The association between risk disclosure and firm characteristics: a meta-analysis

Abstract

The empirical literature on the determinants of risk disclosures offers mixed results. This complicates efforts among stakeholders to understand the factors affecting firms’ decision to report risk information. The aim of our paper is to analyze the findings of 42 empirical studies using a meta-analysis technique. We examine whether differences in the findings are attributable to random error or due to legal and institutional systems, uncertainty avoidance, disclosure regime (mandatory vs. voluntary), industry types, and the proxies used to measure corporate characteristics. We find that all moderators affect the relationship between corporate size and risk reporting. Legal system, disclosure regime, industry types, and leverage ratio measurement moderate the association between leverage ratio and risk disclosure. Industry types and uncertainty-avoidance level affect the relationship between profitability and risk disclosure. Finally, the association between risk factor and risk disclosure is moderated by industry types. We discuss the implications of our findings and offer suggestions for future research.

Keywords:

• risk reporting
• legal system
• uncertainty avoidance
• disclosure regime
• industry types
• explanatory variables measurement
• meta-analysis

Notes

1. In risk-disclosure literature, three main proxies are used to measure the extent of risk disclosure, including sentences and word count (Amran, Bin, and Hassan 2009), disclosure index (Lajili and Zeghal 2005; Mohobbot 2005; Linsley and Shrives 2006), and a dummy variable proxy for study examining specifically internal control risk disclosure (Doyle, Ge and McVay 2007a). In addition, some studies combine word counts and disclosure index approach. With respect to disclosure type, some studies focus on specific risk disclosure (e.g. internal control), while others consider several types of risk reporting in their analysis (internal control risk, risk management, market risk).

2. For more details see Oliveira, Rodrigues, and Craig (2013), Tables 1–3, pages 36–44.

3. For these three variables we obtain less than 13 observations.

4. This classification is based on Stulz and Williamson (2003) Table 1 pages 323–324. Countries like Iran, Tunisia, Malawi, and UAE are not listed in this table. For Tunisia, Kuwait, and UAE, additional investigations show that they are classified as civil law countries, while Malawi is classified as common law setting. For Iran, no relevant information is found and thus, it is dropped from the analysis for this moderator.

5. Since Dobler, Lajili, and Zéghal (2011) encompasses four independent samples.

6. The tabulated Chi-square statistic with a degree of freedom of 42 (43-1).

7. We note here that the size measures are highly correlated when firms operate in sector with low level of intangibles assets. However, when firms operate in industries where intangible assets account for a large proportion of the assets (e.g. high-tech sector), there will be a gap between market capitalization and total assets. Empirical studies do not control for this factor in their analysis which limits our ability study its moderating effect.

8. It should be noted here that Souissi and Khlif (2012) document in their meta-analysis dealing with the effect of voluntary disclosure on cost-of-equity capital, a non-significant association between cost-of-equity capital and voluntary disclosure in high-disclosure environment, including Australia, UK, and USA. Given the inverse relationship between cost-of-equity capital and market capitalization, and the high weight of Australia, UK, and USA for the market capitalisation sub-sample, the same non-significant is expected for market capitalisation and risk reporting.

9. Countries classified in high uncertainty-avoidance group are: Australia, Belgium, Finland, Japan, Kuwait, Portugal, and Switzerland.

10. Countries classified in low uncertainty-avoidance group are: Canada, Netherlands, South Africa, Malawi, UK and USA.

11. This result should be interpreted with caution given the limited number of studies examined.

12. The tabulated chi-square statistic with a degree of freedom of 19 (20-1) accounts for 36.191.

13. For the purpose of ranking, we used the Association of Business Schools’ (ABS) list of journals (2010), in order to avoid confusion due to the availability of several university-specific journal rankings. This ranking considers quality journals and classifies them from grade 4 to grade 1. In our meta-analysis, quality journals are those reported in this raking. All the remaining are considered as decent or low-quality journals.

14. According to ABS, ranked journals are: Accounting and Finance, Auditing: Journal of Practice and Theory, British Accounting Review, Canadian Journal of Administrative Sciences, Journal of Accounting and Economics, Journal of Accounting Research, International Review of Financial Analysis, The International Journal of Accounting, Journal of International Accounting Research, Managerial Auditing Journal, Journal of Financial Regulation and Compliance, and The Journal of Risk Finance.

15. The fail-safe N accounts for four studies.