A Study of Risk Disclosures in the Annual Reports of Pakistani Companies: A Content Analysis

Abstract

Increasing complexity of business environment, operations and regulatory sanctions have fostered the demand for firms to provide a higher level of disclosure. Corporate risk information plays an important role in the decision making process and improve the stakeholder’s ability to make precise valuation of firm. This paper explores the main risks disclosed by largest Pakistani companies and analyse the firm characteristics that are linked to the provision of corporate risk information. The content analysis of risk disclosure statements provided in annual reports reveal that firms are providing disclosure for both mandatory(financial) and voluntary (non-financial) risks. Financial risks are the most disclosed risks followed by strategic and operations risks. We use multiple theoretical framework to explain the variation in the extent of corporate risk disclosure. Among the firm characteristics, corporate size is significantly and positively related with risk disclosure sentences and explains variation in corporate risk disclosure. Large companies are politically sensitive and are likely to disclose more risk related information in explaining their level of return. Leverage and profitability are not significant drivers of corporate risk disclosure. Effective audit environment plays a significant role in enhancing corporate risk disclosure and firms operating in the same industry provide similar level of risk disclosure.

Keywords: Corporate disclosure, Mandatory Risk, Voluntary Risk, Content Analysis