Proactive Disclosure of Corona Virus Disease (COVID-19) and Firm Performance

Abstract

This exploratory study examines whether firm financial performance and the strength of corporate governance are associated with the proactive disclosure of coronavirus risks. In addition, we examine whether firms that proactively disclose are more likely to provide updates to their initial risk disclosures than those that do not.

We are motivated by the need to understand factors that drive managers’ disclosure of unexpected and unusual risks caused by events over which they have little control. We find a negative association between firm performance, measured as Return on Assets (ROA) and Return on Equity (ROE) and the proactive disclosure of COVID-19 risk. In addition, we find a negative association between the strength of corporate governance and proactive COVID-19 risk disclosure. This result suggests that firms with weaker performance, measured as ROA and ROE, and firms with weaker corporate governance measured using a composite index of governance quality are more likely to proactively disclose coronavirus risks. Last, we find that firms that proactively disclose coronavirus risks in their item 1A are more likely to update those disclosures and disclose even more coronavirus related risks compared to those that do not. These findings are robust to an alternative measure for the disclosure of coronavirus risks.

The outcome of this research provides an insight into the characteristics of firms that are more forthcoming in their disclosures. The findings are also informative to regulators on the need for further enforcement mechanisms as risk factor disclosures may not be timely in informing users of the annual report.

Keywords: Disclosure; coronavirus; COVID; Firm Performance; Corporate Governance

JEL Classification: M41