The Determinants and Consequences of Risk Disclosure in Saudi Banks

Abstract

Purpose- The aim of this research is to address the current gap in the disclosure literature by investigating risk disclosure in a developing economy (Saudi Arabia). The current study aims to widen the understanding of risk disclosure levels, determinants and economic consequences, by firstly examining the levels of risk disclosure in the annual reports of both Islamic and non-Islamic listed banks, secondly by empirically exploring corporate governance and the demographic traits of top management teams as the determinants of voluntary risk disclosure practices in and thirdly by investigating whether the levels of voluntary risk disclosure in Saudi listed banks are value-relevant or not. \nDesign/Methodology/Approach- The sample consists of all banks listed on Tadawul. All data was collected from the annual reports of the sample banks from 2009 to 2013 using manual content analysis. Other variables were collected using DataStream and Bloomberg. This study develops two holistic risk disclosure indices to measure the levels of risk disclosure in both Islamic and non-Islamic banks. It also uses ordinary least squares regressions analysis to examine the effect of a combination of determinants stemming from corporate governance and demographic traits on risk disclosure. Ordinary least squares regressions analysis is also used in determining whether the levels of voluntary risk disclosure in Saudi listed banks are value-relevant or not. \nResults- The first empirical analysis shows that Islamic banks report less risk information than non-Islamic banks. However, the analysis also reveals that both Islamic and non-Islamic banks report relatively the same amount of risk information regarding the banks’ non-Islamic risk-related items. The second empirical analysis shows that Islamic banks report very low levels concerning Islamic risk-related items. It also shows that external ownership, audit committee meetings, gender diversity, education levels and profitability are primary determinants of risk disclosure practices in Saudi listed banks. Thirdly findings also exhibit that there is no association between the levels of voluntary risk disclosure and firm value as measured by the market to book value (MTBV). But, the results generated from the accounting based measure (ROA) show that there is a positively significant association between the levels of voluntary risk disclosure and firm value. \nPotential Contributions- This study contributes to the literature on general accounting disclosure and in particular advances and contributes to the literature on risk disclosure in developing economies. It also contributes to the understanding of the role of accounting information in relation to the levels, determinants and market valuation of a firm. Specifically, this study is significant in that it sheds light on the voluntary risk-disclosing practices of banks that operate in an environment that is often considered to be opaque. This investigation makes major contributions to the literature and increases the knowledge on risk disclosure and reporting practices in the annual reports of all listed Saudi banks, namely Islamic and non-Islamic banks. It makes a healthy contribution to the discussion on the levels, determinants, economic consequences and risk disclosure in banks annual reports. To the best of the researchers’ knowledge, no prior research has been conducted on the levels or the determinants voluntary of risk disclosure in Saudi Arabia. Also no prior research has been conducted on the relationship between firm value and levels of risk disclosure in general or in emerging markets. Therefore, this is the first study to investigate the levels, determinants and economic consequences of risk disclosure in this context. This study has also pioneered a novel contribution to the field of disclosure by incorporating the upper echelons theory into investigating disclosure. Particularly in this study this theory is extended into exploring the determinants of voluntary risk disclosure. \nImplications- The reported results should be useful to accounting and regulatory bodies by providing information about the inadequacies of risk reporting in Saudi banking sector. Regulatory institutions should be above all concerned about the disclosure needs of users. Therefore, SAMA, SOCOPA and CMA are called upon to find solutions to improve the reporting of risk information in the Saudi banking industry. The study also provides information for managers to keep investors satisfied about the risk that their banks encounter. Investors may use the findings for understanding risk disclosure behaviour of listed banks. It also informs regulators and investors about the importance and current levels of risk disclosure in all Saudi listed banks as well as informing them of the influence voluntary risk disclosure has on the value of the firm. It also calls upon managers who prefer to withhold from offering information to shareholder to be more transparent if they prefer to increase their banks market value and entice more investment. This can be used to increase the value relevance in the banking sector.

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