sustainability Disclosure: Egyptian Case

This study aims to analyze the impact of corporate governance on the both voluntary risk and sustainability disclosure. I use the corporate governance attributes that are represented on board size, board independence, CEO duality, directors’ ownership, blockholders’ ownership, ownership concentration, and the audit committee. Using 100 firm year observations I found a positive association between the board independence and the dependent variables risk and sustainability disclosure, and positive association between directors’ ownership and the dependent variable sustainability disclosure without any effect on the risk disclosure. Moreover, I found a negative relationship between CEO duality and blockholder ownership as predictors and the dependent variables risk and sustainability disclosure. Furthermore, never have I found any relationship between the board size, ownership concentration and audit committee as predictors and the dependent variables risk and sustainability disclosure.

Economic Consequences of Risk Disclosures: Evidence from Crowdfunding

ABSTRACT On September 20, 2012, the rewards-based crowdfunding platform Kickstarter.com added a “risks and challenges” section to all project pages. While the section header became a mandatory part of the platform, discussion of risks within that section is voluntary and unverified, making this setting particularly useful for identifying the effects of disclosure on both crowdfunders and entrepreneurs. Consistent with increased salience of risks, we find that backer support for high-risk projects decreases after the introduction of this section, but that lengthier risk disclosures mitigate this decrease in backer support. Further analysis reveals that creators who provide lengthier risk disclosures also increase other non-risk disclosures, and that these non-risk disclosures are primarily responsible for the increased backer support. Collectively, we provide evidence that the introduction of a voluntary and unverified risk disclosure reduced information asymmetry within this unregulated market. JEL Classifications: M41; G24; L15; R12; D03.

Corporate governance and voluntary risk and forward-looking disclosures

PurposeThe purpose of this paper is to examine the impact of corporate governance on risk and forward-looking disclosures in Qatar.Design/methodology/approachThe authors automatically measure levels of risk and forward-looking disclosures in the annual reports of Qatari firms for the period 2008–2014. The authors also use two ways clustered error pooled panel regressions to examine the determinants of these disclosures.FindingsThe authors find that firms with a higher percentage of foreign ownership disclose more forward-looking information; conversely, board size has a negative impact on the forward-looking disclosure. Financial firms tend to disclose less forward-looking information, however, they tend to disclose more forward-looking information after the 2008 global financial crisis. The authors also find negative relationships between the risk disclosure and both the number of non-executive members of the board of directors and duality role of the CEO.Research limitations/implicationsThe study uses the quantity of disclosure as a proxy for the quality of disclosure.Practical implicationsThe findings should help the users of corporate annual reports in Qatar to understand managerial incentives for reporting risk and forward-looking information. This should help regulators to set a proper set of disclosure rules. Moreover, this study increases our understanding of the behavior of international investors and the board characteristics (i.e. board size) in motivating risk and forward-looking disclosures in Qatari firms.Originality/valueThe authors provide the original empirical evidence on the impact of corporate ownership and board characteristics on risk and forward-looking disclosures for Qatari firms using two ways clustered error pooled panel regressions.

Voluntary Disclosure Through the Ranking of Risk Factors in the 10-K

In this study, we examine whether managers rank risk factors and list them in order of their importance in Item 1A of the 10-K. We focus on firms’ credit risk disclosures and where they are positioned in Item 1A. Firms that place the credit risk factor closer to the beginning have lower credit ratings and higher bond spreads. They are also more likely to experience future rating downgrades and bankruptcies. Risk factor position, or rank, is a more robust measure of risk than disclosure characteristics examined in prior studies. We also use firms’ proximity to the investment grade threshold as an exogenous disclosure cost measure and find that firms with ratings near the threshold are more likely to move their credit risk factor to a less prominent position. Our study provides evidence on firms’ voluntary risk disclosure behavior and informs the SEC debate on whether to require risk factor ordering.