Risk Disclosure and Firm Value: Evidence from the United Kingdom

• Authors: Marta Tache

Abstracts

EN

The International Accounting Standard Board (IASB) aimed to increase the decision usefulness of firms’ risk disclosures with the 2007 introduction of the International Financial Reporting Standards (IFRS) 7. Specifically, listed firms were mandated to provide information to the market on both their (1) exposure and (2) risk management, which are associated with holding their financial instruments. This study investigates whether IFRS 7 financial instruments and their disclosures are associated with firm valuation. Using data on premiumlisted United Kingdom (UK) companies, for the period 2007–2019, I find evidence that firm value (proxied by Tobin's Q) is negatively associated with the quantity of IFRS 7 interest and credit risk disclosures. I further find that the market value decreases with the presence of quantitative information tabulated in the disclosures. The findings of this study have important implications for the IASB's standard-setting process.

Keywords

EN

market valuation; risk disclosures; IFRS 7; downside risk

• Publisher: Uniwersytet Warszawski. Wydawnictwo Naukowe Wydziału Zarządzania
• Journal: Central European Economic Journal
• Year: 2021
• Volume: 8
• Issue: 55

Dates

published

2021

Contributors

author

Marta Tache

• University of Economic Studies, Bucharest, Romania

References

• Abraham, S., & Cox, P. (2007). Analyzing the determinants of narrative risk information in UL FTSE 100 annual reports. The British Accounting Review, 39, 227–248.
• Accounting Standards Board (ASB). (2009). Rising to the challenge, a review of narrative reporting by UL listed companies. London, UK: Accounting Standard Board.
• Adams, R., Almeida, H., & Ferreira, D. (2009). Understanding the relationship between founder–CEOs and firm performance. Journal of empirical Finance, 16(1), 136–150.
• Aljifri, K. (2008). Annual report disclosure in a developing country: The case of the UAE. Advance in accounting. Incorporating Advances in International Accounting, 24, 93–100.
• Al-Shammari, B. (2014). Kuwait corporate characteristics and level of risk disclosure: A content analysis. Journal of Contemporary Issues in Business Research, 3(3), 128–153.
• Amendments of IFRS 7. (2010). Endorsement of the amendments to IFRS 7 financial instruments: Disclosures – Transfers of financial assets. Retrieved from: http://ec.europa.eu/info/sites/info/files/20110316-effect-study_en.pdf.
• Bushee, B. J., & Miller, G. S. (2007). Investor relations, firm visibility, and investor following. Firm Visibility, and Investor Following (August 2007).
• Barzel, Y. (1982). Measurement cost and the organization of markets. Journal of Law and Economics, 25, 27–48.
• Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24, 3–37.
• Berle, A. A., & Means, C. G. (1932). The modern corporation and private property. New York, NY: Macmillan Publishing Co.
• Deumes, R., & Knel, R. W. (2008). Economic incentives for voluntary reporting on internal risk management and control systems. Auditing: A Journal of Practice and Theory, 27(1), 35–66.
• Easley, D., & O’hara, M. (2004). Information and the cost of capital. The journal of finance, 59(4), 1553–1583.
• Elliot, A. J., & Dweck, C. S. (Eds.). (2013). Handbook of competence and motivation. Guilford Publications.
• Elzahar, H., & Hussainey, H. (2012). Determinants of narrative risk disclosures in UL interim reports. Journal of Risk Finance, 13(2), 133–147.
• Elshandidy, T., Fraser, I., & Hussainey, K. (2013). Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies. International Review of Financial Analysis, 30, 320–333.
• Elzahar, H., & Hussainey, K. (2012). Determinants of narrative risk disclosure in UK interim reports. Journal of Risk Finance, 13(2), 133–147.
• Hassan, M. K. (2009). UAE corporations-specific characteristics and level of risk disclosure. Managerial Auditing Journal, 24(7), 668–687.
• Hauser, H. (1925). Le “Parfait Négociant” de Jacques Savary. Revue d’histoire économique et sociale, 1–28.
• Hellman, N., Carenys, J., & Moya Gutierrez, S. (2018). Introducing more IFRS principles of disclosure–will the poor disclosers improve?. Accounting in Europe, 15(2), 242–321.
• Hill, P., & Short, H. (2009). Risk disclosures on the second tier markets of the London Stock Exchange. Accounting and Finance, 49(4), 753–780.
• Himmelberg, C. P., Hubbard, R. G., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership structure and performance. Journal of Financial Economics, 53, 353–384.
• Holmstrom, B. (1985). The provision of services in a market economy. In R. P. Inman (Ed.), Managing the service economy: Prospects and problems (pp. 183–213). Cambridge, UK: Cambridge University Press.
• Iatridis, G. (2008). Accounting disclosure and firm's financial attributes: Evidence from the UK stock market. International Review of Financial Analysis, 17, 219–241.
• IFRS 7. (2005). Financial instruments: Disclosure. Retrieved from: https://www.ifrs.org/issued-standards/list-of-standards/ifrs-7-financial-instruments-disclosures/
• Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305–360.
• Khlif, H., & Hussainey, K. (2016). The association between risk disclosure and firm characteristics: a meta-analysis. Journal of Risk Research, 19(2), 181–211.
• Lajili, K., & Zeghal, D. (2005). A content analysis of risk management disclosures in Canadian annual report. Canadian Journal of Administrative Sciences, 22(2), 125–142.
• LaPorta, R., Lopez-de-Silanes, F., Schleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.
• Lindenberg, E. B., & Ross, S. A. (1981). Tobin's q ratio and industrial organization. Journal of Business, 41, 1–32.
• Linsley, P. M., & Shrives, P. J. (2006). Risk reporting: a study of risk disclosures in the annual report of UL companies. The British Accounting Review, 38(1), 387–404.
• Linsley, P., & Shrives, P. (2000). Risk management and reporting risk in the UK. Journal of Risk, 3(1), 115–112.
• Liu, Y. (2006). A content analysis of external risk reporting in UK public telecommunications companies. Unpublished: University of Nottingham. MA.
• LaFond, R., & Watts, R. L. (2008). The information role of conservatism. The Accounting Review, 83(2), 447–478.
• Mokhtar, E. S., & Mellett, H. (2013). Competition, corporate governance, ownership structure and risk reporting. Managerial Auditing Journal.
• Mihkinen, S. (2013). The usefulness of firm disclosure under difference firm risks, investor-interest and market conditions, new evidence from Finland. Advance in Accounting in Corporate Advance in Internal Accounting, 29, 312–331.
• Miihkinen, A. (2012). What drives quality of firm risk disclosure? The impact of a national disclosure standard and reporting incentives under IFRS. The International Journal of Accounting, 47(4), 437–468.
• Mokhtar, E. S., & Mellett, H. (2013). Competition, corporate governance, ownership structure and risk reporting. Managerial Auditing Journal, 28(9), 838–865.
• Mork, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 27, 595–612.
• Ntim, C. G., Lindop, S., & Thomas, D. A. (2013). Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre-and post-2007/2008 global financial crisis periods. International Review of Financial Analysis, 30, 363–383.
• Ojo, M. (2010). The Role of the IASB and Auditing Standards in the Aftermath of the 2008/2009 1 Financial Crisis. European Law Journal, 16(5), 604–623.
• Oliveira, J. S., Rodrigues, L. L., & Craig, R. (2011b). Voluntary risk reporting to enhance institutional and organizational legitimacy: Evidence from Portuguese banks. Journal of Financial Regulation and Compliance, 19(3), 271–288.
• Oliveira, J., Rodrigues, L. L., & Craig, R. (2011a). Risk-related disclosure practices in the annual reports of Portuguese credit institutions: an exploratory study. Journal of Banking Regulation, 12(2), 100–118.
• Panzar, J. C., & Willig, R. D. (1981). Economies of scope. American Economic Review, 71, 268–272.
• Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies, 22(1), 435–480.
• Schrand, C. M., & Elliott, J. A. (1998). Risk and financial reporting: A summary of the discussion at the 1997 AAA/FASB conference. Accounting Horizons, 12(3), 271–282.
• Skinner, D. J. (1994). Why firms voluntarily disclose bad news. Journal of Accounting Research, 32, 38–60.
• Souissi, M., & Khlif, H. (2012). Meta-analysis review of disclosure level and cost of equity capital. International Journal of Accounting and Information Management, 20(1), 49–62.
• Watson, A., Shrives, P., & Marston, C. (2002). Voluntary disclosure of accounting ratios in the UK. The British Accounting Review, 34(4), 289–313.
• Watts, R. L., & Zimmerman, J. L. (1983). Agency problems, auditing and the theory of the firm: Some evidence. The Journal of Law and Economics, 26(3), 613–633.
• Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall.
• Wernerfelt, B., & Montgomery, C. A. (1988). Tobin's q and the importance of focus in firm value. American Economic Review, 78, 246–250.
• Zeithaml, V. A. (1981). How consumer evaluation processes differ between goods and services. In J. H. Donnelly and W. R. George (Eds.), Marketing of services (pp. 186–190), Chicago, IL: American Marketing Association.

Identifiers

DOI

10.2478/ceej-2021-0002

Biblioteka Nauki

1356520