Research Output

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

  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.

  • Type:


  • Date:

    31 January 2009

  • Publication Status:


  • Library of Congress:

    HF5601 Accounting

  • Dewey Decimal Classification:

    657 Accounting


Rajab, B. Corporate risk disclosure: its determinants and its impact on the company's cost of equity capital. (Thesis). Edinburgh Napier University. Retrieved from


risk analysis; information disclosure; equity capital; trends; information asymmetry;

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