Accepted Manuscript

Title: Islamic Financial Institutions, Corporate Governance,

and Corporate Risk Disclosure in Gulf Cooperation Council
Countries

Author: Abed Al-Nasser Abdallah Mostafa Kamal Hassan

Patrick L. McClelland

PII: S1042-444X(15)00011-0
DOI: http://dx.doi.org/doi:10.1016/j.mulfin.2015.02.003
Reference: MULFIN 469

To appear in: J. of Multi. Fin. Manag.

Received date: 23-11-2014

Accepted date: 2-2-2015

Please cite this article as: Abdallah, A.A.-N., Hassan, M.K., McClelland, P.L.,Islamic
Financial Institutions, Corporate Governance, and Corporate Risk Disclosure in Gulf
Cooperation Council Countries, Journal of Multinational Financial Management
(2015), http://dx.doi.org/10.1016/j.mulfin.2015.02.003

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 Islamic Financial Institutions, Corporate Governance, and Corporate Risk
Disclosure in Gulf Cooperation Council Countries

Abed Al-Nasser Abdallah*

School of Business Administration, American University of Sharjah, P.O. Box: 26666

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Sharjah, UAE. Email: abedabdallah@aus.edu, Tel +971 6 515 2594, Fax +971 6

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5585065.

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Mostafa Kamal Hassan
College of Business Administration, University of Sharjah (on leave from Alexandria
University, Egypt), P. O. Box 27272, Sharjah, UAE. Email: mhssan@sharjah.ac.ae, Tel:

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+971 6 5050571, Fax: +971 6 5050100.

Patrick L. McClelland
School of Business Administration, American University of Sharjah, P.O. Box: 26666

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Sharjah, UAE. Email: pmcclelland@aus.edu, Tel +971 6 515 4601, Fax +971 6 5152893.
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Abstract

Using content analysis we evaluate the determinants of corporate risk disclosure in a

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sample of 424 publicly traded firms in the Gulf Cooperation Council countries. We
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hypothesize that corporate risk disclosure will be lower in Islamic financial institutions

when compared to conventional financial institutions and higher in firms that have high
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quality corporate governance contexts. We also argue that corporate risk disclosure will
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vary across the Gulf Cooperation Council countries despite sociocultural and regulatory
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similarities. Results are generally supportive of our hypotheses. Implications for theory

and practice are discussed.

Keywords: Corporate Risk Disclosure; Islamic Financial Institutions; Conventional

Financial Institutions, Corporate Governance; Disclosure; Corporate Communication;

JEL: G2, G21, G3, M1, M4, F3

*Corresponding author

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Page 1 of 41
1. Introduction

Over the past several years standards of risk reporting have been shown to be a

critical dimension of corporate disclosure. A riskier business climate often results in a

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riskier investment climate. To reduce this inherent risk investors demand that financial

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statements include information that is relevant in helping to accurately assess the risks

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and uncertainties concerning a business enterprise’s future cash flows and operating

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results. It is widely accepted that risk reporting results in both greater transparency and

heightened investor confidence with benefits to the market performance of the firm (e.g.

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Meier et al., 1995; Solomon et al., 2000; Schrand and Elliot, 1998; Cabedo and Tirado,

2004; Linsley and Shrives, 2006; Abraham and Cox, 2007; Linsley and Lawrence, 2007,
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Hassan, 2009, 2014).

Much of the empirical work to this point has focused on the standards of the risk
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reporting practices of publicly-traded firms in developed countries ranging from the

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United Kingdom (e.g., Solomon et al., 2000; Linsley and Shrives, 2006; Abraham and
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Cox, 2007; Iatridis, 2008; Linsley and Lawrence, 2007; Elshandidy et al., 2013) to Italy
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(Beretta and Bozzolan, 2004; Maffei et al., 2014), Canada (Lajili and Zéghal, 2005), the

United States (Rajgopal, 1999; Linsmeier, Thirnton, and Venkatachalam, 2002; Jorion,
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2002; Schrand, 1997), Australia (Poskitt, 2005), Finland (Miihkinen, 2013), Spain

(Madrigal et al., 2012), and Portugal (Oliveira et al., 2011 a, b). Notwithstanding the

work of Amran, Rosli, and Hassan (2009), Mokhtar and Melett (2013), Elkelish and

Hassan (2014), and Hassan (2009; 2014) very little attention has been given to the risk

reporting practices of publicly traded firms in emerging economies.

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Page 2 of 41
With the exception of Dobler et al. (2011) who studied the risk disclosure practices of

U.K., U.S., Canadian, and German manufacturing firms in a multi-country sample very

few studies have investigated the risk disclosure practices of firms outside a single

country context. Specifically, empirical work has focused on the risk disclosure practices

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of financial (Oliveira et al., 2011a; Maffei et al., 2014; Hassan, 2014) and non-financial

(Oliveira et al., 2011b, Madrigal et al., 2012; Elshandidy et al., 2013) firms in the context

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of single-country studies.

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This study extends prior work by evaluating the risk disclosure practices of firms

operating in the Gulf Cooperation Council (“GCC”) countries, which includes Bahrain,

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the Kingdom of Saudi Arabia, Kuwait, Qatar, the Sultanate of Oman, and the United

Arab Emirates. Specifically, we evaluate the impact of firm level characteristics on

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corporate risk disclosure (“CRD”) practices in a sample of 424 publicly traded GCC
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firms. This empirical context is unique in that despite having developed relatively new
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market strategies typically associated with Western economies such as market

diversification, economic deregulation, and the reformation of economic life (Anderson,

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2000; Europa Regional Surveys of the World, 2003, 2004; Kamla and Roberts, 2010)
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firms in GCC countries are generally considered to operate in an Arab-Islamic context

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that is often considered to be opaque in terms of disclosure practices (Kamla and Roberts,

2010). Notwithstanding this view, investors have become increasingly interested in

stabilizing the capital markets in an Arab-Islamic context that is home to many

international financial institutions, a center of regional trade, and is being integrated into

the global economic system with increasing speed (Kamla and Roberts, 2010). Hence, the

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Page 3 of 41
adoption of international standards of risk reporting (“ISFR”) is a critical component of

this process.

In as much, this study is a comprehensive evaluation of the risk reporting

practices of three different types of GCC firms including financial (Islamic), financial

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(non-Islamic), and non-financial firms. Accordingly, the study identifies the institutional

characteristics that yield variation in the risk reporting practices of firms operating in

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different sectors of the GCC. It is noteworthy that, unlike conventional financial

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institutions, Islamic financial institutions adhere to Islamic principles while attempting to

meet emerging international standards of risk reporting (Olson and Zoubi, 2008). GCC

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countries are similar in that they have similar sociocultural characteristics, share a

common language, are dependent on natural resources, have similar levels of wealth, and
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pursue development in the social, economic and political spheres simultaneously
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(Baydoun, Maguire, Ryan, and Willett, 2013). Given these similarities publicly traded
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firms in the GCC are also similar in that they comply with Basel II requirements

(Baydoun et al., 2013). These characteristics yield an isomorphic move towards greater
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similarity in the risk reporting practices of firms in the GCC.

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This study, therefore, is novel in that it investigates firm-level determinants of the

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risk reporting practices of GCC firms. Specifically, it evaluates the extent to which CRD

practices vary as a function of financial institution type whereby we expect that Islamic

financial institutions will disclose less risk than their conventional counterparts. The

study is also novel in that it evaluates CRD practices as a function of firm-level

governance characteristics. Lastly, we evaluate the risk disclosure practices of 424

publicly traded GCC firms by using the content analysis of annual reports. This approach

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is interesting because the typical annual report has not only become a device that

provides financial information but also conveys complex strategies and information about

the character of the firm (Campbell et al., 2009).

Several important findings emerge from this study. First, we find that Islamic

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financial institutions disclose less corporate risk than do their non-Islamic peers. Using a

firm-level corporate governance score as a proxy for governance quality we also show

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that CRD is more likely in firms that have high quality corporate governance contexts.

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Lastly, we find that the risk disclosure practices of GCC firms vary by country. The rest

of the paper is organized as follows. In section 2 we define corporate risk, review the

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CRD literature, and develop our hypotheses. In section 3 we discuss the methodology

used to test our model. In section 4 we discuss the results of the study while the study’s
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conclusions, limitations, and points of emphasis for future research are discussed in the
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last section.
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2. The determinants of corporate risk disclosure: Theory and hypotheses

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2.1 Definitions of risk and risk reporting

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The definition of corporate risk is a complex question. Cabedo and Tirado (2004)
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define risk as “a series of internal and external factors that condition a corporation’s

wealth, challenges, opportunities and threats” (p.184). Further, they specify risk as the

potential loss or improvement of a corporations’ wealth that arises from the interaction of

these factors. Schrand and Elliott (1998) assert that risk refers to the potential for loss and

opportunities. Linsley and Shrives (2006) add that risk is characteristic of “any

opportunity or prospect, or of any hazard, danger, harm, threat or exposure, that has

already impacted upon the company or may impact upon the company in the future or of

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Page 5 of 41
the management of any such opportunity, prospect, hazard, harm, threat or exposure”

(p.389). Despite a relevant concern for the potential for loss it is clear that risk must

comprise concerns for two-sided volatility: both the potential for loss and gains. Given

this definition we adopt an equally two-sided approach to what constitutes risk reporting.

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In this regard, CRD is defined as the reporting of the circumstances that may cause the

value of a firm to increase or decrease as well as the measures that are introduced to

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minimize such risk (Hassan, 2009).

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2.2 Literature review and hypotheses development

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Several studies have shown CRD to be related to changes in firm share price (e.g.

Rajgopal, 1999; Linsmeier et al., 2002; Jorion, 2002; Schrand, 1997; Wong, 2000; Uddin
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and Hassan, 2011). Given the material relevance of the impact of CRD on this critical

measure of market performance it is important that investigation explicates the

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underlying determinants of variability in CRD. Some work has been done in this area
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with recent empirical work linking CRD to firm-level variables including firm size (e.g.
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Amran et al., 2009; Linsley and Shrives, 2006; Lopes and Rodrigues, 2007), the number
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of exchanges a firm is listed on (e.g. Lopes and Rodrigues, 2007; Oliveira el al., 2011a),

firm ownership structure (e.g. Abraham and Cox, 2007; Mokhtar and Melett, 2013), and
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director type (e.g. Abraham and Cox, 2007 Oliveira el al., 2011b).

In a related stream of research empirical work evaluates the prevalence of CRD in

emerging economies (e.g. Amran et al., 2009; Hassan, 2009, 2014, Elkelish and Hassan,

2014). For instance, Amran et al. (2009) investigated the relationship between firm-level

characteristics and risk disclosures made in the non-financial sections of annual reports.

Using a methodology employed by Linsley and Shrives (2006) and Abraham and Cox

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Page 6 of 41
(2007) to study firms in the U.K., Amran et al. (2009) showed that both firm size and

industry type were significant predictors of CRD in Malaysia. It should be noted that this

study was the first to evaluate the prevalence of CRD of firms operating in an Islamic

context. Following Amran et al. (2009), Hassan (2009) evaluated the impact of firm-

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specific variables on CRD in the United Arab Emirates. Unlike Amran et al. (2009),

however, Hassan (2009) did not find firm size to be a predictor of CRD while industry

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type was. Elkelish and Hassan (2014) examined the influence of organizational culture,

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expressed in terms of Clan, Adhocracy, Market and Hierarchy culture, on CRD in the

United Arab Emirates. Yet, that study did not underscore the influence of Islamic rules on

CRD.

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In an unrelated stream of research researchers examine risk narrative disclosures
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(“RNDs”) (Deumes, 2008; Oliveira et al., 2011b; Hassan, 2014). Deumes (2008)
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examined RNDs by analyzing the textual risk information that was published in the
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prospectuses of a sample of Dutch firms listed on the Amsterdam Stock Exchange.

Hassan (2014) used legitimacy theory and impression management to evaluate how UAE
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financial institutions applied different risk reporting strategies to restore their reputations
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and credibility after the occurrence of global financial crisis. Findings indicated that the
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managers of UAE financial institutions used defensive or assertive tactics to influence the

perceptions of readers of their annual reports. Likewise, Oliveira et al. (2011a) explored

factors that affect the voluntary reporting of risk information by Portuguese banks. They

found that voluntary risk reporting enhances Portuguese banks’ legitimacy through their

compliance with the institutional pressures to adopt Basel II requirements.

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Page 7 of 41
 This study extends this growing line of inquiry in that it evaluates the impact of

firm level as well as industry level determinants on CRD in an Islamic emerging market

context, the GCC. It is novel in the sense that it also evaluates this relationship across

countries rather than focusing on one country’s institutional environment. In terms of the

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methodology used, this study is also novel in that it classifies the textual information

provided in annual reports into one of seven different risk-reporting categories (see table

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1). This study, therefore, explores the variance in CRD across these categories, different

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sectors - non-financial, financial (Islamic) and financial (non-Islamic) - and different

countries in the GCC.

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2.2.1 Islamic versus non-Islamic financial institutions.

Within the GCC some financial institutions operate under a set of constraints
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guided by the Islamic legal code, or Sharia. Islamic finance grew from an isolated
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business activity to an important component of the global financial system (El-Gamal,

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2006). Economic demand for Islamic finance signals the importance of Islamic principles

with many Muslims believing that their business activities should be guided by the rules
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of Islamic law whereby the main objective is to ensure general well-being and justice,
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values that often conflict with the free market focus on profit maximization (Rahman,
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2000).

This legal regime is inherently conservative in that it imposes three constraints on

Islamic financial institutions that conventional financial institutions are not subject to.

First, Islamic financial institutions are prohibited from either paying or receiving riba, or

interest (Merchant, 2012; Olson and Zoubi, 2008). Second, Islamic institutions lend funds

to debtors in the context of a profit and loss sharing system (Khan, 2012). Specifically,

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Page 8 of 41
Islamic institutions must share risk under either Mudarabah or Musharakah. Under

Mudarabah, Islamic financial institutions receive funds from the investing public and use

those funds in any activity that the management deems appropriate so long as such

activities are halal, not forbidden by Islamic law. Under Musharakah, financial

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institutions make loans to borrowers who will use the funds to make investments that are

approved by the bank (Olson and Zoubi, 2008). The financial institution then pools the

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profits and losses from its various investments and shares them with its depositors

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according to a predetermined formula (Olson and Zoubi, 2008). Lastly, Islamic financial

institutions are prohibited from engaging in gharar, or taking unnecessary risks and

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engaging in excessive speculation (Merchant, 2012).

In contrast to the legal system under which Islamic financial institutions operate,
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conventional financial institutions operate under more relaxed legal constraints in their
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efforts to pursue profit maximization. For instance, conventional financial institutions

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regularly generate income from the spread between the interest charged to debtors and

the interest paid to depositors whereby the varying rates of interest charged to debtors is
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associated with the risk of the underlying investment (e.g. Mohammad et al., 2008).
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Since the principles that guide Islamic financial institutions are more conservative
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than are those that govern conventional financial institutions Islamic financial institutions

are less likely to be engaged in, and therefore report, risk than are their conventional

counterparts. Hence, we hypothesize that:

H1. CRD will be lower in Islamic financial institutions than in conventional

financial institutions.

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Page 9 of 41
2.2.2 Quality of corporate governance mechanisms

Conflicts between shareholders and managers arise because managers hold less

than 100% of the firm’s residual claims. As a result, managers do not capture the gains of

their value-maximization efforts (e.g. investments in research and development). Because

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managers do not consume the full yield of their productive efforts, they are expected to

consume pecuniary (e.g. use of corporate jets) and nonpecuniary perquisites (e.g.

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unrelated diversification). Agency theorists have asserted that this set of conditions

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results from information asymmetry, which leaves managers in control of the firm’s

systems and resources (e.g. Jensen and Meckling, 1976).

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Shareholders have the capacity to reduce information asymmetry through the

monitoring of managerial decisions and performance by implementing effective

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corporate governance mechanisms. Such mechanisms impose a system of checks and
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balances designed to curtail the likelihood that information asymmetry will be used to
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conceal and distort information that is critical to the firm’s shareholders. Concern for the

quality of governance mechanisms not only reduces the likelihood that information
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asymmetry will be exploited in the interest of the firm’s top managers, it also incentivizes
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top managers to disclose relevant risk-related information in an effort to signal

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managerial competency and public accountability through compliance with institutional

requirements thereby resulting in greater transparency.

As a result, top managers are incentivized to reduce the extent of such monitoring

by signaling an alignment of their interests with those of shareholders whereby effective

governance mechanisms will lead to the disclosure of greater information to the firm’s

shareholders (Chen and Jaggi, 2000; Eng and Mak, 2003; Gul and Leung, 2004; Healy

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and Palepu, 2001; Ho and Wong, 2001). In a sample of Malaysian firms Haniffa and

Cooke (2002) showed that, although the presence of a non-executive board Chairperson

did not lead to more disclosure of corporate risk, the disclosure of risk-related

information actually decreased when directors were related family members. This finding

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is consistent with the corporate governance literature (e.g. Daily and Johnson, 1997;

Fredrickson, Hambrick and Baumrin, 1988; Lajili, 2009; McClelland and Brodtkorb,

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2014; Shen and Cannella, 2002; Van Essen et al., 2012).

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Hence, we argue that higher quality governance mechanisms will reduce

information asymmetry thereby leading to the disclosure of corporate risk. Therefore, we

hypothesize that:

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H2: CRD will be positively associated with the quality of the firm’s corporate
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governance mechanisms.

2.2.3 Country effect

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A country’s institutional norms and regulations exert a constraining influence

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over organizations that operate within its regulatory context leading to mimetic
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isomorphism (DiMaggio and Powell, 1983). Specifically, a country’s accounting

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regulators will encourage, and sometimes mandate, the disclosure of risk-related

information in their annual reports in a way that will lead disclosure practices of firms
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within that country to become less variable over time (Solomon et al., 2000; Cabedo and

Tirado, 2004; Abraham and Cox, 2007; Linsley and Lawrence, 2007; Hassan, 2009;

Poskitt, 2005; Lopes and Rodrigues, 2007). The regulatory frameworks of GCC countries

contain provisions that require the disclosure of risk-related information as part of a

broader approach to corporate governance. For instance, the disclosure standards

implemented by the Bahrain Monetary Agency (BMA) regulates the corporate

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governance and risk management practices of Bahrain’s publicly traded firms (Baydoun

et al., 2013). The UAE has several stock market listing conditions that require potential

registrants to similarly disclose risk-related information in their annual reports (Hassan,

2009). For example, listed firms are required to establish different types of reserves,

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which are a means to manage corporate risks and consequently may affect CRD (Hassan,

2009; 2014). With the exception of Saudi Arabia, which has its own national accounting

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standards, commercial laws in GCC countries require that firms adhere to generally

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accepted accounting principles (Baydoun et al., 2013).

Because GCC countries have not developed a set of financial reporting standards

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specific to regional conditions firms in the GCC follow International Financial Reporting

Standards (IFRSs). This means that GCC countries are obliged to apply IFRS 7, which
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imposes the disclosure of market, liquidity, and cash flow risk information. Although the
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regulatory constraints are narrow, managers have the capacity to use discretion with
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which to make decisions about the quality of information they disclose (Combes-Thuélin

et al., 2006; Dobler et al. 2011). Such discretion allows for variance in risk information
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that is disclosed beyond the minimum threshold requirements of IFRS 7.

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Accordingly, the disclosure of risk information is expected to vary across GCC

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countries as a function of differences in their regulatory frameworks. Therefore, we

hypothesize that:

H3: CRD will vary by GCC country.

3. Data, variables, and methodology

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Page 12 of 41
 INSERT TABLE 1 HERE

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3.1 Data

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The initial sample was comprised of 672 firms that were listed on GCC stock

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exchanges as of the end of 2009. The annual reports of these companies and their

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industry classifications were collected from Zawya (a database specific to companies in

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the MENA region) and company websites. We include only those firms that published

annual reports in English resulting in a final sample of 424 firms. Table 1 indicates the

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frequency of firms in the sample across the six GCC countries as well as the distribution

of the sample across financial and non-financial sectors. The financial sector is further
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decomposed into Islamic and non-Islamic financial institutions.
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3.2. Variables
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3.2.1. Corporate Risk Disclosure (CRD) Index

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Following Hassan (2009) we develop a CRD index that measures both the type
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and number of instances of CRD as our dependent variable. However, we modified our

index so as to be applicable to all firms in the GCC. Specifically, we remove items that
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are specific to the UAE and add items that are relevant to all GCC countries. After these

modifications, the index incorporates 45 types of risk disclosure that were then clustered

into seven dimensions of risk disclosure (see Table 2). The dimensions are accounting

policies, derivatives hedging, financial risks, general risks, financial instruments,

reserves, and segment information.

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Page 13 of 41
 INSERT TABLE 2 HERE

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3.2.2. Control and explanatory variables

Large firms are more likely to have political processes that allow them to manage

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relationships with stakeholders (Watts and Zimmerman, 1986). Firm size has been shown

to predict CRD (Amran et al., 2009). RSIZE is a control variable that was measured as the

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firm’s total assets. Firms with higher levels of debt typically work to reduce information

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asymmetry by disclosing more information to their stakeholders (e.g. Abraham and Cox,

2007; Holthausen, 1990; Iatridis, 2006; Linsley and Shrives, 2006; Lopes and Rodrigues,

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2007). RLeverage is a control variable that was measured as the firm’s total debt divided

by its total assets. LReserves is a control variable that represents the amount of legal
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reserves, which the corporation was required to disclose in its 2008 annual report. Some
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GCC countries were early adopters of IFRS. Early adoption of IFRS provides an
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opportunity for companies to learn and apply these complex standards earlier than their

peers. YIFRS is a control variable measured in the number of years since a firm first
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implemented IFRS. Industry membership influences firm risk disclosure practices since
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firms in the same industry are more likely to exhibit the same level of risk disclosure in
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order to avoid negative evaluation by the market (Lopes and Rodrigues, 2007). FNONF

is a categorical variable that is coded ‘1’ if the corporation is in the finance sector and ‘0’

if otherwise.

Our explanatory variables were constructed as follows: Islamic is a categorical

variable that is coded ‘1’ if the firm follows the Islamic (sharia) law and ‘0’ if otherwise;

Country Dummies are categorical variables that denote the domicile of each firm in our

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Page 14 of 41
sample. Firms are domiciled in one of the six GCC countries including Bahrain, Kuwait,

Qatar, the Sultanate of Oman, the Kingdom of Saudi Arabia, or the United Arab

Emirates. Country Dummies is coded to ‘1’ to denote the country of the firm’s domicile

and ‘0’ otherwise. RBasic is the ranking of the BASIC Score, which is a measure of the

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quality of the firm’s corporate governance context. It is a score that is given to each firm

and ranges from 0 to 10. The higher the score the better the quality of the firm’s corporate

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governance context. RBasic is calculated as the average of all scores obtained for the firm

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in each of three areas including trading history, corporate communication, and disclosure.

The BASIC score reports components that were published by the National

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Investor (NI) and the Institute of Corporate Governance in Dubai (HAWKAMAH1), UAE

(Halawi, H. and Awan, H., 2008).2 BASIC measures 43 parameters covering three
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different sub-groups (Trading History, Corporate Communications, and Disclosure).
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Trading History is an evaluation of volatility, length of trading history, liquidity and

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shareholding structure and consists of nine measures: stock volatility, market volatility,

trading history, trading frequency, average daily turnover, bid/ask spread, number of
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shareholders, possibility of foreign ownership, and the proportion of foreign ownership.

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Corporate Communication gauges the extent to which a company communicates with its
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shareholders and the broader market and consists of nine measures: history of publicly

available accounts, availability of a corporate website, availability of the latest annual

report on the website, availability of investor relations contact information, pre-

1
HAWKAMA is the brief name of the Institute of Corporate Governance that operate in Dubai, UAE, and
aim at developing and enhancing good governance practices in the GCC region. See
http://www.hawkamah.org/about_hawkamah/history/index.html.
2
The BASIC was published in 2008, and is titled: Back to BASICs: An alternative look at liquidity,
volatility and transparency, Sept. 2008. The report covers data for most, 581, GCC publicly-listed
corporations. The Basic components are available at http://hawkamah.org/wp-
content/uploads/2014/10/BASIC-Final-25.08.2008.pdf

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announcement of results publication date, holding of analyst meetings/conference calls,

annual general meeting (“AGM”) pre-announcement date, AGM’s notice period in days,

and earnings-per-share (“EPS”) calculation. Disclosure assesses access to, and quality of,

public corporate information and includes the following twenty five measures: disclosure

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of number of shareholders, disclosure of whether or not foreign ownership is allowed,

disclosure of percentage foreign ownership allowed, disclosure available in English,

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disclosure type, disclosure in non-alterable format, and complete interim results

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disclosure. In addition to the seven disclosure items above the annual reports of 581

companies have been screened for the presence of the following information:

corporate governance policies, board an

management/chairman’s report, financial performance summary, summary of operations,

sub-committees, director independence,

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executive/non-executive directors, management profiles, board member profiles, revenue
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breakdown by geography, revenue breakdown by business line, directors’ shareholdings,

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shareholders holding >= 5% of total shares, pre-emptive rights policy, proxy voting

policy, cumulative voting policy, disclosure of accounting policy, and auditor’s approval.
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The use of the BASIC score as a measure of the quality of corporate governance
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is valid for four reasons. First, it is a broad measure of the quality of a company’s
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corporate governance context. Second, it is the first and only published measure of

corporate governance for GCC listed companies that is published by a reputable

corporate governance organizations (e.g. HAWKAMAH). Third, BASIC is similar in

quality to prior measures of country-specific corporate governance scores used by

Baydoun et al. (2013) who asserted that honesty and trust are key elements of good

corporate governance and that these values are affected by the sociocultural

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Page 16 of 41
characteristics of a society. Hence, the BASIC Score both reflects the underlying

institutional characteristics that are unique to the members of the GCC as well as

international standards. Lastly, this measure has some similarities to other measures used

in previous studies on corporate governance (e.g. Klapper and Love, 2004; Durnev and

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Kim, 2005; Leal and Carvalhal-da-Silva, 2005; Da Silveira and Barros, 2007).

3.3. Methodology

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Using NUD*IST 6 we carried out content analyses of the 2008 annual reports of

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all 424 firms in our sample in order to evaluate both the types and instances of risk

disclosure. NUD*IST 6 allowed that we code each risk indicator and count the number of

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instances a risk indicator appears. Following Linsley et al. (2006) and Amran et al.

(2009) we divided this number by the total number of words in the annual report to
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determine the proportion of the document’s content that was used to disclose the firm’s
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risk.
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To test each hypothesis we conducted univariate and multivariate analyses. Our

univariate analysis is based on reporting the average CRD that is grouped, according to
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the aforementioned hypotheses, as Islamic versus Non-Islamic financial institutions, high

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versus low BASIC score/the BASIC score components, and country of origin. Our
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multivariate analyses were conducted using STATA 13 and were based on the following

regression equation:

CRD = β0RSize + β1RLeverage + β2Reserves + β3YIFRS + β4FNONF +

β5Islamic+ β7CountryDummies + β8RBasic

In each iteration of the multivariate analyses the dependent variable was one of

the seven risk disclosure dimensions.

17
Page 17 of 41
4. Presentation and discussion of results

4.1. Univariate Analysis

--------------------------------------------

INSERT TABLE 3 HERE

t
ip
--------------------------------------------

Table 3 reports the descriptive statistics (number of observations, means, standard

cr
deviations, and range) of all variables. On average, the highest CRD exists in the area of

us
the reporting of financial risks (0.97%) followed by the reporting of reserves (0.086%),

financial instruments (0.061%), derivatives hedging (0.0472%), accounting policies

an
(0.0467%), segment information (0.0041%), and general risk information (0.036%),

respectively. The average number of years that sample firms have been using IFRS is 15
M
years with a range of 10 years (minimum) to 23 years (maximum).
d

--------------------------------------------
te

INSERT TABLE 4 HERE

--------------------------------------------
p
ce

Table 4 indicates that Islamic financial institutions (0.0443%) are more likely to

report CRD than are non-Islamic financial institutions (0.0379%). The same is true of
Ac

accounting policies, financial risks, and reserves categories, where Islamic financial

institutions report more risks than non-Islamic financial institutions. It is worth noting,

however, that the difference in the mean CRD between Islamic financial institutions and

non-Islamic financial institutions is not significant for the overall and all-risk categories,

except for the financial risks category whereby the mean difference is significant at the

18
Page 18 of 41
10% significance level. In general, this suggests that on average the two groups report a

similar amount of risks.

--------------------------------------------

INSERT TABLE 5 HERE

t
ip
--------------------------------------------

Improving the level of corporate governance for companies operating in the GCC

cr
region has been a priority for most GCC governments, especially in the United Arab

us
Emirates, where the establishment of HAWKAMAH in 2004 aimed to foster corporate

sector reform and the development of good corporate governance practices that are

an
sustainable and adaptive to national requirements in the Middle East-North Africa

(MENA) region.
M
Consistent with this argument and with H2, Table 5 shows that the higher the
d

quality of a firm’s corporate governance context the higher the CRD. The average risk
te

reporting for firms with relatively low-quality corporate governance contexts is 0.0356%

compared to 0.0411% for firms with relatively high-quality corporate governance

p

contexts. The results are significant at the 1% level and also for the mean difference
ce

between the two groups. Similar results are also reported for trading history, corporate
Ac

communication, and for each of the seven CRD categories with the exception of

accounting policies and reserves.

--------------------------------------------

INSERT TABLE 6 HERE

--------------------------------------------

19
Page 19 of 41
 Table 6 provides mixed but interesting results at the country level. As for the

overall risk categories, CRD is the highest in Bahrain (0.0511%) followed by the UAE

(0.0459%), Kuwait (0.0420%), Qatar (0.0381%), Saudi Arabia (0.0372%), and Oman

(0.0243%), respectively. Nonetheless, CRD categories do not follow a similar order. The

t
ip
results are mixed even though some countries have a higher level of risk reporting in all

categories. For example, Bahrain is ranked first in terms of the reporting of risk in

cr
accounting policies, financial risks, and segment information. It is ranked second in terms

us
of the reporting of risk in financial instruments and segment information. Rankings for

the UAE, on the other hand, range between second and third place; Kuwait is between

an
third, fourth, and first in terms of the reporting of risk in reserves. Qatar takes fourth

place in most categories, whereas Oman is in the lowest ranks (five to six) for most of the
M
CRD categories. Saudi Arabia has a mix of different rankings depending on the type of
d

risk reporting. Overall, the results suggest differences in CRD vary across the GCC with
te

firms in Bahrain, the UAE, and Kuwait being the highest in terms of the reporting of risk.

These findings indicate that although most GCC firms follow IFRS the differences in
p

CRD across countries is due to differences in their regulatory environments.

ce

4.2 Multivariate Analysis

Ac

--------------------------------------------

INSERT TABLE 7 HERE

--------------------------------------------

Table 7 reports Pearson correlations. The highest correlations exist between the

BASIC score and corporate communication and disclosure. All other variables in the

Table exhibit relatively low correlations (below 50%), with few cases where the

20
Page 20 of 41
correlation is between 50% and 60%. Although there is no agreement among researchers

regarding the cut-off correlation percentage, Field (2000) suggests that correlations

greater than 70% may create concerns for multicollinearity. An evaluation of bivariate

correlations indicates that multicollinearity is not a concern in this study.

t
ip
--------------------------------------------

INSERT TABLE 8 HERE

cr
--------------------------------------------

us
Panel A of Table 8 reports results of the control variables while Panel B of Table

an
8 reports the results of our hypotheses tests. All results are reported using robust standard

errors. When CRD is regressed onto the control variables results indicate that large
M
(RSize), highly leveraged (RLeverage) firms that were early adopters of IFRS (YIFRS)

and which have greater reserve requirements (Reserves) reported more CRD than their
d

peers. These results are generally consistent across most of the seven risk categories.
te

However, the CRD and FNONF relationship was not statistically significant in any of the
p

regressions.
ce

To test our hypotheses, each of the measures of CRD was regressed onto Islamic

(H1), RBasic (H2), and the CountryDummies (H3) in an iterative manner. In general,
Ac

results indicate support for hypothesis 1 in which it was argued that Islamic financial

institutions would disclose less corporate risk than their non-Islamic peers. As expected,

the Islamic coefficient has a negative sign in each of the seven CRD regressions except

for the regression in which accounting policies are used as a measure of CRD.

Specifically, the Islamic coefficients are significant when the measure of CRD is overall

risk (p < .05), derivatives hedging (p < .10), financial and other risks (p < .10), financial

21
Page 21 of 41
instruments (p < .01), and segment information (p < .05). In hypothesis 2 we argued that

higher quality governance mechanisms would result in the greater disclosure of corporate

risk. Results indicate general support for this hypothesis. As expected, the RBasic

coefficient is positive in each of the seven CRD regressions. Specifically, the RBasic

t
ip
coefficient is significant when the measure of CRD is overall risk (p < .10), derivatives

hedging (p < .05), financial instruments (p < .10), and segment information (p < .10)

cr
--------------------------------------------

us
INSERT TABLE 9 HERE

--------------------------------------------

an
In subsequent analyses we regressed CRD onto each of the components of the

RBasic variable: trading history, corporate communication, and disclosure. Table 9

M
reports results, which indicate positive and significant relationships between CRD and
d

corporate communication as well as CRD and the level of disclosure. However, results
te

indicate a negative relationship between CRD and trading history. This evidence suggests

that both corporate communication and disclosure are critical to improving the risk
p

reporting of corporations. However, as is shown in Table 9, the relationship between

ce

CRD and the components of BASIC becomes statistically non-significant when we

Ac

account for the country of domicile.

The results shown in Table 9 indicate general support for hypothesis 3.

Specifically, results indicate that CRD varies according to differences in the institutional

environments specific to each of the GCC countries in our sample.3 When CRD is

measured as a function of overall risk the coefficient of the Bahrain categorical variable

3
Given that RYIFRS is a country dummy, unreported analysis shows that its inclusion in the regressions
with country dummies created multicollinearity problem with these dummies. Hence, YIFRS was dropped
from the analyses reported in Panel B of Table 5.

22
Page 22 of 41
is the highest at 0.0389% (p < .01) followed by Kuwait at 0.0339% (p < .01) and the

UAE categorical variable at 0.0285% (p < .05). When CRD is measured as a function of

the risk associated with accounting policies the coefficient of the Kuwait categorical

variable is the highest at 0.0548% (p < .01) followed by the UAE categorical at .0485%

t
ip
(p < .05) and the Bahrain categorical variable at .0439% (p < .10). When CRD is

measured as a function of the risk associated with derivatives hedging the coefficient of

cr
the Qatar categorical variable is 0.0575% (p < .10). When CRD is measured as a function

us
of financial and other risks the coefficient of the Bahrain categorical variable is the

highest at 0.0714% (p < .05) followed by the Kuwait categorical at .0509% (p < .10) and

an
the UAE categorical variable at .0445% (p < .10). When CRD is measured as a function

of the risks associated with reserves the coefficient of the Kuwait categorical variable is
M
0.0388% (p < .10). No other CRD-country relationship was significant at p < .10
d

irrespective of the measure of CRD used.

te

5. Conclusions and Implications

In this paper we explored the impact of firm-specific and country characteristics on

p

the CRD practices of firms in the GCC countries. Based on the results presented in this
ce

study the following conclusions can be made. First, Islamic financial institutions disclose
Ac

less risk than do non-Islamic financial institutions. We assert that this finding is reflective

of the inherently conservative nature of the principles that guide Islamic financial

institutions to provide financial products that serve the interests of society more broadly

than do firms that are more likely to be oriented to the pursuit of profit maximization.

Second, firms that operate in the context of better quality corporate governance appear to

disclose more risk than do their counterparts. This finding is consistent with agency

23
Page 23 of 41
theoretic arguments that assert that information asymmetry will diminish in concert with

shareholders’ capacity to impose monitoring on the firm’s top managers as a function of

having access to a higher quality of relevant information. Lastly, we find that CRD

practices vary across countries within the GCC. We assert that despite their sociocultural

t
ip
and institutional similarities GCC countries vary in the sophistication of the regulatory

environments in which their firms operate. This finding may be a function of the

cr
differences in time at which GCC countries adopted IFRS. Specifically, the early

us
adoption of IFRS appears to yield a learning advantage with respect to the adoption of

standards related to financial instruments, related parties’ transactions, and segment

an
reporting when compared to their late-adopting counterparts.

In the context of our sample Bahrain, Kuwait, and Oman adopted IFRS in 1986,
M
1991, and 1996, respectively while Saudi Arabia, Qatar, and the UAE adopted IFRS in
d

1992, 1999, and 1999, respectively. Given the disparity in the length of time that firms in
te

member countries will have had to become familiar with IFRS, it may be expected that

variance across countries exists in terms of both prevalence and the quality of reporting
p

by firms within them. For instance, all firms in Bahrain, Kuwait, and Oman adopted IFRS
ce

while only banks and finance and investment companies adopted IFRS in Saudi Arabia,
Ac

Qatar, and the UAE. Therefore, we assert that the prevalence of CRD varies by country

according to the time at which the country adopted IFRS (Al-Shammari, Brown, and

Tarca, 2008).

Our results offer important implications for theory and practice. First, this is the

first study that explores CRD in the context of the GCC countries, an economically

important and culturally varied geographic context. This focus is significant in that it

24
Page 24 of 41
sheds light on the risk-disclosing practices of firms that operate in an environment that is

often considered to be invariably opaque. Second, while we do not study the risk profiles

of Islamic institutions directly, our results suggest that Islamic financial institutions are

more likely to be risk-averse than are their non-Islamic counterparts suggesting a worthy

t
ip
pasture for future research. Lastly, our results show that better quality corporate

governance has a direct impact on the extent to which agency problems may be reduced

cr
in the context of firms operating in a region of the world that continues its integration into

us
the global economic system. Notwithstanding this result, GCC regulators should continue

their efforts towards the implementation of emerging international standards of corporate

governance.

an
One limitation of the study is that the way in which corporate governance was
M
measured departs from the measures commonly used in the literature. However, unlike
d

the measure developed by the World Bank which evaluates country-level governance
te

quality, this measure focuses on each firm listed on GCC exchanges and is prepared by

the National Investor, a leading investment management firm in Abu Dhabi, UAE, in
p

collaboration with the Institute for Corporate Governance, HAWKAMAH.

ce

This study may be extended in several ways. First, we believe that a rich pasture
Ac

of research lies in the evaluation of the performance implications of the CRD practices of

GCC firms. Second, very little is known about the characteristics of the top managers and

top management teams of GCC firms and how their demographic, psychological, and

sociological characteristics impact the risk disclosure practices of the firms they manage.

Lastly, we see as fruitful the evaluation of specific governance mechanisms and their

impact on CRD. Specifically, we see the evaluation of the impact of ownership structure,

25
Page 25 of 41
board structure, and top manager compensation on the CRD practices of GCC firms as a

potentially rich area of study.

t
ip
cr
us
an
M
d
p te
ce
Ac

26
Page 26 of 41
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Table 1: Frequencies of Firm by Country and Industry
Final Sample
Initial
Country Sample Segment Islamic/non Islamic COUNT TOTAL
Financial non-Islamic 16
Bahrain 44 Financial Islamic 7
non-Financial 9 32

t
Financial non-Islamic 32
206

ip
Kuwait Financial Islamic 15
non-Financial 97 144
Oman Financial non-Islamic 29
126

cr
non-Financial 81 110
Financial non-Islamic 10
Qatar 44 Financial Islamic 6

us
non-Financial 19 35
Financial non-Islamic 2
Saudi Arabia 130 Financial Islamic 1
non-Financial 8 11

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Financial non-Islamic 39
UAE 122 Financial Islamic 11
non-Financial 42 92
Total 672 424
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d
p te
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Table 2: Dimensions of the CRD Index
Category Type of reported risks Category Type of reported risks
Risk Management Derivatives
Objective of Holding Derivatives Face Value
Estimates Financial instruments Cumulative Change in Fair value
Collateral Assets Reserves

t
Financial Assets Impairment Statutory Reserves

ip
Assets Impairment Reserves Legal Reserves
Contingent Liabilities Geographical Concentration
Segment information

cr
Contingent Assets Customer Concentration
Lower of Cost or Market
Accounting Policies Contingency

us
Hedging Description
Derivatives hedging Cash flow Hedge
Pricing Risk

an
Commodity
Liquidity
Credit
M
Capital Adequacy
Changes in Interest Rates
Credit Risk Exposure
Operational Risk
d

Insurance Risk
te

Market Risk
Interest Rate
Exchange Rate
p

Financial and other risks Sensitivity Analysis

ce

Concentration of Credit Risk

Equity Risk
Exchange Rate
Customer Satisfaction
Ac

High Competition
Natural Disasters
Communications
Outsourcing
Reputation
Competition
Weather Conditions
General risks information Change in Technology

33
Page 33 of 41
Table 3: Descriptive Statistics
Variable NOBS Mean StdDev Min Max
Basic 5584 3.9100 1.3732 1.32 7.49
Trading history 5584 5.3393 1.3158 1.55 8.04
Corporate communication 5584 3.6172 1.9533 0 7.78
Disclosure 5584 3.7146 1.7485 0.9 8.08
Size 6784 12.5775 2.3438 0 18.1579
Leverage 6784 0.4823 0.2896 0 1.7217

t
LReserves 6784 131,190.36 478,125.07 -1624177 4689277

ip
Kuwait 6784 0.3396 0.4736 0 1
Oman 6784 0.2594 0.4384 0 1

cr
UAE 6784 0.2170 0.4122 0 1
Bahrain 6784 0.0755 0.2642 0 1
Qatar 6784 0.0825 0.2752 0 1

us
KSA 6784 0.0259 0.1590 0 1
Islamic 6784 0.0943 0.2923 0 1
YIFRS 6784 14.6580 4.0499 10 23
Accounting policies 6784 0.000467 0.0013 0 0.0169

an
Financial risks 6784 0.00970 0.0024 0 0.0323
Financial Instruments 6784 0.00061 0.0004 0 0.0088
General risk information 6784 0.000036 0.0004 0 0.0243
Reserves 6784 0.00086 0.0004 0 0.0121
M
Segment information 6784 0.000041 0.00005 0 0.0012
Derivative hedging 6784 0.000472 0.0013 0 0.0133
FNONF 6784 0.3962 0.4891 0 1
Note: Size and leverage are the natural logarithm of the total assets of firm, and total debts divided by total
d

assets, respectively, as of the end of 2008.

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Table 4: Univariate Analysis by Islamic vs. Non-Islamic Financial Institutions
Islamic vs. Non-Islamic
Types of Risk Disclosure NOBS Mean pv-T
Overall 1760 0.000443 (0.000)
Accounting Policies 400 0.000942 (0.000)
Derivatives Hedging 80 0.000229 (0.024)

t
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Financial and other Risks 640 0.001247 (0.000)
Islamic Financial instruments 120 0.000177 (0.028)
General Risk Information 320 0.000049 (0.000)

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Reserves 120 0.000436 (0.000)
Segment Information 80 0.000019 (0.105)

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KW-pv--χ2 (0.000)
Overall 16896 0.000379 (0.000)
Accounting Policies 3840 0.000699 (0.000)
Derivatives Hedging 768 0.000274 (0.000)

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Financial and other Risks 6144 0.000942 (0.000)
Non-
Islamic Financial instruments 1152 0.000245 (0.000)
General Risk Information 3072 0.000069 (0.000)
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Reserves 1152 0.000407 (0.000)
Segment Information 768 0.000016 (0.000)
KW-χ2 (0.000)
d

Overall 18656 (0.112)

Accounting Policies 4240 (0.647)
te

Derivatives Hedging 848 (0.532)

KW- Financial and other Risks 6784 (0.037)
pv--χ2 Financial instruments 1272 (0.824)
p

General Risks Information 3392 (0.514)

Reserves 1272 (0.355)
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Segment Information 848 (0.761)

Notes: Risk is expressed as a ratio and calculated as the number of words, for each of the 45 risk types that
are reported in the firm’s 2008 annual report, divided by the total number of words in that annual report.
Mean represents the average of all risks’ ratios in a particular category. pv-T is p-value of the student T-test
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statistics, and KW-pv-χ2 is the p-value of the chi-square of the Kruskal-Wallis test of the equality of the
mean across categories and groups. NOBS is the number of firm-CRD observations.

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Table 5: Univariate Analysis by the level of Corporate Governance (Basic) and its Components

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Basic Components of Basic
Trading History Level of Corporate Communication Level of Disclosure
pv-T pv-T pv-T pv-T

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Level Types of Risk Disclosure NOBS Mean NOBS Mean NOBS Mean NOBS Mean
Overall 7612 0.000356 (0.000) 7656 0.000348 (0.000) 7656 0.000325 (0.000) 7700 0.000386 (0.000)
Accounting Policies 1730 0.000736 (0.000) 1740 0.000708 (0.000) 1740 0.000670 (0.000) 1750 0.000769 (0.000)
Derivatives Hedging 346 0.000172 (0.000) 348 0.000139 (0.000) 348 0.000148 (0.000) 350 0.000222 (0.000)

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Financial and other Risks 2768 0.000943 (0.000) 2784 0.000968 (0.000) 2784 0.000879 (0.000) 2800 0.000989 (0.000)
Financial Instruments 519 0.000136 (0.000) 522 0.000143 (0.000) 522 0.000103 (0.000) 525 0.000153 (0.000)
Low
General Risk Information 1384 0.000062 (0.004) 1392 0.000089 (0.000) 1392 0.000083 (0.000) 1400 0.000058 (0.006)
Reserves 519 0.000433 (0.000) 522 0.000368 (0.000) 522 0.000380 (0.000) 525 0.000501 (0.000)

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Segment Information 346 0.000013 (0.011) 348 0.000022 (0.001) 348 0.000013 (0.011) 350 0.000013 (0.011)
KW-X2 (0.000) (0.000) (0.000)
Overall 7744 0.000411 (0.000) 7700 0.000420 (0.000) 7700 0.000443 (0.000) 7656 0.000382 (0.000)

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Accounting Policies 1760 0.000699 (0.000) 1750 0.000726 (0.000) 1750 0.000764 (0.000) 1740 0.000664 (0.000)
Derivatives Hedging 352 0.000370 (0.000) 350 0.000404 (0.000) 350 0.000395 (0.000) 348 0.000322 (0.000)
Financial and other Risks 2816 0.001006 (0.000) 2800 0.000982 (0.000) 2800 0.001071 (0.000) 2784 0.000961 (0.000)
High Financial Instruments 528 0.000340 (0.000) 525 0.000334 (0.000) 525 0.000374 (0.000) 522 0.000325 (0.000)
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General Risk Information 1408 0.000084 (0.000) 1400 0.000057 (0.000) 1400 0.000063 (0.000) 1392 0.000088 (0.000)
Reserves 528 0.000359 (0.000) 525 0.000424 (0.000) 525 0.000412 (0.000) 522 0.000290 (0.000)
Segment Information 352 0.000022 (0.001) 350 0.000013 (0.005) 350 0.000022 (0.001) 348 0.000022 (0.001)
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KW-X2 (0.000) (0.000) (0.000)

Overall (0.000) (0.000) (0.000) (0.000)
Accounting Policies (0.809) (0.160) (0.316) (0.292)
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Derivatives Hedging (0.001) (0.000) (0.000) (0.152)

KW- Financial and other Risks (0.011) (0.540) (0.000) (0.095)
pv--χ2 Financial Instruments (0.003) (0.000) (0.000) (0.011)
General Risk Information (0.000) (0.708) (0.222) (0.000)
Reserves (0.656) (0.446) (0.362) (0.181)
Segment Information (0.046) (0.647) (0.043) (0.040)
Notes: Risk is expressed as a ratio and calculated as the number of words, for each of the 45 risk types that are reported in the firm’s 2008 annual report, divided by the total number of words in that annual report. Mean represents
the average of all risks’ ratios in a particular category. Basic is a score that is given to each firm and ranges from 0 to 10, of which the higher the score the higher the level of corporate governance a firm enjoys. Basic for each firm
is calculated as the average of all scores obtained for the firm in each of three areas that composes the Basic score, and these are: Trading history, corporate communication, and disclosure. pv-T is p-value of the student T-test
statistics, and KW-pv-χ2 is the p-value of the chi-square of the Kruskal-Wallis test of the equality of the mean across categories and groups.

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Table 6: Univariate Analysis by Country of Origin

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Bahrain Kuwait Oman Qatar Saudi Arabia UAE
KW-pv-
Risk Type NOBS Mean pv-T NOBS Mean pv-T NOBS Mean pv-T NOBS Mean pv-T NOBS Mean pv-T NOBS Mean pv-T X2
Overall 1408 0.000511 (0.000) 6336 0.000420 (0.000) 4840 0.000243 (0.000) 1540 0.000381 (0.000) 484 0.000372 (0.000) 4048 0.000459 (0.000) (0.000)
Accounting Policies 320 0.000851 (0.000) 1440 0.000838 (0.000) 1100 0.000499 (0.000) 350 0.000633 (0.000) 110 0.000402 (0.000) 920 0.000835 (0.000) (0.000)

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Derivatives Hedging 64 0.000006 (0.178) 288 0.000210 (0.000) 220 0.000175 (0.000) 70 0.000575 (0.017) 22 0.000607 (0.060) 184 0.000413 (0.000) (0.000)
Financial and other Risks 512 0.001515 (0.000) 2304 0.001055 (0.000) 1760 0.000660 (0.000) 560 0.000805 (0.000) 176 0.000728 (0.002) 1472 0.001112 (0.000) (0.000)
Financial Instruments 96 0.000435 (0.001) 432 0.000183 (0.000) 330 0.000111 (0.000) 105 0.000299 (0.024) 33 0.000442 (0.120) 276 0.000363 (0.000) (0.337)
General Risk Information 256 0.000159 (0.000) 1152 0.000054 (0.035) 880 0.000093 (0.000) 280 0.000010 (0.012) 88 0.000097 (0.026) 736 0.000043 (0.000) (0.000)
Reserves 96 0.000567 (0.000) 432 0.000589 (0.000) 330 0.000153 (0.000) 105 0.000342 (0.000) 33 0.000290 (0.034) 276 0.000421 (0.000) (0.009)

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Segment Information 64 0.000042 (0.048) 288 0.000011 (0.032) 220 0.000009 (0.017) 70 0 22 0.000041 (0.112) 184 0.000027 (0.011) (0.004)
KW_pv-X2 (0.000) (0.000) (0.000) (0.000) (0.002) (0.000)

Notes: Risk is presented as a ratio and calculated as the number of words, for each of the 45 risk types, reported in the firm’s 2008 annual report divided by the
total number of words in that annual report. pv-T is p-value of the student T-test statistics, and KW-pv-χ2 is the p-value of the chi-square of the Kruskal-Wallis

ed
test of the equality of the mean across categories and groups. NOBS is the number of firm-CRD observations.
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Table 7: Correlation Matrix

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Note: Size and leverage are the natural logarithm of the total assets of firm, and total debts divided by total assets, respectively, as at the end of 2008.
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Table 8: Multivariate Analysis by CRD Type
Accounting Derivatives Financial and Financial General Risk Segment
Overall Policies Hedging other Risks Instruments Information Reserves Information

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Variable Estimate pv-T Estimate pv-T Estimate pv-T Estimate pv-T Estimate pv-T Estimate pv-T Estimate pv-T
Panel A
Intercept 0.000532 (0.000) 0.000532 (0.000) 0.000044 (0.150) 0.000654 (0.000) 0.000030 (0.220) 0.000082 (0.000) 0.000263 (0.000) 0.000012 (0.047)

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RSize 0.00008 (0.043) 0.000082 (0.043) 0.000323 (0.000) 0.000135 (0.026) 0.000187 (0.000) -0.000033 (0.147) 0.000089 (0.096) 0.000061 (0.994)
RLeverage 0.000119 (0.003) 0.000119 (0.003) 0.000196 (0.002) 0.000221 (0.000) 0.000138 (0.001) -0.000005 (0.827) -0.000058 (0.233) -0.000001 (0.886)
RYIFRS 0.000162 (0.000) 0.000162 (0.000) -0.000164 (0.017) 0.000250 (0.000) -0.000008 (0.869) 0.000018 (0.452) 0.000275 (0.000) 0.000003 (0.677)
LReserves 0.000027 (0.144) 0.000083 (0.607) 0.000095 (0.129) 0.000062 (0.310)

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0.000019 (0.003) 0.000020 (0.003) 0.000029 (0.001) 0.000041 (0.000)
FNONF -0.000047 (0.318) -0.000047 (0.318) 0.000029 (0.693) -0.000064 (0.374) -0.000030 (0.568) -0.000032 (0.052) -0.000013 (0.798) 0.000015 (0.194)
Adj R-Sq 0.0119 0.0216 0.1041 0.0304 0.0968 0.0050 0.0319 0.0675
NOBS 15356 3490 698 5584 1047 2792 1047 698

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Panel B
Intercept 0.000160 (0.162) 0.000146 (0.495) -0.000191 (0.501) 0.000283 (0.283) -0.000182 (0.422) 0.000164 (0.073) 0.000195 (0.400) 0.000045 (0.157)
RSize 0.000057 (0.112) 0.000055 (0.413) 0.000273 (0.002) 0.000066 (0.420) 0.000164 (0.021) -0.000029 (0.309) 0.000038 (0.600) -0.000012 (0.235)
Rleverage 0.000110 (0.001) 0.000127 (0.031) 0.000259 (0.001) 0.000174 (0.016) 0.000161 (0.010) -0.000015 (0.553) -0.000034 (0.592) -0.000011 (0.218)
LReserves

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0.000017 (0.000) 0.000017 (0.011) 0.000000 (0.072) 0.000024 (0.004) 0.000034 (0.000) 0.000020 (0.494) 0.000068 (0.355) -0.000012 (0.219)
FNONF 0.000170 (0.000) 0.000096 (0.135) -0.000065 (0.939) 0.000394 (0.000) 0.000105 (0.122) -0.000035 (0.204) 0.000038 (0.587) 0.000048 (0.000)
IslamicD -0.000122 (0.024) 0.000084 (0.934) -0.000254 (0.058) -0.000208 (0.094) -0.000356 (0.001) -0.000044 (0.992) -0.000157 (0.152) -0.000034 (0.022)
RBasic 0.000066 (0.074) 0.000035 (0.616) 0.000194 (0.034) 0.000085 (0.313) 0.000129 (0.077) 0.000010 (0.731) 0.000097 (0.192) 0.000018 (0.085)
Kuwait
pt
0.000339 (0.003) 0.000548 (0.010) 0.000125 (0.658) 0.000509 (0.051) 0.000151 (0.503) -0.000066 (0.467) 0.000388 (0.092) -0.000032 (0.311)
Oman 0.000062 (0.599) 0.000207 (0.346) 0.000010 (0.997) 0.000095 (0.725) 0.000030 (0.896) -0.000059 (0.526) -0.000125 (0.598) -0.000056 (0.083)
UAE 0.000285 (0.012) 0.000485 (0.023) 0.000167 (0.554) 0.000445 (0.089) 0.000179 (0.428) -0.000083 (0.364) 0.000141 (0.540) -0.000032 (0.311)
Bahrain
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0.000389 (0.002) 0.000439 (0.056) -0.000276 (0.365) 0.000714 (0.011) 0.000267 (0.274) 0.000044 (0.652) 0.000247 (0.321) -0.000020 (0.560)
Qatar 0.000180 (0.139) 0.000323 (0.156) 0.000575 (0.056) 0.000214 (0.444) 0.000282 (0.242) -0.000122 (0.209) 0.000116 (0.637) -0.000052 (0.122)
Adj R-Sq 0.0138 0.0161 0.0934 0.0213 0.0784 0.0016 0.0330 0.0394
NOBS 15356 3490 698 5584 1047 2792 1047 698
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Note: Size and leverage are the natural logarithm of the total assets of firm, and total debts divided by total assets, respectively, as of the end of 2008.

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Table 9: Multivariate Analysis with Basic Components
Without Country Control With Country Control

Corporate Corporate
Communication/ Communication/
Variable Trading History Disclosure Trading History Disclosure
Intercept 0.00036 (0.000) 0.00033 (0.000) 0.00019 (0.095) 0.00016 (0.165)

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RSize 0.00014 (0.000) 0.00009 (0.005) 0.00009 (0.016) 0.00007 (0.061)

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RLeverage 0.00009 (0.004) 0.00009 (0.003) 0.00011 (0.000) 0.00011 (0.001)
RYIFRS 0.00014 (0.000) 0.00014 (0.000)
LReserve 0.00002 (0.000) 0.00002 (0.000) 0.00002 (0.000) 0.00002 (0.000)

cr
FNONF 0.00020 (0.000) 0.00021 (0.000) 0.00017 (0.000) 0.00017 (0.000)
IslamicD -0.00010 (0.065) -0.00013 (0.015) -0.00012 (0.030) -0.00013 (0.021)
RCC 0.00008 (0.020) 0.00004 (0.297)

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RDisc 0.00005 (0.096) 0.00001 (0.768)
RTH -0.00007 (0.016) -0.00003 (0.338)
Kuwait 0.00031 (0.006) 0.00033 (0.004)
Oman 0.00009 (0.426) 0.00009 (0.456)

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UAE 0.00027 (0.021) 0.00027 (0.017)
Bahrain 0.00040 (0.001) 0.00040 (0.001)
Qatar 0.00018 (0.150) 0.00017 (0.157)
Adj-R2 0.0122 0.0122 0.0136 0.0136
M
F 28.154 24.771 20.270 18.627
NOBS 15355 15355 15355 15355
Notes: Size and leverage are the ranking of the natural logarithm of the total assets of firm, and total debts
divided by total assets, respectively, as of the end of 2008; NOBS is the number of firm-CRD observations.
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Research Highlights
*We explore corporate risk disclosure (CRD) for the GCC listed firms.
* CRS is lower in Islamic financial institutions compared to conventional counterparts
*CRD is higher in firms that have high quality corporate governance contexts.
*CRD varies across the GCC countries despite their cultural and institutional similarities.
*CRS is the highest in Bahrain, followed by Kuwait, UAE, Qatar, Saudi Arabia, and
Oman

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