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Abstract

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Journal of Financial Regulation and Compliance, vol. 13 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 5 October 2015

Liang Song

This study aims to examine the effects of firms’ accounting disclosure policies on stock price synchronicity and stock crash risk, using a sample including 13 emerging…

3249

Abstract

Purpose

This study aims to examine the effects of firms’ accounting disclosure policies on stock price synchronicity and stock crash risk, using a sample including 13 emerging markets. Furthermore, this research investigates how these relationships are affected by country-level investor protection and firm-level governance rankings.

Design/methodology/approach

This paper uses accounting disclosure measures constructed based on survey questions by Credit Lyonnais Securities Asia (2001, CLSA). The accounting disclosure measure is used to explain the two dependent variables, stock price synchronicity and stock crash risk. The stock price synchronicity measure is defined as the logistic transformation of R2 following Hutton et al. (2009) and Jin and Myers (2006). R2 is taken from the estimation of an extended market model. The stock crash risk variable is measured as the frequency difference between extremely negative and positive stock return residues following Jin and Myers (2006). These stock return residues are taken from the estimation of an extended market model. Because the CLSA firm-level disclosure data are from 2000, this paper matches other data taken from the same year, for consistency. The final sample includes 204 observations in 13 emerging countries.

Findings

This paper finds that firms’ stocks are less synchronized with the entire market and have less crash risk if firms have superior accounting disclosure policies. These results suggest that the cost to collect firm-specific information may be decreased for investors if firms are more transparent. Thus, these firms’ stocks have more firm-specific information content. These results also suggest that management is less likely to hide some negative information and release such negative information suddenly in the future if firms have higher levels of accounting disclosure. Thus, these firms’ stocks are less likely to crash. In addition, the influences of firms’ accounting disclosure policies on stock price synchronicity and crash risk are more significant for firms with superior country-level investor protection and firm-level governance rankings. These results imply that external investors place more value on accounting disclosure by well-governed firms because firms with superior governance standards are less likely to intentionally disclose misleading information. Thus, these firms’ stocks can incorporate more firm-specific information and have less crash risk.

Originality/value

The current study is the first to show that the effects of accounting disclosure on stock price synchronicity and crash risk are more pronounced for firms with superior country-level investor protection and firm-level governance standards. Thus, this research extends the literature by providing a comprehensive picture of the influences of accounting disclosure on stock markets. In addition, the existing literature (Chen et al., 2006; Durnev et al., 2004) shows that firms with lower stock price synchronicity are associated with higher investment efficiency because managers invest based on the information in stock prices. Obviously, higher stock crash risk is highly related to higher bankruptcy risk for firms. Thus, examining the effects of accounting disclosure on stock price synchronicity and stock crash risk is of obvious importance to policy makers.

Details

International Journal of Accounting & Information Management, vol. 23 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 31 July 2007

Philip M. Linsley and Michael J. Lawrence

The purpose of this paper is to examine risk disclosures by UK companies within their annual reports. Tests are performed to measure the level of the readability of the…

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Abstract

Purpose

The purpose of this paper is to examine risk disclosures by UK companies within their annual reports. Tests are performed to measure the level of the readability of the risk disclosures and to assess whether directors are deliberately obscuring bad risk news.

Design/methodology/approach

The paper draws upon methodologies developed in prior empirical studies of annual report readability. Thus it uses the Flesch Reading Ease formula to measure the readability of the risk disclosures and coefficients of variation are used to measure obfuscation. A content analysis approach is adopted to identify risk disclosures.

Findings

The paper finds that the mean Flesch reading ease ratings for the sample companies are all below 50 indicating that the level of readability of the risk disclosures is difficult or very difficult and this supports prior research examining the readability of sample passages in annual reports. No evidence is found to suggest that directors are deliberately obfuscating or concealing bad risk news through their writing style.

Research limitations/implications

The paper also finds that the Flesch reading ease ratings measure the readability, not the understandability, of disclosures and whilst actions can be taken to minimise problems associated with reliability when performing content analysis they cannot be wholly eliminated.

Practical implications

The paper shows that there have been calls for improved risk disclosures to enable stakeholders to better understand a company's risk position. Requiring directors to issue extra risk information will not, however, lead to enhanced risk communication unless the readability of the risk disclosures is also improved.

Originality/value

In this paper it is shown that there have been no prior studies that focus upon testing for readability and obfuscation in risk disclosures. It is important that transparent risk information is provided to the marketplace and therefore this study is valuable in its examination of the clarity of communication of published risk information.

Details

Accounting, Auditing & Accountability Journal, vol. 20 no. 4
Type: Research Article
ISSN: 0951-3574

Keywords

Article
Publication date: 30 September 2022

Hend Monjed, Salma Ibrahim and Bjørn N. Jørgensen

The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk

Abstract

Purpose

The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk disclosure and earnings smoothing.

Design/methodology/approach

This study juxtaposes two competing hypotheses, the “opportunistic” and the “signaling”, and empirically investigates whether one dominates the other for a sample of large UK firms for the period 2005–2015. This study also uses the global financial crisis as an arguably exogenous shock on overall risk in the economy to investigate its effect on managers' joint use of textual risk disclosures and earnings smoothing.

Findings

This study finds that risk disclosure and earnings smoothing are negatively associated. This finding supports that managers with incentives to mask the firm’s true underlying risk through smoothing earnings provide lower levels of risk-related disclosures. This study documents that the trade-off between risk disclosure and earnings smoothing is more pronounced during the global financial crisis period than before and after the crisis period. Further, this study demonstrates a more negative association for firms with higher volatility of cash flows. This negative association is robust to various model specifications, additional corporate governance related controls and an alternative measure of earnings smoothing.

Originality/value

The findings provide new empirical evidence about the association between risk disclosure and earnings smoothing and support the opportunistic hypothesis, especially when firms are faced with increased risk.

Details

Review of Accounting and Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

Book part
Publication date: 1 October 2015

Ikseon Suh and Joseph Ugrin

This study investigates how disclosure of the board of directors’ leadership and role in risk oversight (BODs oversight disclosure) influences investors’ judgments when…

Abstract

This study investigates how disclosure of the board of directors’ leadership and role in risk oversight (BODs oversight disclosure) influences investors’ judgments when information on risk exposures is disclosed. The theoretical lens through which we examine this issue involves negativity bias. Sixty-two stock market investors who engage in the evaluation and/or investment of stocks on a regular or professional basis participated in our study. Our results reveal that the addition of BODs oversight disclosure (positive information) does not carry significant weight on investor judgments (i.e., attractiveness and investment) when financial statement disclosures indicate a high level of operational and financial risk exposures (negative information). In contrast, under the condition of a low level of risk exposures, BODs oversight disclosure causes investors to assess higher risk in terms of worry, catastrophic potentials and unfamiliarity about risk information and, in turn, make less favorable investor judgments. Our findings add to the literature on negativity bias and contribute to the debate on the usefulness of disclosures about risk.

Details

Advances in Accounting Behavioral Research
Type: Book
ISBN: 978-1-78441-635-5

Keywords

Article
Publication date: 9 May 2022

Simona Cosma, Salvatore Principale and Andrea Venturelli

The purposes of this paper are: firstly, to assess the disclosure related to climate change (CC) by major European banks to understand if the banks have grasped the most…

Abstract

Purpose

The purposes of this paper are: firstly, to assess the disclosure related to climate change (CC) by major European banks to understand if the banks have grasped the most substantive aspects of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and secondly, to evaluate the contribution of a non-traditional committee (i.e. corporate social responsibility (CSR) committee) to TCFD-compliant disclosure.

Design/methodology/approach

Using content analysis and ordinary least squares regressions on a sample of 101 European banks, this study sought to investigate completeness, tone and forward-looking orientation of CC disclosure and explore the relationships between CSR committee and previous disclosure aspects.

Findings

This study shows that European banks have been able to reach an intermediate level of adequacy of compliance in terms of completeness of information but forward-looking orientation seems to be the aspect that needs the most improvement. The existence of a CSR committee dedicated to sustainability issues seems to constitute the difference between the banks in terms of disclosure. The results highlight vulnerabilities in disclosure and board characteristics relevant for improving CC disclosure.

Practical implications

Firms interested in strengthening stakeholder engagement and capturing strategic opportunities involved in CC should be encouraged to establish a CSR committee and appoint female directors in financial companies. This paper should be of interest to policymakers, governance bodies and boards of directors considering the initiative of corporate sustainable governance complementary to Directive 2014/95/EU on non-financial reporting by the European Commission.

Originality/value

To the best of the authors’ knowledge, no prior study has investigated the relationship between the CSR committee and the application of the TCFD’s recommendations in the European banking industry.

Details

Corporate Governance: The International Journal of Business in Society, vol. 22 no. 6
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 21 January 2022

Mubashir Ali Khan, Josephine Tan Hwang Yau, Asri Marsidi and Zeeshan Ahmed

This 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

Abstract

Purpose

This 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/approach

This 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.

Findings

The 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/value

This 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.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 22 July 2021

Malek Hamed Alshirah, Ahmad Farhan Alshira’h and Abdalwali Lutfi

This study aims to empirically examine whether the political connection is related to risk disclosure practices. The study also seeks to contribute to the existent risk

Abstract

Purpose

This study aims to empirically examine whether the political connection is related to risk disclosure practices. The study also seeks to contribute to the existent risk disclosure literature by investigating the moderator effect of family ownership on this relationship.

Design/methodology/approach

The content analysis approach was used to collect data and determine the level of risk disclosure over the non-financial Jordanian firms listed on 1Amman Stock Exchange. The sample of this study contains 376 annual reports over four years from 2014 to 2017. It used the random effect regressions to examine the hypothesis of the study.

Findings

The results show that politically connected companies disclose less risk information than the unconnected ones in Jordan. The results also refer that family ownership contributes in mitigating the negative effect of the political connection on the level of corporate risk.

Practical implications

The results have implications for regulatory institutions such as the Jordan Securities Commission to take the negative effect of political connection in their consideration and impose further regulations to monitor this board’s attribute and control politicians’ domination on the board decisions.

Originality/value

The current study also contributes to the body of literature by investigating the effects of the political connections on the level of risk disclosure in the financial reports. To the best of the authors’ knowledge, the current study is the first to examine the effect of the political connection on the risk disclosure practices. Moreover, the study is among the first studies that examine the moderating role of family ownership on such relationship.

Details

Meditari Accountancy Research, vol. 30 no. 5
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 3 December 2018

Wael Hemrit

This paper aims to investigate the determinants of operational and liquidity risk reporting for the Tunisian insurance and banking sectors after the outbreak of the…

Abstract

Purpose

This paper aims to investigate the determinants of operational and liquidity risk reporting for the Tunisian insurance and banking sectors after the outbreak of the Tunisian revolution on 14 January 2011.

Design/methodology/approach

A manual content analysis approach was used to measure risk disclosure by counting the number of risk-related words within risk-related sentences in a wide range of publications.

Findings

The results show that operational risk disclosure is associated positively with operational losses frequency, institution size and the proportion of independent non-executive members of the board of directors. Also, board size is found to be negatively associated with risk disclosure. Moreover, net stable funding ratio, size and proportion of independent non-executive members have a positive effect on liquidity risk disclosure. The authors also discover that infrequency of board meetings and the presence of young members on the board increase the extent of liquidity risk information.

Research limitations/implications

The research focuses on a small number of observations which somewhat restrict the generalization of results to the entire class of financial sector in Tunisia. Also, the qualitative character of some supposed explanatory variables (frequency and severity of operational risk) relies heavily on the experiences of interviewees and their basic perceptions.

Practical implications

Investors might do well to rely on such characteristics (large board size, less active board and a high proportion of non-executive directors) to predict the disclosure of risk information, either operational or liquidity risk. Board members should keep an eye on reporting on risk, by promoting the success keys of governance, because good corporate governance has to be recognizable at first to be an effective value driver.

Originality/value

The findings rationalize the debate over the impact of improved corporate governance on risk disclosure practices within the context of the Tunisian revolution. The logic of this rationalization may help to promote political incentives that will encourage a risk management culture based on a dynamic communication framework.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 4
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 5 October 2015

Sherrena Buckby, Gerry Gallery and Jiacheng Ma

Communication of risk management (RM) practices are a critical component of good corporate governance. Research, to date, has been of little benefit in informing…

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Abstract

Purpose

Communication of risk management (RM) practices are a critical component of good corporate governance. Research, to date, has been of little benefit in informing regulators internationally. This paper seeks to contribute to the literature by investigating how listed Australian companies disclose RM information in annual report governance statements in accordance with the Australian Securities Exchange (ASX) corporate governance framework.

Design/methodology/approach

To address this study’s research questions and related hypotheses, the authors examine the top 300 ASX-listed companies by market capitalisation at 30 June 2010. For these firms, the authors identify, code and categorise RM disclosures made in the annual according to the disclosure categories specified in ASX Corporate Governance Principles and Recommendations (CGPR). The derived data are then examined using a comprehensive approach comprising thematic content analysis and regression analysis.

Findings

The results indicate widespread divergence in disclosure practices and low conformance with the Principle 7 of the ASX CGPR. This result suggests that companies are not disclosing all “material business risks” possibly due to ignorance at the board level, or due to the intentional withholding of sensitive information from financial statement users. The findings also show mixed results across the factors expected to influence disclosure behaviour. While the presence of a risk committee (RC) (in particular, a standalone RC) and technology committee (TC) are found to be associated with some improvement in disclosure levels, the authors do not find evidence that company risk measures (as proxied by equity beta and the market-to-book ratio) are significantly associated with greater levels of RM disclosure. Also, contrary to common findings in the disclosure literature, factors such as board independence and expertise, audit committee independence and the usage of a Big-4 auditor do not seem to impact the level of RM disclosure in the Australian context.

Research limitations/implications

The study is limited by the sample and study period selection as the RM disclosures of only the largest (top 300) ASX firms are examined for the fiscal year 2010. Thus, the findings may not be generalisable to smaller firms or earlier/later years. Also, the findings may have limited applicability in other jurisdictions with different regulatory environments.

Practical implications

The study’s findings suggest that insufficient attention has been applied to RM disclosures by listed companies in Australia. These results suggest RM disclosures practices observed in the Australian setting may not be meeting the objectives of regulators and the needs of stakeholders.

Originality/value

The Australian setting provides an ideal environment to examine RM communication as the ASX has explicitly recommended RM disclosures areas in its principle-based governance rules since 2007 (Principle 7). This differs from other jurisdictions where such disclosure recommendations are typically not provided and provides us with a benchmark to examine the nature and quality of RM disclosures. Despite the recommendation, the authors reveal that low levels and poor RM communication are prevalent in the Australian setting and warrant further investigation.

Details

Managerial Auditing Journal, vol. 30 no. 8/9
Type: Research Article
ISSN: 0268-6902

Keywords

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