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The determinants and use of risk disclosure quality: Evidence from an emerging market

The determinants and use of risk disclosure quality: Evidence from an emerging market

Neri, Lorenzo ORCID: 0000-0001-6627-0386, Elshandidi, Tamer and Guo, Yingxi (2017) The determinants and use of risk disclosure quality: Evidence from an emerging market. [Working Paper] (Submitted)

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Few studies have focused on emerging markets owing to difficulties in identifying the real effect of disclosures on these economies, where many institutional variables influence the growth of capital markets. This paper fills this gap by focusing on China, a country that has had a greater influence than others on worldwide economies in recent years. This paper investigates the main drivers for the quantity and the quality of risk disclosure, and further studies the impact of such disclosure on market liquidity.

The sample comprises all financial firms listed in the Shanghai A-shares market for the period 2013-2015. The quality of risk disclosure is measured through a multidimensional approach which encompasses three factors: quantity of disclosure, coverage of disclosure, and the semantic properties of depth and outlook. This paper utilises manual content analysis of annual reports to capture risk disclosure quality and quantity. To identify the main drivers for quality and quantity of risk disclosure and then to observe their impact on market liquidity, this paper uses ordinary least squares (OLS) and fixed-effects estimations.

Findings (limit 100 words)
Our study highlights that Quantity and Quality risk disclosure show a general positive interaction with size and book to market, a moderate negative interaction with capital structure and a marked negative interaction with the presence of board independent directors. These findings confirm that at this stage of Chinese market development, companies’ characteristics and market indicators can capture some of the risk disclosure configurations, while the corporate governance indicators do not provide significant results. When we reintroduced the previous analyses on a yearly basis, we find that limited role for risk disclosure in improving market liquidity over the crisis period (2014 and 2015), suggesting that our previous conclusion is mainly driven by 2013.

Research limitations/implications:
The sample of this paper is limited to financial firms in China. Further research is needed either to look at non-financial firms or to compare between these types of firms. The usage of manual content analysis limits our ability to investigate risk reporting drivers and its impact on market liquidity on a large scale. Further research is needed to study risk reporting practices in China over a longer period of time. This paper makes an important contribution to extant literature on risk disclosure by confirming the high tendency towards reporting information related to the past compared to the future.

Practical implications:
Our paper is likely to be of interest to investors, since there has been no significant previous research of the quality of risk disclosure practices in China. The importance of this paper stems from documenting several reporting incentives concerning not only firms’ quantity, but also firms’ quality of risk reporting. Collectively, our findings support activism for reforms and the enhancement of regulations in China in order to make the market more efficient.

Originality/value (limit 100 words)
This study provides new evidence on the impact of firm characteristics on risk disclosures and highlights the impact of risk disclosure practices on market liquidity of financial companies in China’s market. Furthermore, this paper confirms previous findings on the Chinese market (Ball et al., 2000; Zou and Adams, 2008) in which, given a decreasing but still strong state presence, there is higher stock volatility and weak corporate governance.

Item Type: Working Paper
Uncontrolled Keywords: Chinese Market; Companies' Characteristics; Emerging Markets; Financial Institutions; Quantity and Quality; Risk Disclosure
Faculty / School / Research Centre / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Last Modified: 18 May 2019 22:27

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