4 Prior Research 4.1 Introduction There has been extensive research in the developed countries to examine the corporate disclosure in financial and non-financial companies. The focus of this chapter lies upon prior research on risk disclosure in (financial) companies. The following question will be answered in this chapter: What are the results of prior risk disclosure research? The second paragraph introduces the research papers that have evoked the research on risk disclosure by financial institutions. In the third paragraph studies on the extent of risk disclosures are discussed, on both financial and non-financial companies. The fourth paragraph continues with studies on the factors that influence risk disclosures. Research on the usefulness of risk disclosure is discussed in the fifth paragraph. Studies examining the association between the volume of risk disclosures made by within their annual reports and potentially relevant variables are very scarce, and that is the banks reason that also studies examining risk disclosure in firms are reviewed. The literature nonfinancial review in this chapter is used to develop hypotheses in the next chapter. 4.2 Initiation of risk disclosure research A large number of disclosure studies have been performed in the last 30 years but their primary focus has been analyses of corporate disclosures in general. Additionally, the majority of these prior studies have examined the annual reports of non-financial firms. The study of Linsley et al. (2006) specifically focused on risk and risk management disclosure within the banking sector and had therefore an exploratory aspect. With their paper, they intend to initiate risk disclosure research in the financial services arena (Linsley et al., 2006, p. 268). The results of their study will be discussed in paragraph 4.3.2. Before academic (empirical) research on the risk disclosure started, two papers were published in the field of accountancy focusing on risk and risk reporting. In 1998, it was the Institute of Chartered Accountants in England and Wales (ICAEW) that started a debate on the importance of risk reporting, publishing a discussion paper Reporting of The paper stated that quoted UK entitled “Financial Risk”. companies should voluntarily undertake to disclose risk information within a separate statement contained within the annual report. Furthermore, it concluded that the annual report did not present a coherent discussion of the risks that challenge the company and the action the directors are undertaking to manage those risks (Linsley and Shrives, 2005a, p. 211-212).
4 Prior Research 4.1 Introduction There has been extensive research in the developed countries to examine the corporate disclosure in financial and non-financial companies. The focus of this chapter lies upon prior research on risk disclosure in (financial) companies. The following question will be answered in this chapter: What are the results of prior risk disclosure research? The second paragraph introduces the research papers that have evoked the research on risk disclosure by financial institutions. In the third paragraph studies on the extent of risk disclosures are discussed, on both financial and non-financial companies. The fourth paragraph continues with studies on the factors that influence risk disclosures. Research on the usefulness of risk disclosure is discussed in the fifth paragraph. Studies examining the association between the volume of risk disclosures made by banks within their annual reports and potentially relevant variables are very scarce, and that is the reason that also studies examining risk disclosure in nonfinancial firms are reviewed. The literature review in this chapter is used to develop hypotheses in the next chapter. 4.2 Initiation of risk disclosure research A large number of disclosure studies have been performed in the last 30 years but their primary focus has been analyses of corporate disclosures in general. Additionally, the majority of these prior studies have examined the annual reports of non-financial firms. The study of Linsley et al. (2006) specifically focused on risk and risk management disclosure within the banking sector and had therefore an exploratory aspect. With their paper, they intend to initiate risk disclosure research in the financial services arena (Linsley et al., 2006, p. 268). The results of their study will be discussed in paragraph 4.3.2. Before academic (empirical) research on the risk disclosure started, two papers were published in the field of accountancy focusing on risk and risk reporting. In 1998, it was the Institute of Chartered Accountants in England and Wales (ICAEW) that started a debate on the importance of risk reporting, publishing a discussion paper entitled “Financial Reporting of Risk”. The paper stated that quoted UK companies should voluntarily undertake to disclose risk information within a separate statement contained within the annual report. Furthermore, it concluded that the annual report did not present a coherent discussion of the risks that challenge the company and the action the directors are undertaking to manage those risks (Linsley and Shrives, 2005a, p. 211-212).