Board Risk Committees and Risk Factor Disclosure Tone

45 Pages Posted: 17 Jan 2019

See all articles by Muhammad Farhan Malik

Muhammad Farhan Malik

The University of Western Australia

Yuan George Shan

The University of Western Australia - UWA Business School

Jamie Tong

The University of Queensland

Date Written: January 16, 2019

Abstract

Adopting effective risk governance and improving risk disclosure quality have received considerable attention in the recent years. In this paper, we investigate the impact of board risk committee (BRC) on mandatory risk factor disclosure (RFD) tone. Based on a sample of 4,798 observations from publically listed financial firms in the U.S. during 2005 to 2017, our multivariate analysis shows that the existence of BRC and its structural characteristics, including the committee size, independence, and percentage of financial and CEO experts, are negatively associated with abnormal RFD tone. This implies that the BRC restrains managerial incentives to manipulate RFD language and improves the quality of RFD. Our cross-sectional analyses further reveal that both mandatory and voluntary adoption of the BRC is negatively associated with abnormal positive tone in RFD, however the impact of voluntary adoption is statistically pronounced in the post-Dodd-Frank Act period of 2010−2017. Our paper supports the efforts made by the regulatory and professional bodies to improve the risk governance in the financial sector after the global financial crisis (GFC).

Keywords: Risk committee, Risk disclosure, Disclosure tone

JEL Classification: G30, G34, M41

Suggested Citation

Malik, Muhammad Farhan and Shan, Yuan George and Tong, Jamie Yixing, Board Risk Committees and Risk Factor Disclosure Tone (January 16, 2019). 2019 Financial Markets & Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=3316614 or http://dx.doi.org/10.2139/ssrn.3316614

Muhammad Farhan Malik (Contact Author)

The University of Western Australia ( email )

Crawley, Western Australia 6009
Australia

Yuan George Shan

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

Jamie Yixing Tong

The University of Queensland ( email )

Brisbane, Queensland 4072
Australia

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