Introduction
Risk disclosure came to the center of
academic attention in recent years, especially from the accounting perspective.
The literature sailed out to explore the unknown ahead, and therefore
stimulated and inspired many researchers. The research might be horizontal
approach for now, but with more and more studies involved, it would go vertical
approach and this subject would become better understandable.
This article would continue as follow:
first paragraph briefly outlined the review article ‘ATTRIBUTES OF CORPORATE
RISK DISCLOSURE: AN INTERNATIONAL INVESTIGATION IN THE MANUFACTURING SECTOR’ by
Dobler et al. (2011). The second paragraph presented critical review of the
article brought up above. Lastly, this article finished with a conclusion and
my most humble and modest thinking.
What about Dobler et al. (2011)
This paper of Dobler et al. (2011) tried to
identify the attributes of corporate risk disclosure and the association
between quantity of risk disclosure and level of firm risk by carrying out
detailed content analysis of 160 annual reports from the U.S., Canadian, U.K.,
and German companies. There were three main research objectives Dobler et al. (2011)
aimed to test: (1) risk disclosure characteristics, (2) differences in risk
disclosure among different case countries, and (3) the relationship between
risk disclosure quantity and the level of firm risk. Dobler et al. (2011) found
that, among those case companies, managers made more qualitative and
non-forward looking disclosure in management reports rather than quantitative
and forward looking one. Furthermore, they found that there were different
levels of disclosure content among case countries, for example, the U.S. firms
tended to provide more risk disclosure, but the link between the amount of risk
disclosure and domestic disclosure regulation only played a limited part
explaining the difference, and that riskier companies tended to disclose more.
Critical review of Dobler et al. (2011)
The critical review of Dobler et al. (2011)
would be structured into following sections: the research area, the literature
review and the contribution, the sample selection and the research method, and
the results.
The areas of research
Before the world famous financial scandals
and crisis occurred, corporations and investors paid relatively little
attentions to risk reporting or risk disclosure because the future seemed very
promising at that time. One major issue is the asymmetric information between
internal information users and external information users, often referring to
managers and investors, misguiding information that could result in
inappropriate judgment of relocating monetary resources. The literature has
been pouring efforts related to in formation disclosure, extinguishing the
reason of voluntary or mandatory disclosure (Beyer et al., 2010), the decision
of investors (Daniel et al., 2002), the incentive for management decision (Deumes,
2008), and the correlation with regulation (Miihkinen, 2012), and even providing
a framework (Healy and Palepu, 2001). Similarly, risk disclosure of the firm
becomes gradually important due to globalization and severe competition, Abraham
and Cox (2007) outlined that several different aspects of risk disclosure has
been covered by researchers from the concern of insufficient information about
risk and risk management, broadly examining risk disclosure and categorizing
risk into different types, to investigating the quality of risk disclosure. However,
as mentioned in Linsley and Shrives (2006), the difficulty of performing risk
disclosures research started with the definition of risk. The literature has
various definitions in terms of many aspects. Dobler et al. (2011) tried to
bring together different studies done within individual country and then
identify the key factors compared with other countries, broadening the
horizontal aspect of the literature. Still, the problem of ill-defined 'risk'
was seen also in Dobler et al. (2011). It would lead to ambiguity if the
research failed to set boundary for the problem it set out to explore.
The literature review and the contribution
Linsley and Shrives (2006) investigated
risk disclosures within a sample of 79 UK company annual reports and tried to recognize
whether there was a relationship between the number of risk disclosures and
company size, and company risk level. This article later provided foundation
for Dobler et al. (2011) article, which was further built on in three aspects:
a) a more international approach, b) a more detailed coding instrument and c) a
multiple regression model for determining the relationship between risk
disclosure and various proxies. Nevertheless, one could still make argument that
the theoretical base for either Linsley and Shrives (2006) or Dobler et al.
(2011) was relatively weak. The lack of theoretical base support really
suggested that the literature should propose a consensus reaching framework or
underpinning theory in order to explain or to develop.
Dobler et al. (2011) pointed out that the
existing empirical studies about the attributes of risk disclosure only covered
specific items or sections, without large-scale and cross-country examination
to date, and didn’t prove the connection between the amount of risk disclosure
and the level of firm risk. The term ‘risk disclosure’ used in Dobler et al. (2011)
was not clearly defined; the authors provided a combination of definitions from
other academic papers but later on when examining the contents of annual report
adopted one specific paper’s definition, suggesting the difficulty of dealing
with non-specialized term and there’s no final decision of its coverage.
The contribution of Dobler et al. (2011)
was said to identify the similarity and differences among different countries,
and provide insights for harmonization of international regulatory bodies. The
debate arose again, approximate to the relevance of the international
accounting standards and the question whether the world needed only one set of
standards. Due to different cultural factors and actual practices among
countries, the consequences of single set of regulations were remained unknown.
After all, having a set of totally irrelevant unpractical rules could either
bring chaos or regain balance, yet the effects needed further evaluation.
The sample selection and the research method
Dobler et al. (2011) stated that the
rationale of choosing these case countries (US, UK, Germany and Canada) was
because 1) these countries represented largest domestic economics in North
America and Europe, 2) these countries were more concerned with risk
disclosures and thus with most advanced regulations on risk disclosures, 3) these
countries had more complex institutional settings, and 4) these countries were
the initial members of International Accounting Standards Board. Apparently,
the researchers chose to evaluate countries with more regulatory upon financial
markets rather than investigate emerging financial markets. Considering the
complexity of analyzing emerging financial markets without controlled
environment, future research could carefully apply the findings in Dobler et
al. (2011) and make further suggestion.
The focus group in Dobler et al. (2011)
would be manufacturing sector, for its broad coverage of different risks. The
researchers especially excluded financial firms because the risk financial
institutions faced differed in the essentials. Linsley and Shrives (2005)
pointed out that the essence of any bank was based on risk-taking business and
therefore the market expected relevant risk-related information disclosures.
Deumes (2008) outlined that prior studies in risk disclosure put much weigh on
quantified risk disclosure and specifically on market risk. This might provide
good reason for Dobler et al. (2011) to add more aspects into risk disclosure
research field. It seemed reasonable to follow the trail of thinking. As for
the aspects of risk types, one might consider manufacturing sector covering
more aspects than merchandising sector, but if taking the complexity to
extreme, the oil industry would be considered to cover the most aspects of risk
type. The justification of rationale was not very convincing and thus the
effort to determine attributes of risk disclosure might be in vain, especially
when dealing with cross-country analysis. The researchers should give more
description about the selection and again set the boundary of the discussion. For
a project covering multi-country data analysis, any in-depth cross referencing
research would take a lot of time and energy, and consequently lead to
tentative conclusion. Abraham and Cox (2007) chose the year of 2002 and
provided an explanation behind the choice: significant stock market decline and
volatility, which was a benchmark year for analyzing risk disclosure. The
boundary line was clearly drawn here in Abraham and Cox (2007).
The content analysis carried out in Dobler
et al. (2011) was assessed through two means of risk disclosure: the management
report and the notes to financial statements. Adopting the sentence count
rather than the word count, the researchers aimed to estimate the quantity of
risk disclosure not the quality, making a further suggestion which could be
improved in future study. This
would also help reducing biases while processing the counting procedure. Therefore,
the accuracy level was not so demanding. However, the process of coding was
questionable for the researchers only extract five sample annual reports from
each country handing to the independent coder. After coding completed, one of
the researchers then tested the consistency of the coding. Similar situation
happened in Abraham and Cox (2007), the way these studies ensured their
reproducibility was to have another inspector to view the work. To certain
level, bringing an independent inspector would definitely cut down the biases
and ambiguity, but it still remained controversial whether this so-called
independent third party proved to be unbiased. Also the time spending on the
reexamination of the results of coding wasn't reported, which might be crucial
in terms of thoroughly evaluating the results.
The results
Dobler et al. (2011) presented the finding
among four case countries, UK, US, Germany and Canada, included the amount of
disclosure sentences, the traits of risk disclosure, the relationship between
the level of risk management and the risk sources, the type of risk disclosure,
the time frame of risk disclosure, and the type of risk. Here I would only
concentrate on discussing the amount of sentences disclosure, and the time
frame of risk disclosure. Firstly, in terms of the amount of sentences
disclosure, no surprisingly US had the highest disclosure amount than others.
Considering the social situation such as financial scandal and the power U.S.
Securities and Exchange Commission therefore possessed, the disclosure
requirement environment in US should be more demanding than other countries.
However, onerous regulations could cause an illusion of what was not written down
should be permitted. This would bring up the dispute of whether to have
principle-based rules or code-based ones. Indeed making disclosure was crucial
for firms but there should be an authority to supervise the compliance (Linsley
and Shrives, 2005). Secondly, the time frame of risk disclosure meant whether
the risk disclosure identified any past, present, non-time specific and
forward-looking information. Similarly to the amount of sentences disclosure
result, US firms outperformed others in terms of providing forward-looking risk
disclosure. Clearly, the key issue here for analyzing the difference among
countries should put cultural, political and economic factors into
consideration and thus narrow the gap instead of widening it.
The regression model Dobler et al. (2011)
used contained many proxies, the variable sought to identify size effect and the
quantity of risk disclosure. The researchers applied beta factor as systematic
risk proxy and also consider leverage, operation leverage, share of foreign
revenue, and the existence of major customer as other risk proxies. Considerably,
compared to Abraham and Cox (2007) regression model, the one that Dobler et al.
used to evaluate the relation was carefully built. In quantifying the type of
risks, the researchers obviously sketched the blueprint in a broader view.
Conclusion
After discussing these following perspectives
of Dobler et al. (2011): the areas of research, the literature review and the
contribution, the sample selection and the research method, and the results, I
have come to a conclusion that Dobler et al. (2011) has provided a rich
discussion concerned with risk disclosure and opened up further opportunities despite
some minor defect. However, the researchers made a huge effort to undermine the
possible drawbacks they could foresee. Credits must be given to the attempts
even though the effects might be insignificant.
Reference list
Abraham, S., & Cox, P. (2007). Analysing the determinants of
narrative risk information in UK FTSE 100 annual reports. The British Accounting Review, 39(3), 227-248.
Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. (2010).
The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics,
50(2), 296-343.
Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor
psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1),
139-209.
Deumes, R. (2008). Corporate Risk Reporting A Content Analysis of
Narrative Risk Disclosures in Prospectuses. Journal
of Business Communication, 45(2), 120-157.
Dobler, M., Lajili, K., & Zéghal, D. (2011). Attributes of
corporate risk disclosure: an international investigation in the manufacturing
sector. Journal of International
Accounting Research, 10(2), 1-22.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry,
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accounting and economics, 31(1), 405-440.
Linsley, P. M., & Shrives, P. J. (2005). Transparency and the
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Linsley, P. M., & Shrives, P. J. (2006). Risk reporting: A study
of risk disclosures in the annual reports of UK companies. The British Accounting Review, 38(4), 387-404.
Miihkinen, A. (2012). What Drives Quality of Firm Risk Disclosure?:
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