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We have carried out this research so as to ascertain annual reports as far as risk information disclosure is concerned, for assistance in trend establishment. We also analyse the effects of 4 different factors on risk disclosure levels that are mentioned in annual reports. The 4 factors include: performance, liquidity and leverage, size, and growth. A sample was analysed that included 78 different non-financial UK companies that were taken from FTSE-100 index. We made use of content analyse so s to understand and interpret this sample. The number of sentences that were revealed was a measure for us to assess the risk disclosure in the sample annual reports. These sentences were categorized in three ways for the sake of simplicity, namely, strategic risk, operation risk, and financial risk. Overall, our research indicated an increasing trend of risk disclosure in annual reports. This helps in concluding that regulations and rules relating to accounting, along with accounting institution’s recommendations, have an impact on this rise in the risk information disclosure. There is a strong correlation between risk disclosure and the firm factors. Our study also suggests that the extent to which risk disclosure is stretched is influenced by the market or the rules. The general analysis is suggestive of the idea that UK firms disclose risk related information considerably, however, use of this information is not very easy. Chapter one…..Introduction Research Background For over a decade, regulators have been very concerned about risk disclosure levels. Regulators became even more concerned about the London Stock Exchange’s second tier markets. They try to devise ways for improving it. (Hill. & Short. 2009. Hassan, 2008. Abraham and Cox, 2007.
particularly for information regarding uncertainties and risks. however. Epstein and Palepu. Public demand relating to corporate information disclosure has risen considerably. Risk information disclosure is not merely helpful for investors. Firm’s external reporting. Management of portfolios gets harder for stakeholders if the annual reports have incoherent or inadequate information regarding risk (Linsley & Lawrence. 2000. 2000). 2002. It is not wrong to say that or research aims for ‘testing of annual reports’ risk disclosure levels’. 1999b). Healy and Palepu.. in particular the risk information they disclose for use by the annual report readers. 2000. (Deegan. 2 . C 2000). Corporate reports do not provide enough information for risk assessment. If the annual report is important as far as revealing the firm’s financial knowledge is concerned. 2003. but is also helps in making the firm’s position clear in the market. and hence users fail to make informed decisions. 2001. A survey carried out by UK’s institutional investors concluded firms’ annual reports give out risk information that is incoherent. Linsley and Shrives. 2005). relies on the content of the report and also on the people who use these reports. 1997. Various sophisticated approaches of risk management have been formed in past few years so as to facilitate managers regarding various risks (Linsley and Shrives. 1999. which in turn help in curtailing the quality gap that arises in reporting systems regarding internal risk management. Woods and Reber. it was suggested that firm directors take this into consideration. Solomon et al. We are primarily focused on analysis of UK firms. as suggested by literature such as Beattie and Pratt.Linsley and Shrives. Hence. 2006. ICAEW. Hence. and make sure that relevant information is available for potential investors and other concerned stakeholders for assessment purposes. ICAEW. was not adequate as far as uncertainties and risks are concerned. Schrand and Elliot. since users now ask for more relevant information so as to carry out risk assessment. 1998. and for evidence see ICAEW.
It was also agreed upon that financial reporting standards. 3 . 2007) We have also come up to conclude that if risk information is shared. that is referred to as ‘information asymmetry’. 2002. 1987. It is an issue of great importance since it may influence capital market functions. AIMR. or the International Accounting Standards Board (IASB). like those created by the UK Accounting standards Board (ASB). which in turn has lead to a problem of information.CICA. meanwhile analysis of the determining factors of narrative risk information in UK FTSE 100 annual reports is being done. failed to provide desired information to the report users. then the problem of asymmetric information may rise. It results from agency conflict as a result of separated ownership for business owners and business managers. 2005). Beattie.1997. Henceforth. it is possible for the institutions to keep shares for a longer duration. Eccles and Mavrinac. (Abraham & Cox. First two researchers are concerned with annual reporting and risk disclosure that assists stakeholders in making informed decisions after risk assessment. 1993. 1995. so much so that markets may completely or partially breakdown (Akerlof. 2005. The conventional financial reports were not sufficient for stakeholder facilitation in this regard. If managers do not share certain information with the business owners due to particular reasons. continental Europe’s civil law codes. 1970). 1999b. AICPA. Literature relating to corporate disclosure covers a whole lot about information problems.1994. 2005. such as information pertaining to uncertainty regarding measurements or commercial sensitivity. with narrowing internal reporting gap. 2002. IASB. external reporting gap stays wide. Risk disclosure cannot be ignored since the new economic system is greatly affected by the risk types as far as business failure or success is concerned (Lajili & Zeghal.
In the end. along with a discussion on the research objectives and aims. It should be kept in mind that we discuss risk disclosure with regard to regulation only. Risk disclosure is an endogenous variable for both of the analytic models. We also investigate the risk disclosure and risk reporting aims. We are able to distinguish between verifiable and non-verifiable risk reporting. The relationship between regulations and risk disclosure may be comprehended easily with the help of these models. We have discussed the two models in great detail. thesis’ structure outline is presented. To sum it up. Our area of study is corporate risk disclosure and in the later chapters we have presented an overview as well as justification for carrying out this location. This is an effort for bridging gap in the literature present regarding this subject. Rationale and Justification 4 . this study covers the business itself and the financial risks that are associated with it.As mentioned earlier. This chapter mainly aimed for establishing the context of our thesis. It is beneficial for an outsider since he/she can assess the financial position of a firm and may also anticipate future performance (Linsley & Shrives 2006). Our study defines risk reporting and also how it may benefit in anticipating future finances of the firms. we have analysed UK’s non-financial firms draw from FSTE100 index for risk disclosure study. A brief account of the research methods that were used for the purpose of this study is presented later. the cheap talk models and the discretionary disclosure models. They also assist business managers in finding ways of disclosing other firms’ risk information since they interact strategically on a constant basis with each other (Beattie & Mcinnes & Fearnley 2004).
one of them is the ease for people in general to handle their portfolios. Some researchers have instead covered risk information in great detail and its entirety. hence it is important for stakeholders to understand the situation properly.It is commonly believed that various businesses try not to disclose any information relating to risk in annual reports for the sake of maintenance of stakeholders’ interest.2006. It has also enabled authorities to take regulatory measures in this regard. 2002and Linsmeier and Pearson. Sometimes statistical data that is not so clear is used to disguise the stakeholders. 1997). Woods and Reber (2003) investigated annual reports for risk disclosure but not the possible factors that influence risk disclosure. Our study is based on the assumption that stakeholders who use annual reports are required to understand if they should rely on the annual reports or not. however only two factors. accounting researchers are compelled to delve into the area of risk reporting. Formerly. Non-financial UK firms were investigated for risk disclosure by Linsley and Shrives (2005). Since competition has increased a great deal and various firms have opted for risk disclosure. For instance. With the increasing discussion on this topic and also the requirement conditions. Even though various researches have been carried out in relation to this topic. Researches that focused on the 5 . Abraham and Cox.. They have also analysed annual reports for risk disclosure (Linsley and Shrives. other businesses are compelled to do so as well. 2005. 2007). that as risk level and firm size were tested while the rest were ignored. empirical literature is still not sufficient in this area. However. There are various advantages associated with risk disclosure n annual reporting. since they cannot be sure if the company is hiding some relevant information or not. they are focused on different aspects. studies were mainly concerned about particular risk types and examination of quantified risk disclosure in financial statements (Linsmeier et al. The issue of transparency gained significance and hence it is now vital to reveal risk related information in annual reports.
Accounting researchers are also keen to find out the correlation between the determining factors and the disclosure itself. 6 . Hence. 2007.. et ( Abraham and Cox. growth. Abraham et al. Haniffa and Cooke. size. and the motivating factors or incentives to the firms to allow for risk disclosure. 2007. Understanding the variations of risk disclosure. Investigating the objective of risk disclosure and determining factors with regard to corporate risk disclosure as UK firms practice in their annual reports. leverage. It is also important to focus on the weaknesses of risk reporting. Oliveira et al. The extent of risk disclosure is affected by varying determinants like leverage. Aims and objectives of the study We have based our research on the non-financial UK firms that are listed in FSTE100 index. Existing studies give us a good way to start off with this investigation. performance. Linsley and Shrives. and performance. 2005.1997). We used these factors since they are mostly used as autonomous factors in accounting disclosure. Evaluation of disclosure practices is also to be done so as to see if there are any modifications in corporate reporting. Wildstrom. 2004). size. In this research we have talked about factors such as liquidity. we have three main aims in relation with risk disclosure 1. 2006. It is also important to understand how far the disclosed information can be stretched. the factors that influence the firms’ decision to reveal information. 2006.. 2007. We are trying to investigate answers to the following Identification of what is to be reported by the firms. 2.determining factors have failed to provide unanimous results and there is a mixed outcome rather (Abraham and Cox. Beretta and Bozzolan.
ICAEW1999) that enhancement in sharing of risk information promotes corporate transparency. This is done so as to determine if the firm has actually shared real information in the annual report with interested stakeholders.3. For instance. The study also incorporates what risk disclosure means to regulatory bodies and the government. And finally. Moreover. Linsley and Shrives 2000.2002. To cut it short. Research Problems As stated before. we can say that this research deals with the question of determining factors as far as corporate risk disclosure is concerned. it is going to facilitate future studies in this area. We also try to analyse how well the firm directors have handled the information disclosure and if readers can understand what is implied by tat information. The significance of financial reports for the process of decision-making regarding investments. other questions that we have tried to investigate are: o Definition of risk and risk disclosure o The meaning of information that has been shared o Ways to evaluate risk disclosures 7 . sometimes it is hard for the readers to assess this information and draw a conclusion regarding firm’s performance.1997. Apart from this. The current practices in this regard are also identified and it is checked if the UK firms incorporated these developments into their approach. the research is focused on studying annual reports of UK firms that have included risk information in the annual reports. Apart from this major question. it is believed ( Botosan. Hail. it facilitates decision-making and helps in creation of a corporate image. It is also discusses how this information should be shared and what is the purpose of doing so. As a lot of data is included in these reports. we also try to seek whether disclosed information relies on something else or if it is disguised with confusing data. This in turn pressurizes these firms to improve risk disclosure.
. g. Consequently. It further enables investors to think about the timing and amount of the cash flows in future. along with the reasoning for choosing this methodology. as well as risk management.. 1998. 1999. Summary of Research Methods This research is empirical as well as descriptive. and research models. 2006) was used as the approach for collection of data for assessment of risk disclosure level in annual reports. They will also be able to highlight firms’ characteristics that disclose information in that way. in accordance with the set criteria (Weber. 1988). Content analysis (e. liquidity.o If there is a link between information disclosure and company’s characteristics. The investors and regulators will find it easy to determine the risk information type that is going to be disclosed by various firms in varying sectors. Campbell 2004. also the standard setters for framework development and the corporate risk disclosure requirements. methods. They also have idea about the likelihood of future cash flows. Milne and Adler. Content analysis enables codification of the data into several groups. and performance Research contributions This research adds to existing researches as we have highlighted the determining factors relating to risk reporting. It is going to benefit in different ways. sample selection. like growth. leverage. size. all types of users are affected. The research methodology used for our research is discussed in chapter 4. Investors must be able to understand and then create an opinion of their own regarding the risks that are likely to influence the firm. which includes statistical tests. Linsley and Shrives. Neu et al. It is quite obvious that increases in disclosed risk are going to attract users. There are other benefits as well as investors are able to carry out objective analysis of the reporting practices. Risk disclosure’s nature and extent is assessed 8 .
A discussion on corporate disclosure is presented in chapter 2 with particular attention on recent business trends and the issues relating to corporate reporting. they are all faced with more or less same disclosure pressure levels that result from different regimes in the capital market and regulations. Linsley and Shrives. Abraham and Cox. It is also a dependable and most used source. and environmental risk. 9 . Dunne et al. Summary of this chapter The introduction and outline of the main objectives is presented in chapter 1.. We chose annual reports as a measure since they are important for the users as far as acquiring information is concerned. N addition to this. 2006. This is beneficial since using FTSE-100 index businesses means incorporating those firms into our sample that are listed multiply. 2007). Moreover. It is a sensible decision to concentrate on the UK’s non-financial firms drawn from FTSE-100 index since we know how previous researches regarding risk disclosure practices addressed this topic (e. We later proceed to a discussion on problems regarding information and what users require. 2007.. Readers are also informed with the research’s theoretical perspective. There monitoring is supposed to be accurate and hence predicted analysis is likely to hold true (Kou and Hussain. A detailed account of former researches regarding corporate risk disclosure is presented. It is also important to see that FTSE-100 firms are the biggest businesses of UK that are usually audited by the biggest audit firms. 2007).using the number of sentences as a measure for annual reports. g. The literature on these issues is also discussed. operational risk. Strategic risk. are 3 types of risk disclosure. majority of the accounting codes and rules relating to corporate governance highlight the disclosures presented in annual reports. These are also evaluated for identification of gaps in the research works or literature.
in relation with all of the independent and dependent variables. It covers the aims. and performance of the firm.In the beginning of chapter 3. size. The research design and methods used for attaining the objectives and aims of this research have been discussed in chapter 4. questions. We also incorporate theoretical contexts into our research so as to form hypotheses that is to be tested in following chapters. A discussion on independent and dependent variables is presented next and it is advised that data be examined. Moreover. leverage. 10 . Furthermore. In the end. along with the research’s weaknesses. Disclosure is discussed with regard to its theoretical framework and different related theories are also analysed. Conclusions drawn from this chapter are discussed later. as well as the hypotheses of research. Research models along with sample selection procedures are discussed later. we define what disclosure means and its various types. the chapter 6 gives a brief account of the research findings while our contributions have been highlighted as well. statistical analysis outcome regarding relationship of disclosure and certain firm-specific traits such as liquidity. discussion on prospective future areas of study is also done. We also try to find out what incentive managers have when they share additional information relating to their businesses. growth. An overview of the sample and survey findings is presented in chapter 5.
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