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Corporate risk disclosure: its determinants and its impact on the company's cost of equity capital.

Rajab, Bassam (2009) Corporate risk disclosure: its determinants and its impact on the company's cost of equity capital. PhD thesis, Edinburgh Napier University.

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    Abstract/Description

    Risk disclosure has received considerable interest and attention in recent times.
    The aim of this research is to examine risk information disclosure in annual reports
    with the aim of establishing trends. Further, this research empirically examines the
    influence of four firm factors on the level of risk disclosure in the annual reports.
    These factors are firm size, leverage, industry and US-dual listing. In addition, the
    research examines the association between risk disclosure and the company's cost
    of equity capital (and information asymmetry) after controlling for firm size and
    market beta.
    The annual reports of a sample comprising 52 UK non-financial companies, drawn
    from the FTSE-100 index, for three different periods (1998,2001, and 2004) were
    sought, collected, and analysed. Content analysis was applied and risk disclosure in
    the annual report was measured according to the number of sentences disclosed
    and trends were analysed over the six-year period. Risk disclosure sentences were
    classified according to four main quality dimensions: type of risk, the nature of the
    evidence, the type of news disclosed, and news time-frame. A four-stage dividend
    growth model was used to measure the company's cost of equity capital. Bid-ask
    spread and stock volatility were also used as proxies for information asymmetry.
    Only when investors perceive that the information is relevant, risk information
    disclosed in the annual report can lead to a reduction in the cost of equity capital.
    The study found, in aggregate, a trend of increasing amounts of risk disclosure in
    the annual report. Risk disclosure was found primarily qualitative; good and
    neutral; and non-time. There is minimal disclosure of quantified risk information
    and bad news information. These results suggest that accounting rules and
    regulations, in addition to recommendations from accounting institutions, have
    influenced the increase in the level of risk information disclosed, though without
    ensuring the quality of the disclosed risk information. US-dual listing and industry
    are found to be significantly related to risk disclosure, but firm size and leverage
    are found to have insignificant association with the level of risk disclosure. These
    findings suggest that the extent of annual report risk disclosure is driven more by
    regulation than by the market.
    The findings reveal that for the largest UK companies with high analyst following,
    no relation was found between risk disclosure level and cost of equity capital.
    However, the study found that both quantitative and bad news risk information are
    significantly and negatively related to stock volatility. Moreover, a significant and
    negative association was found between bad news risk disclosure and bid-ask
    spread. This suggests that firms with greater bad news and quantitative disclosure
    enjoy a reduction in information asymmetry as measured by proxies for
    information asymmetry. Overall, the analysis suggests that UK companies make
    substantial risk disclosure but the usefulness of this disclosure is limited.

    Item Type: Thesis (PhD)
    Uncontrolled Keywords: risk analysis; information disclosure; equity capital; trends; information asymmetry;
    University Divisions/Research Centres: The Business School > School of Accounting, Economics and Statistics
    Dewey Decimal Subjects: 600 Technology > 650 Management & public relations > 657 Accounting
    Library of Congress Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
    Item ID: 3744
    Depositing User: Mrs Lyn Gibson
    Date Deposited: 05 May 2010 10:41
    Last Modified: 12 Jan 2011 04:55
    URI: http://researchrepository.napier.ac.uk/id/eprint/3744

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