The usefulness of firm risk disclosures under different firm riskiness,investor-interest,and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.     

Factors Influencing Corporate Environmental Disclosures

We investigate the effectiveness of the Carbon Disclosure Project (CDP), a not‐for‐profit organization that facilitates environmental disclosures of firms with institutional investors, thereby serving as a corporate governance mechanism for shareholders to influence the firm's environmental disclosures. We examine firm characteristics associated with firms' decisions to disclose carbon‐related information via the CDP for a sample of 319 Canadian firms over a four‐year period. In particular, we examine how firms' decisions to disclose via CDP are associated with shareholder activism, litigation risk, and the opportunity for low‐cost positive publicity once requested by the firms' “signatory” investors. Our results also show that management's decision to release climate change data is associated with domestic, but not foreign, signatory investors. We also find that disclosing firms tend to be those from lower polluting industries with less exposure to litigation risk. This suggests that this new form of coordinated shareholder activism may not be successful at altering the behavior of firms that are heavier polluters.     

Corporate social responsibility orientation and textual features of financial disclosures

This paper examines the relationship between corporate social responsibility (CSR) orientation and textual attributes of financial disclosures. Using a large U.S. sample from 1999 to 2017, we find that firms with high CSR orientation provide more readable disclosures and use a less ambiguous tone in their annual reports. These findings are consistent with the notion that managers in CSR-conscious firms adhere to high ethical standards and commit to improving the transparency of their firms' financial disclosures. Our results are robust to alternative measures of readability and CSR performance, potential endogeneity, and sampling methods. Moreover, in a cross-sectional analysis, we show that the impact of CSR on corporate readability/tone ambiguity is more pronounced for firms with weak corporate governance. Overall, the results suggest that CSR serves as a substitute for traditional corporate governance mechanisms to ensure transparent disclosure.     

Climate transition risk in U.S. loan portfolios: Are all banks the same?

We examine banks' exposure to climate transition risk using a bottom-up, loan-level methodology incorporating climate stress test based on the Merton probability of default model and transition pathways from the Intergovernmental Panel on Climate Change (IPCC). Specifically, we match machine learning predictions of corporate carbon footprints to syndicated loans initiated in 2010–2018 and aggregate these to loan portfolios of the twenty largest banks in the United States. Banks vary in their climate transition risk not only due to their exposure to the energy sectors but also due to borrowers' carbon emission profiles from other sectors. Banks generally lend a minimal amount to coal (0.4%) but hold a considerable exposure in oil and gas (8.6%) and electricity firms (4.6%) and thus have a large exposure to the energy sectors (13.5%). We observe that climate transition risk profile was stable over time, save for a temporary (in some cases) and permanent (in others), reduction in their fossil-fuel exposure after the Paris Agreement. From the stress testing, the median loss is 0.5% of US syndicated loans, representing a decrease in CET1 capital of 4.1% when extrapolated to the whole balance sheet. The loss is twice as large in the 1.5°C scenarios (1.4%–2.1% of loan value, 12%–16% of CET1 capital) compared to the 2°C target (0.6%–1.1% of loan value, 5%–9% of CET1 capital) with significant tail-end risk (7.7% of loan value, 62% of CET1 capital). Banks' vulnerabilities are also driven by the ex-ante financial risk of their borrowers more generally, highlighting that climate risk is not independent from conventional risks.     

Shareholder Litigation and Corporate Disclosure: Evidence from Derivative Lawsuits

Using the staggered adoption of universal demand (UD) laws in the United States, we study the effect of shareholder litigation risk on corporate disclosure. We find that disclosure significantly increases after UD laws make it more difficult to file derivative lawsuits. Specifically, firms issue more earnings forecasts and voluntary 8‐K filings, and increase the length of management discussion and analysis (MD&A) in their 10‐K filings. We further assess the direct and indirect channels through which UD laws affect firms' disclosure policies. We find that the effect of UD laws on corporate disclosure is driven by firms facing relatively higher ex ante derivative litigation risk and higher operating uncertainty, as well as firms for which shareholder litigation is a more important mechanism to discipline managers.     

Intertemporal Dynamics of Corporate Voluntary Disclosures

While empirical evidence alludes to the intertemporal nature of corporate voluntary disclosures, most of the existing theory analyzes firms' voluntary disclosure decisions within single‐period settings. Introducing a repeated, multiperiod, disclosure setting, we study the extent to which firms' strategic disclosure behavior in the past affects their prosperity to provide voluntary disclosures in the future. Our analysis demonstrates that by voluntarily disclosing private information firms make an implicit commitment to provide similar disclosures in the future, and therefore are less willing to voluntarily disclose information in the first place. This effect is expected to be of larger magnitude for firms (1) with a long history of absence of voluntary disclosures and an impressive past operating performance, or (2) that operate in a relatively stable and predictable business and information environment, or (3) whose managers have a long time horizon and a high degree of risk aversion.     

Compensation peer crash risks and corporate own investments: New evidences from U.S. stock markets

This study, employing US listed firms with compensation peer disclosures, investigates the impact of compensation and industry peer stock price crash risks on firms' own investments. We document three new evidences in the examination. First, we find that firms' own investments are positively affected by compensation peer crash risks but not industry peers. Second, we show that firms' own investments are explained by compensation peer crash risks only. Third, we demonstrate that the compensation peer crash risks and firms' own investments relation is positively moderated by corporate governance. Besides, additional analysis suggests that peers' incentive effect is a possible explanation to the positive compensation peer crash risks and firms' own investments relation.     

The effect of stock-based incentives and governance mechanisms on voluntary disclosure of intangibles

The purpose of this study is to investigate the role of stock-based incentives in encouraging more voluntary disclosures about firm-specific intangibles. I also examine whether corporate governance, previously found to be related to voluntary disclosures, is a complement to or substitute for stock-based incentives. Using content analysis of annual reports of a sample of high-tech firms, I find that stock-based incentives are positively associated with firms' voluntary disclosures about intangibles. With regard to the effect of governance mechanisms, I find that corporate governance does not have a relationship with disclosures when stock-based incentives are low. On the other hand, better governance will strengthen the positive effect of stock-based incentives on disclosures, suggesting that governance and incentives mechanisms are complements instead of substitutes. The results also show that this complementary effect primarily results from the internal monitoring provided by the board of directors.     

Does external uncertainty matter in corporate sustainability performance?

Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.     

Carbon policy risk and corporate capital structure decision

This study examines the relationship between carbon policy risk and corporate capital structure in China. Using a sample of A-share listed firms from 1997 to 2018, we find that carbon policy risk reduces firms' financial leverage. The result is robust to the introduction of difference-in-differences tests, instrumental variable regression, and a placebo test used to address endogeneity, as well as to other tests of alternative measures. This negative relationship is more pronounced for non-state-owned enterprises, firms with low institutional investor ownership, firms with poor corporate social responsibility performance, firms belonging to competitive or carbon-sensitive industries, and firms located in provincial cities. Financing constraints, bankruptcy risk, and government power are potential mechanisms underlying this observation. Our findings provide practical suggestions through which firms can address carbon policy risk and provide guidance to governments and regulators for the further implementation of environmental policies.     

Women in power with power: The influence of meaningful board representation on default risk

This paper examines the relationship between the presence of female board members and firms' corporate default risk. We find an inverted “U-shaped” relationship for a sample of 917 firms in 19 emerging markets for the period 2005–2019. We also show that, consistent with critical mass theory, boards need to have three or more female directors to significantly reduce default risk. Furthermore, having female directors with an independent role on the board in countries with less familial dominance, or having female directors with a leadership position, significantly reduces default risk. Finally, we find a positive effect of the interaction between a country's gender inequality and board gender diversity on default risk.     

Interest Rates and Credit Risk

This paper explores the effects of shifts in interest rates on corporate leverage and default in the context of a dynamic model in which the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival. The need to finance new investment pushes firms' leverage ratio above some state‐contingent target toward which firms gradually adjust through earnings retention. The response to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms. Our results help rationalize some of the evidence regarding the risk‐taking channel of monetary policy.     

Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities

A commonly held view in corporate finance is that firms are less leveraged than they should be, given the potentially large tax benefits of debt. In this paper, I study the effect of firms' leverage on default probabilities as represented by the firms' ratings. Using an instrumental variable approach, I find that the leverage's effect on ratings is three times stronger than it is if the endogeneity of leverage is ignored. This stronger effect results in a higher impact of leverage on the ex ante costs of financial distress, which can offset the current estimates of the tax benefits of debt.     

Does the market value greenhouse gas emissions? Evidence from multi-country firm data

Despite increasing global attention on corporate carbon emissions, few studies have examined the value relevance of carbon emission information in the international context. This paper examines whether carbon emission information voluntarily disclosed by a firm affects its market value. After controlling for a firm's likelihood to provide voluntary carbon disclosures, we find that the level of carbon emissions is negatively related to firm value. This negative impact is more prominent for firms in countries that have a national carbon emission trading scheme and stringent environmental regulations. Furthermore, corporate governance is found to reduce the negative value effect of carbon emissions, indicating that shareholders have favorable perceptions regarding the carbon management ability of firms with good corporate governance. Cultural contexts such as uncertainty avoidance and long-term orientation also affect the value effect of risks and future liabilities associated with carbon emissions. We find that the value-decreasing effect of carbon emissions is weaker in countries characterized by high uncertainty avoidance and long-term orientations.     

Foreign shareholders,relative foreign policy uncertainty and corporate cash holdings

Studies have shown that foreign investors hedge risks stemming from economic and political uncertainty in the home country through outward investment. This paper studies how foreign investors' home country risk affects their overseas investment and the host country firms' corporate cash holdings. We find that relative foreign EPU, defined as the difference between foreign investors' home country EPU and the host country of investment EPU, negatively impacts the host country firms' cash holdings through their influences on managerial decision-making. This negative relationship arises from firms' precautionary and transaction motives as foreign investors perceive lower corporate risk and better investment opportunities in the host country firms. Good corporate governance is also instrumental in yielding this negative relationship. The reduction in cash holdings due to high relative foreign EPU is more pronounced if foreign investors' home country legal environment is weaker, the two countries are further apart, and there is little trade partnership between them.     

Textual risk disclosures and investors’ risk perceptions

We examine the association between changes in companies’ textual risk disclosures in 10-K filings and changes in stock market and analyst activity around the filings. We find that annual increases in risk disclosures are associated with increased stock return volatility and trading volume around and after the filings. Increases in risk disclosures are also associated with more dispersed forecast revisions around the filings. In contrast to prior literature documenting resolved uncertainties in response to various types of company disclosures, our findings suggest that textual risk disclosures increase investors’ risk perceptions. However, the results are less pronounced for firm-level disclosures that deviate from those of other companies in the same industry and year. These results lend support for critics’ arguments that firm-level risk disclosures are more likely to be boilerplate.     

Voluntary Disclosure, Earnings Quality, and Cost of Capital

We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self‐constructed index of coded items found in 677 firms' annual reports and 10‐K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure.     

Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China

This paper assesses the risk arising from transition toward a low-emission economy and examines its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulation impairs firms' balance sheets in the short term, as it enforces firms to internalize the pollution costs, which consequentially escalates the risks facing the financial system. For the empirical analysis, we employ the Clean Air Action that the Chinese government launched in 2013 as a quasi-natural experiment. The analysis on a unique dataset containing more than one million loans indicates that the default rates of high-polluting firms rose by around 80% along their environmental policy exposure. Further analysis shows those joint equity commercial banks with lower degree of government intervention and better corporate governance structure were able to appropriately manage their exposure to transition risks, while the state-owned banks failed to factor in such risks when extending credit to the borrowers targeted by the environmental regulation.     

Does corporate social responsibility help the survivorship of SMEs and large firms?

Using a sample of 2480 firms from 51 countries covering the period 2010–2015, we find that firms with more effective corporate governance mechanisms are more likely to be more engaged in CSR. Consistent with the stakeholder theory and the conflict resolution model, this result suggests that managers adopt effective governance mechanisms together with CSR engagement in an attempt to mitigate conflicts among stakeholders. Moreover, after controlling for endogeneity and simultaneity issues, we find that both CSR engagement and corporate governance mechanisms have a significantly negative influence on the firms' risk of financial distress measured by the Altman et al. model (1995). Our results also show that the favorable influence of CSR on the firms' capability of survivorship is more pronounced in SMEs than in large firms.     

年报风险信息披露与银行贷款利率

既有文献较少从银行视角关注年报风险信息披露的经济后果。银行更有能力解读年度风险信息,银行利益也更直接受到年报风险信息的影响,银行贷款利率更能体现年报风险信息披露的经济后果。本文基于2008-2017年单笔银行贷款利率数据的研究发现:总体上我国年报风险信息披露降低了银行贷款利率,说明我国年报风险信息披露更符合趋同观假说。中介效应检验发现:我国年报风险信息披露通过提高信息透明度,降低银行风险感知水平进而降低了银行贷款利率,即信息质量和风险是我国年报风险信息披露影响银行贷款利率的不完全中介。进一步分析发现:我国年报风险信息披露与银行贷款利率的负相关关系主要体现在货币政策紧缩组、非国有企业组以及公司治理水平较高组。本文首次研究银行贷款利率与年报风险信息披露的关系,有助于丰富风险信息披露文献和银行贷款文献。