IFRS 7 Risk Disclosure, Firm Value, and the Moderating Effects of an Auditing Committee

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IFRS 7 Risk Disclosure, Firm Value, and

the Moderating Effects of an Auditing

Committee

By:

Jasper KleinJan - S2896850

Tuinbouwstraat 74A, Groningen

0622963127

j.g.kleinjan@student.rug.nl

Word count: 10310

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ABSTRACT

Since 2007, IFRS 7 became mandatory for firms to apply in their financial reports. This standard not only requires disclosure regarding the significance of financial instruments for firms, but also requires firms to specify, in both quantitative and qualitative terms, what is the riskiness that is attributable to the instruments. With this study, I aim to answer the question about how IFRS 7 risk disclosure quality affects the firm value of a company, and how the characteristics of an audit committee moderates this effect. This study draws on a sample of UK firms with a premium listing on the London Stock Exchange during the period 2010 – 2016 and made use of an ordinary least squares regression method to answer the research questions. Evidence was found that no significant relationship exists between IFRS 7 risk disclosure quality and firm value, and that the audit committee characteristics size, tenure, and qualifications, are not moderating that relationship. By further dividing risk disclosure into several components, evidence was found that disclosure about risk exposure, concentration and impairment affects the firm value positively. Disclosure about sensitivity and maturity analysis affects the firm value negatively. This also implicates that for further research the components of IFRS 7 risk disclosure quality should be taken into account separately, as the components as a whole may be cancelling each other’s effect.

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Inhoudsopgave

3.1 Quality of Risk Disclosure and Firm Value of a Company ... 9

3.2 The Moderating Effect of Audit Committee Characteristics ... 10

3.2.1 Qualifications of Audit Committee ... 11

3.2.2 Tenure of Audit Committee ... 12

3.2.3 Size of Audit Committee ... 13

4. Research Methodology ... 14

4.1 Sample ... 14

4.2 Statistical model ... 15

4.3 Dependent Variable: Firm Value ... 16

4.4 Independent Variable: Quality of Risk Disclosure ... 17

4.5 Moderating Variables ... 17

4.5.1 Qualifications of Audit Committee ... 17

4.5.2 Tenure of Audit Committee ... 17

4.5.3 Size of Audit Committee ... 18

4.6 Control Variables ... 18 5. Results ... 21 5.1 Descriptive Statistics ... 21 5.2 Correlation Analysis ... 21 5.3 Regression analysis ... 23 5.4 Additional analyses ... 25

5.4.1 Different proxy for firm value ... 25

5.4.2 Components IFRS7 risk disclosure index ... 26

6. Discussion and Conclusion ... 28

7. Implications, limitations and further research ... 30

7.1 Implications ... 30

7.2 Limitations ... 30

7.3 Further Research ... 31

8. References ... 32

9. Appendices ... 38

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1. Introduction

This paper will investigate the relationship between IFRS 7 risk disclosure, firm value and the moderating effects of an auditing committee. It is an important subject to investigate as corporate transparency about risk is vital for the well-functioning of capital markets. (Deumes 2008). Deumes (2008) found evidence that risk disclosure about the company’s strategic goals may result in increased transparency and eliminate disparities between what investors understand and expect and what management can deliver. Investment analysts, bankers and shareholders rely on the annual reports of companies as it is one of the most important sources of useful information for better decision-making and provides a fair review of the development of a company’s business and its position (Vergoossen 1993). It is important that these users have a rich disclosure environment and low information asymmetry as it has many desirable consequences: an efficient allocation of resources, capital market development, decreased cost of capital and a high analyst forecast accuracy (Kothari, Li, & Short, 2009). It is also important that the information is disclosed in a timely matter, to ensure an efficient capital market (Healy & Palepu 2002). However, Vergoossen (1993) found that the annual report may not always be sufficient to satisfy the information needs of these users.

A large study of UK listed companies found evidence that the annual reports are already structurally changing and concluded that there has been a sharp increase in page length and narrative information (Beaty 2008). Not only annual reports are changing, the information need of the prominent users of annual reports is also in a continuously change. Due to changes in business models and expectations of stakeholders, the traditional financial section alone has become inadequate to meet the information needs of stakeholders (McDaniel, Martin, & Maines 2002). Large fraud scandals in the past like the Lehman Brothers Scandal, Bernie Madoff Scandal, Satyam Scandal (Soltani, 2014), and the rising complexity of financial instruments has led to the need of more non-financial information and risk disclosure, to decrease uncertainties about potential future cashflows (Elshandidy, Shrives, Bamber, & Abraham 2018). Actors on the stock market are requesting more non-financial information in addition to financial information (Alwert, 2009). Nelson (2017) has shown by surveying 320 institutional investors for a couple of years that non-financial information plays a pivotal role in the investment decisions for a growing number of investors.

One of the significant initiatives taken by the International Accounting Standards Board (IASB) to improve disclosures in the annual reports is the replacement of IAS 30, which was only

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mandatory for banks, by introducing IFRS 7 which is mandatory for every firm or institution that has financial instruments. According to this standard, the IASB mandates that all firms with financial instruments would provide disclosures on “(1) the significance of financial instruments for the entity’s financial position and performance and (2) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.” (IFRS 7). By introducing IFRS 7, the IASB is trying to improve the information disclosed by firms regarding existing financial instruments. The new standard not only requires disclosure regarding the significance of financial instruments for firms, but also requires firms to specify, in both quantitative and qualitative terms, what is the riskiness that is attributable to the instruments.

The mandatory adoption of IFRS 7 has been researched in several studies. Bischof (2009) found that the level of disclosure of banks has significantly increased during the year of the standards first adoption on 1st of January 2007 and concluded that IFRS 7 led to an overall increase in the quality of bank’s risk disclosures in Europe. Other studies also found an increase in IFRS 7 risk reporting (Pucci & Tutino 2013, Agyei-Mensah (2017). Kravet & Muslu (2013) executed a large research in the US and found that firms with a more extensive risk disclosure are perceived to be riskier. Riskier firms may be less interesting for investors and may have a lower firm value. (Iosifidj & Kokas (2015). In the research of Campbell, Chen, Dhaliwal & Steele (2014) they concluded that risk disclosure is very useful to investors. Kravet and Muslu (2013) state that there is still much work to be done in assessing how investors may benefit from risk disclosures. Campbell et al., (2014) stated it could be interesting that future research would examine whether firms that provide more risk disclosures, and thus increase the market’s assessment of their overall risk, are more likely to experience negative future outcomes such as decreased investment or on the contrary experiencing an increased probability. Arvidsson (2011) has shown in his study that non-financial information disclosure can be used to create a lot of value. For example, empirical evidence suggests that banks with increased risk disclosure earn higher market share and profitability. Elbannan and Elbannan (2015) found as reason for this phenomenon that management use higher quality of disclosure to signal their lower risk, which in the end will attract higher deposits.

To fill a gap in the existing literature, I am going to investigate how the quality of risk disclosure is impacting the firm value of a company. As the firm value of a company is important for investors. The quality of risk disclosure will be measured by looking at the exposure of risks,

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and how these exposed risks will be hedged. We also look at the effect of several characteristics of the audit committee, and how these characteristics impact the relationship between the quality of risk disclosure and the firm value. Al-Hadi, Hasan & Habib (2016) found that the tenure, qualifications, and size of audit committees may be used as a channel to improve the disclosure level. I will research the effect of the qualifications, tenure, and the size of an audit committee on the positive relationship between management’s risk disclosure quality and the firm value of a company.

This leads to the following research question: What is the impact of IFRS 7 risk disclosure quality on the firm value of a company? And how are the characteristics of an audit committee moderating this effect?

The contribution to the existing literature by this research lies in new valuable information about the impact of risk disclosure quality on the firm value of a company. Specifically focusing at how risk exposure and the hedging of these risks impact the firm value of a company, which has not been investigated in previous research. A practical implication can be that by knowing what the impact is of risk disclosure, companies can use this information to change the way they disclose risk in order to satisfy users of the annual report better, or showing investors that the company is a solid choice to invest in. This may result in a higher value of the company. The findings in this research will be of interest especially to firms in terms of deciding upon whether to provide or avoid disclosing voluntary risk management information to their stakeholders. Voluntary risk disclosure can be defined as the information that offers more explanation over and above the minimum requirements specified within regulations and accounting standards like IFRS 7 (Alkurdi, Hussainey, Tahat & Aladwan (2019). This research also contributes to the literature by investigating how the characteristics of an audit committee are moderating the relation between the quality of management’s risk disclosure and the firm value of a company. By understanding how the audit committee size, tenure, and qualifications impact the relationship between managements risk disclosure quality, and the firm value of a company, companies will understand better how they should choose their members of the audit committee. For example, how large this group should be in order to obtain the highest firm value. It can help company’s by choosing their audit committee composition that is in the best interests of a company.

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In the remainder of this research I will first elaborate on the theoretical framework of the proposed research. Thereafter I will look at the hypothesis development, and discuss the research methodology, which will be followed by the results, discussion and conclusion.

2. Theoretical Framework

In this section, we resort to the agency theory and the signaling theory in order to fundament our expectations of the relationship between IFRS 7 disclosure quality and the firm value of a company. Linsley and Shrives (2000) argue that signaling and agency theory are the most appropriate theories in explaining risk disclosures quality. However, risk management disclosures are mandatory to a certain extent. Reporting beyond that extent and reporting in much more detail, can be explained by these theories because companies are trying to diminish concerns of shareholders and other users by explaining that risk management systems are in place.

2.1 Agency Theory

The agency theory is intensively studied and can be considered as one of the key theories in financial accounting (Eisenhardt, 1989). The agency theory is a principle that is used to explain and resolve issues in the relationship between the shareholders of the company (principals) and their managers and executives (agents). The managers and executives know a lot more about the company then shareholders do, which isn’t always a problem. However, when the relationship between the managers and shareholders is characterized by divergent interests and bounded rationality, problems arise. The separation of ownership and management provides an opportunity for managers to act in their own self- interest at the cost of the owners. Lundholm & Winkle (2006) found that companies can diminish agency costs, litigation costs, compliance costs and information asymmetry if the managers and executives invest a lot in a high level of disclosure quality. Al-Razeen & Karbari, (2004) states that corporate reporting regulations, such as IFRS 7 are intended to provide investors, analysts and other stakeholders with a minimum quantity of information that they need for their decision-making. Full disclosure can never be guaranteed even in the presence of regulations (Al-Razeen & Karbari, 2004). IFRS 7 is intended to bring more transparency and reduces the agency costs. However, there may be differences in the quality of risk disclosure. A higher quality of risk disclosure thus may lead to less agency costs, as shareholders of the firm will be able to monitor the managers better (Barako, Hancock & Izan, 2006). The quality of information presented in annual reports also

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influences investors’ and other stakeholders’ decisions by mitigating information and incentive problems (Healy & Palepu, 2002). Extensive disclosure and a higher disclosure quality by managers show that companies have better governance mechanism and fewer agency conflicts, which may lead to a higher firm value in the end (Sheu, Chung & Liu, 2010). Siagian, Siregar & Rahadian (2013) and Fauver & Naranjo (2010) also found a relation between fewer agency conflicts and higher firm value. However, Beatie & Smith (2010) show that more disclosure could also have a downside. Companies should avoid giving away information that harm their competitive position. Disclosing more than is needed may also result in attracting unwanted scrutiny by regulators and other stakeholders.

2.2 Signaling Theory

Although the signaling theory was originally developed to clarify the information asymmetry in the labor market, it has also been used to explain disclosure quality in corporate reporting (Ross, 1977). As a result of the information asymmetry problem, companies signal certain information to investors to show that they are better than other companies in the market for the purpose of attracting investments and enhancing a favorable reputation (Verrecchia, 1983). A higher quality of disclosure may be one of the signaling means, where companies would disclose more information than the mandatory ones required by laws and regulations in order to signal that they are better (Campbell et al., 2001). The signaling theory is a principle that states that the signalers are insiders (executives or managers) who obtain information about an organization, product or individual, that is not available to outsiders (Connelly, Certo and Reutzel 2011). The signaling theory is important in this study as it suggests that two parties have access to different information. There is information asymmetry between the managers and the analysts and investors of a company. Managers can choose whether and how they communicate that information to diminish the information asymmetry. In general companies don’t like to report on risks or negative events as they think that it could have negative consequences. IFRS 7 makes reporting on certain risks mandatory, which means that the disclosure itself is not giving a signal. However, when companies differ their content disclosures in relation to other companies, by for example disclosing a higher quality, more detailed risk disclosure than is required by IFRS 7, the company is sending a signal. A higher quality of IFRS 7 risk disclosure may have positive effects. For example, Blacconière and Patten (1994) found that reporting on negative events can become positive if the addressees perceive the negative incidents as proactive. As shown in the introduction, IFRS 7 contains 2 chapters. Exposure of risk, and the way these risks could be hedged. Yang (2007) found that

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the disclosure of negative incidents or risks a company is facing might then be regarded as a positive signal in terms of actively managing risk, thus helping to avoid future issues. Companies should expose risk and focus especially on the hedging of these risks. Reimsbach and Hahn (2015) discuss that disclosure of negative incidents is often accompanied by the mention of measures taken to overcome these issues; hence, the disclosing company could be regarded as being prepared to deal with the issues at hand. In this study we focus on risks, negative events that didn’t occur yet. By exposing risks and reporting on hedging these risks companies might give addressees the perception that a company is well prepared and knows how to tackle these risks. Investors and other users of the annual report might give credit to the company for dealing with the respective aspects, which may result in a higher market capitalization. Gordon, Loeb and Sohail (2010) also state that a higher disclosures quality in the annual report sends signals to the marketplace, and these signals are expected to increase a firm’s net present value and, in turn, its stock firm value. Morris (1987) concluded in his research that as long as the difference in price received after the signal exceeds the costs, signaling will always be an on-going process.

3. Hypothesis Development

In this section the theories introduced in the previous section are further elaborated into hypotheses.

3.1 Quality of Risk Disclosure and Firm Value of a Company

Stiglitz (2002) argued that some individuals wish to convey information, and others wish not to have that information conveyed. Conveying information leads people to alter their behavior and is the reason why information imperfections can have significant effects. By reporting more on risk disclosure, the information asymmetry will be reduced, which could alter the decisions of analysts, forecasters and investors. When we look at CSR disclosure, a higher quality of CSR disclosure only has a positive impact, if the firms have a good CSR performance (Gao, Dong, Ni and Fu, 2016; Dhaliwal, Naiker and Navissi, 2011). This may also apply to risk reporting. When we look at risk disclosure, firms can expose risks, and disclose how these risks will be hedged and mitigated. If a company exposes the risks but doesn’t hedge the risks properly, the firm value may be lower after conveying that information. But if a company is hedging these risks properly, it might give a signal to investors, forecasters and analysts that the company is aware of certain risks and is busy with diminishing these risks, which may give a sign of

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credibility to investors. It is also found that IFRS 7 adoption led to a better risk management and risk hedging (Amoako, 2010), which may give a good signal to investors, and may eventually result in a higher firm value. The signaling theory also may state that a higher level of risk disclosure would impact the firm value of a company positively if the company is disclosing a good and proactive risk management. Connelly et al., (2011) found evidence in his research that firms have an incentive to disclose more information to investors regarding risk management in order to signal its underlying risk management quality to other parties and to signal that the firms are able to protect and create value for the investors. Similarly, Uyar and Kilic (2012) advocated that disclosure more information to signal good news to investors. High-performing firms are also reported to have incentives to disclose more information to investors to signal that the firm has better performance than rival firms and try to get a competitive advantage because of their better performance. (Mavlanova et al., 2012). Above literature may show that the way risks are hedged is vital to benefit from disclosing more information. If companies fail to disclose relevant information about risk exposure and hedging, share- and stakeholders would not be able to know that firms are proactively managing their risks and got their risk management under control. Deumes and Knechel (2008) emphasizes that risk disclosure is needed to reduce investors’ uncertainties about the performance and the prospect of firms. And I argue that the firm value may rise when the firm is signaling their risk management performance, thus reducing the uncertainties of analysts, investors and forecasters. Therefore, I hypothesize:

Hypothesis 1. The quality of risk disclosure has a positive impact on the firm value of a

company

3.2 The Moderating Effect of Audit Committee Characteristics

Some of the key roles of an audit committee are to assist the board of directors in overseeing corporate reporting policy’s, monitoring the board, and ensuring a high quality of disclosed information (Samaha, Khlif and Hussainey 2015). As is more important for this research, Alanezi and Albuloushi (2011) found evidence that audit committees significantly increase the level of compliance with mandatory disclosure. As this research is about IFRS 7 risk disclosure, it may be interesting to research this, and look more closely at the audit committee characteristics. Therefore, I find it interesting to focus on the qualifications of the audit committee, the tenure of the audit committee, and the size of the audit committee. This may lead to information what can help companies by choosing their audit committee composition

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that is in the best interests of the company. In the following paragraph these characteristics will be discussed and will be put into hypotheses about how these characteristics may impact the positive relationship between the quality of risk disclosure and the market value of the company.

3.2.1 Qualifications of Audit Committee

One of the most important characteristics of the audit committee could be the qualifications that the board members hold. According to Dhaliwal et al., (2010) it is important that AC-members are financially literate in order to be able to understand and interpret financial statements. Financial literacy is also beneficial for effectively monitoring the financial disclosure process. Bepari and Mollik (2015) managed to link the AC-members accounting and finance background, with the degree of company’s compliance with IFRS 7 impairment testing and disclosure. Imail and Arshad (2016) found that competent board members are a valuable mechanism for complementing the commitments of regulators and found evidence that it results in higher corporate transparency. Also, experienced and qualified board members are expected to tackle deficits in the risk disclosure and take actions to ensure the informativeness of the annual reports (Al-Hadi et al ., 2016). The nature of market risk exposures makes the disclosure requirements not easy to understand for board members that lack the relevant qualifications and experience. Therefore, it is important that some of the board members are qualified to ensure that the information is rich and useful for investors, analysts and forecasters. Hambrick, Misangyi and Park (2015) found that directors which have a lot of experience in a certain domain, like financial matters, are great in monitoring that domain. And in line with the agency theory, Cabedo and Tirado (2004) found evidence that qualified boards improve managerial monitoring, which is desirable for the interests of stakeholders. A good qualified and experienced board is not only necessary for a high quality of risk disclosure. Jermias and Gani (2014) also found that an experienced board has a direct and positive impact on firm performance. Ujunwa (2012) found that the number of board members with a PhD qualification impacts the firm performance positively. And Ngo, Van Pham and Luu (2019) focus on board members with post-graduate degrees and found that they were statistically associated with improvement in financial performance. On the other hand, Allini, Manes Rossi and Hussainey (2016) found that board directors who have an accounting or finance/business qualification affect the quality of risk disclosure negatively. But in overall, these findings suggest that board members who are tasked with risk management should be well qualified and experienced in order to ensure a high quality of risk management. And in line with the signaling theory,

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companies may like to signal that high-risk management in order to gain competitive advantage over other firms (Uyar and Kilic 2012). In line with the literature above, the qualification of AC-members may impact the relationship between the quality of risk disclosure and firm value, therefore I hypothesize that:

Hypothesis 2a. The positive relationship between the quality of risk disclosure and firm value

is stronger for firms with highly qualified risk committees relative to firms with less qualified audit committees

3.2.2 Tenure of Audit Committee

There is a lot of research about this characteristic of the audit committee. When we look back in time Quińones, Ford and Teachout (1995) already found the relationship between work experience and a higher job performance. For audit committee members tenure may also be very important. Audit committee members need a lot of information about the company in order to do their job efficiently and to deliver a high quality. Herz and Schultz (1999) found in their research that procedural and background knowledge of a company is important for auditors when dealing with accounting issues. Auditors are mostly dependent on the usefulness of the information that they receive (Bjagat and Black, 2002). However, over time directors gain a lot of knowledge about the company’s internal control systems and overall business. Longer-serving audit committee members may accumulate firm-specific expertise, enabling them to more effectively oversee the financial reporting process. In contrast, audit committee members with shorter tenure may not accumulate that specific expertise. Which makes tenure an important characteristic to research. Sun and Liu (2010) also found evidence that long tenure directors have greater expertise and more experience to effectively monitor financial reporting processes. Rahmin and Agoes (2014) found that in general auditor tenure has a positive influence on audit quality. Furthermore, long tenured auditors may also establish working relationships with the management and through these relationships, they can acquire more useful information for their judgements on accounting issues (Sharma and Iselin 2012). Sharma and Iselin (2012) also found that longer tenured auditors are more confident to challenge management when necessary. There is also a downside effect of longer-tenured auditors. Short tenured AC-members are less likely to be influenced by management, whilst longer tenured AC-members may be more influenced by management. DeZoort, Hermanson and Archambeault and Reed (2002) concluded that the tenure of AC-members were positively related to audit quality in early engagement years, but negatively related to audit quality in later

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years. Yang and Krishnan (2005) found a negative relationship between tenure of audit committee directors, and earnings management, which may suggest a positive effect of experience with the firm on accounting processes. Sharma and Iselin (2012) find no significant association between the tenure of the audit committee members and financial misreporting.

As literature suggests a deep understanding of the company is important to deliver a high-quality audit committee. There is evidence that long tenured AC-members have downside effects for disclosure quality, but the overall overwhelming findings suggest that a longer tenure of audit committee members may have a positive impact on risk disclosure. Based on above literature, I argue that a longer audit committee member tenure leads to better risk disclosure quality, which may lead to a higher firm value of a company. Therefore, I hypothesize that:

Hypothesis 2b. Long tenure of audit committee members strengthens the positive relationship

between the quality of risk disclosure and firm value 3.2.3 Size of Audit Committee

The size of the audit committee may impact the relationship between the quality of risk disclosure and the firm value of a company. The agency theory predicts that larger boards incorporate a variety of expertise which results in more effectiveness in the boards’ monitoring role (Singh and Vinnicombe 2004). Allegrini and Greco (2011) found that larger boards are known to devote more resources and have more authority to effectively carry out their responsibilities. A larger board may also help to resolve potential issues in the corporate reporting process, which leads to a smoother reporting process (Li et al., 2012). Another positive association can be found in the signaling theory. Sing and Vinnicombe (2004) found evidence that larger boards have a better risk management performance, so the board has more incentive to signal their risk management performance to the firm shareholders. Ntim, Lindop and Thomas (2013) also found that board size is positively related to the extent of corporate risk disclosure. Elshandidy, Fraser and Hussainey (2013) provide evidence that if a company has a higher risk appetite, they are more likely to have a high quality of risk disclosure. Wang (2012) found that larger boards are more risk averse, thus in combination with the research of Elshandidy et al., (2013) large boards may have less risk appetite which may result in a lower quality of risk disclosure. Al-Hadi et al., (2016) found that a larger board composition is positively correlated with compliance to law and regulations. So, for example they are more likely to comply with IFRS 7. Elshandidy et al., (2013) provided evidence that greater

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compliance with risk regulation implies greater tendency to risk disclosure. The research of Mnif & Znazen (2020) also shows that a larger board size has a positive correlation with the level of compliance to IFRS 7. However, larger boards are not always the answer for better risk disclosure. Guest (2009) supports evidence that a larger board may lead to less effective coordination, communication and decision-making which undermine the effectiveness of larger boards. Henry (2008) found a positive association between the board size and firm value. Kumar and Singh (2013) found a negative relationship between board size and firm value. There is no consistency in the literature about board size and firm value, which makes it interesting to research. Also, looking at above literature about qualifications, if the board size gets larger, it is more likely to bring a larger diversity of views, experience, expertise and skills to the board. Based upon above literature, there could a positive association between the size of the audit committee and the relationship between the quality of risk disclosure and firm performance. Therefore, I hypothesize that:

Hypothesis 2c. The size of the audit committee strengthens the positive relationship between

the quality of risk disclosure and firm value

4. Research Methodology

The research methodology contains the methods to execute the proposed research. The dependent and independent variables will be defined in this chapter. Second the way these variables will be measured are explained. Furthermore, the control variables that will be used in this research will be discussed.

4.1 Sample

In order to investigate the relationship between the quality of risk disclosure and firm value, and how an audit committee is mitigating this relationship, a sample of UK companies listed on the London Stock Exchange during the period of 2010 and 2016 is used. IFRS 7 risk disclosure became mandatory in 2007. However, the data between 2007-2009 may be less valuable due to the financial crisis, also a lot of data was missing for these years. Therefore, 2010 was chosen as the starting point for this research. The data used in this study is both archival and hand collected. The archival data is collected from Worldscope, Compustat Global and BoardEx. The data from Worldscope and Compustat is matched by combining ISIN codes and year and by doing so creating a unique code. The audit committee characteristics are

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collected from BoardEX. To match individual audit committee members, ISIN codes, Year and Director ID’s are combined. In this way the different characteristics of the board members for every company for every year could be combined. Which later could be combined with the data from Worldscope and Compustat Global by ISIN code and year. Concerning the collection of data for the variable of IFRS 7 disclosure quality, the research of Karaibrahimoglu and Porumb (2019) is followed. They created a risk disclosure index, as can be seen in the APPENDIX I, which is followed in this research, and made it possible to collect qualitative disclosure information of the UK Listed companies. In this research, one large dataset of 1096 observations is constructed, which is used to answer all of the hypotheses. This research made use of OLS regression techniques to analyze the data and by using robust standard errors, issues of heteroskedasticity are diminished.

4.2 Statistical model

Regression is commonly used to estimate the unknown effect of changing one variable over another (Stock and Watson, 2003). This research conducted an ordinary least squares method on all the statistical models. Model 1 is to test the first hypothesis, Model 2, 3 and 4 are used to test hypothesis 2A, 2B and 2C respectively. Interaction terms are used to measure the moderating effects of audit committee qualifications, tenure and size on the relationship between IFRS 7 disclosure quality and firm value. Resulting in the following equations: AC_QUALIF * IFRS7_Q, AC_TENURE * IFRS7_Q and AC_SIZE * IFRS7_Q, which will be used in the regression models. Issues of heterogeneity of variance are addressed by using robust standard errors.

(1) SHAREPRICE = 𝛽0 + 𝛽1(IFRS7_Q) + 𝛽2(F_SIZE) + 𝛽3(PROF) + 𝛽4(LEV) + 𝛽5(LOSS) + 𝛽6(FY_END) + 𝛽7 – 12(YEAR_D) + 𝛽13-17(INDUSTRY_D) + 𝜀

(2) SHAREPRICE = 𝛽0 + 𝛽1(IFRS7_Q) + 𝛽2(AC_QUALIF)+ 𝛽3(AC_QUALIF * IFRS7_Q) + 𝛽4(F_SIZE) + 𝛽5(PROF) + 𝛽6(LEV) + 𝛽7(LOSS) + 𝛽8(FY_END) + 𝛽9 – 14(YEAR_D) + 𝛽15-19(INDUSTRY_D) + 𝜀

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(3) SHAREPRICE = 𝛽0 + 𝛽1(IFRS7_Q) + 𝛽2(AC_TENURE * IFRS7_Q) + 𝛽3(F_SIZE) + 𝛽4(PROF) + 𝛽5(LEV) + 𝛽6(LOSS) + 𝛽6(FY_END) + 𝛽7 – 12(YEAR_D) + 𝛽12-16(INDUSTRY_D) + 𝜀

(4) SHAREPRICE = 𝛽0 + 𝛽1(IFRS7_Q) + 𝛽2(AC_SIZE * IFRS7_Q) 𝛽3(F_SIZE) + 𝛽4(PROF) + 𝛽5(LEV) + 𝛽6(LOSS) + 𝛽6(FY_END) + 𝛽7 – 12(YEAR_D) + 𝛽12-16(INDUSTRY_D) + 𝜀

The 𝛽i are coefficients, and 𝜀 is the error term. The variables are defined in table I.

4.3 Dependent Variable: Firm Value

Firm value will be defined as: ‘The highest estimated price that a buyer would pay, and a seller would accept for the company in an open and competitive market’. However, it is not possible or desirable to sell a company only to find out what it is truly worth. In the literature there is no agreement about an ideal measure for firm value (Albassam, 2014). Alotaibi & Hussainey (2016) used return on assets (ROA), Tobins Q and market capitalization as a proxy for firm value to measure the impact of accounting information. They found inconsistent results for the different proxy’s which should have given the same outcomes. However, the valuation model of Ohlson (1995) has been frequently used by researchers because of its simple and its accurate measurement. It provides an accurate way to conceptualize how firm value relates to accounting data and other information, such as IFRS 7 risk disclosure (Ohlson, 1995). Therefore, the valuation model of Ohlson (1995) will also be used in this research. More specifically, the sample firm’s stock price 3 months after the fiscal year-end will be used as a proxy of firm value, which has been done earlier by Cho, Michelon, Patten and Roberts (2014). The data about the share prices will be collected from Worldscope and turned into the variable (SHAREPRICE). In additional analyses I will also consider the Tobin’s Q ratio, ROA and market capitalization as proxy’s for firm value, as literature has shown that different proxies for firm value might give different results. The Tobin’s Q Ratio asserts that a business is worth what it costs to replace and will be measured by total market value divided by total asset value of the company (Chung and Pruitt, 1994). ROA is an indicator of how profitable a company is relative to its total assets and will be measured by net income divided by total assets (Khadafi, Heikal and Ummah 2014). The market capitalization refers to the total dollar market value of a company and will be measured by outstanding shares by the market price.

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4.4 Independent Variable: Quality of Risk Disclosure

There are several definitions that define risk disclosure. In this research we will follow the definition given by the IFRS: ‘The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks. In the research of Karaibrahimoglu and Porumb (2019) they created a risk disclosure index, as can be seen in the APPENDIX 1. This disclosure index is used to analyze the annual reports of UK Listed companies to determine the quality of risk disclosure and will be used to investigate the hypotheses. An IFRS 7 risk disclosure index (IFRS7_Q) is constructed by using the normalized value of the equal weighted average of the items presented in the Appendix 1 (Karaibrahimoglu and Porumb 2019).

To perform additional analysis the disclosure index will also be divided in three components which will create three different variables, index_quality_risk, index_quality_assurance and index_quality_other. In this way the impacts on firm value of the different components can be researched.

4.5 Moderating Variables

4.5.1 Qualifications of Audit Committee

In the research of Al-Hadi et al., (2016) they defined an accounting financial expert as a person who holds an accounting qualification such as CPA, CFA, ACCA. A non-accounting financial expert is defined as a person who has experience as an investment banker or any other financial management role; or experience obtained from supervising the preparation of financial statements (e.g., chief executive officer or company president). The independent variable qualifications (AC_QUALIF) will be created that takes the value of 1 if at least one of the directors on the AC has an academic and/or professional qualification in finance/accounting and 0 if no director has a qualification at all.

4.5.2 Tenure of Audit Committee

Following the research of Chan, Liu and Sun (2013) and Sun and Liu (2014), We define audit committee members with a long tenure, if they have a board time of 10 or more years. Therefore, a variable (AC_TENURE) will be created which takes the score of 1 if one of the audit committee board members has board tenure of more than 10 years. If not, the variable score will be 0.

18 4.5.3 Size of Audit Committee

The size of the audit committee will be measured by the continuous variable (AC_SIZE), which captures the number of directors on the audit committee.

4.6 Control Variables

• Size of the company: The size of the company is an important control variable that should be considered when investigating reporting. Lang and Lundholm (1993) came to this conclusion as the largest companies have economies of scale regarding the production costs of information, and so it is relatively cheap for larger companies to do risk reporting. Karim, Pinsker & Robin (2013) came to the same conclusion as larger companies have more money to spend on disclosure of information than smaller companies. Also, firm size is an indicator for a lower cost of capital, which may lead to a higher film value (Plumlee, Brown, Hayed and Marshall 2015). The size will be measured by taking the natural logarithm of the assets of the corresponding company (F_SIZE).

• Profitability: Elshandidy et al., (2013) and Giner (1997) found in their studies that it is important to control for profitability. According to these studies, and the signaling theory, managers are more likely to signal their good performance to the market, to avoid any undervaluation of their shares. It is also more likely that profitable companies have more money to spend on IFRS 7 risk disclosure. To control for profitability (PROF), we will use the return on assets, which can be calculated by net income divided by total assets at year-end.

• Leverage: According to the research of Cheng & Tzeng (2011) firm leverage does significantly impact the firm value, which makes it an important variable to control for. The values of leveraged firm are greater than that of an unleveraged firm if bankruptcy probability is not considered. García-Sanchez & Noguera-Gamez (2017) also found that agency costs are higher for companies that use more outside funding. To control for these effects a control variable will be created (LEV). Leverage will be measured by the total debt of a company divided by its total assets.

• Loss-making firms: It is important to control for loss-making companies, as they are valued differently / worse than firms which are making profits. (Jiang & Stark 2013). To control for different valuation a loss dummy is created (LOSS). The loss dummy is equal to 1 if the return on assets is positive, and 0 if the return on assets is negative.

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• Firm year-end: This dataset contains UK-Listed companies, which have 12 different fiscal year-end moments. To diminish effects between different fiscal year-endings, a dummy variable is included which takes the value of 1 for firms with the same fiscal year (FY_END).

• Year: This research includes analysis of the years 2010-2016. To control for time effects, year dummies (YEAR_D) are included. The dummy variable takes 1 for that specific year, and 0 for the others.

• Industry: UK Listed companies are active in different industries. To control for industry specific effects, industry dummies is included (INDUSTRY_D), based on the industry classification of Fama & French. They assigned firms based on their SIC (Standard Industrial Classification) code to one of the ten groups.

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TABLE I, List of Variables

Variable Name Measurement Retrieved

From Dependent variable

Share price SHAREPRICE Share price three months after the fiscal year-end

Worldscope

Independent variables

Quality of IFRS 7 risk disclosure

IFRS7_Q Will be measured by the IFRS 7 risk disclosure index Hand collected from annual reports Qualifications of audit committee

AC_QUALIF Dummy variable AC_QUAL that takes the value of 1 of at least one director on the audit committee has an academic and/or professional qualification in finance/accounting and 0 otherwise

BoardEX

Tenure of audit committee AC_TENURE The tenure of the audit committee will be a percentage of the directors that qualifies as independent

BoardEX

Size of audit committee AC_SIZE AC_Size. AC_size is a continuous variable that captures the number of directors on the AC

BoardEX

Control variables

Firm Size F_SIZE The size will be measured by taking the logarithm of the assets of the sample’s company WRDS Compustat Global Profitability of the company

PROF Net income divided by total assets at year-end

WRDS Compustat Global Leverage LEV Total debt divided by total assets WRDS

Compustat Global Loss LOSS Value 1 if the ROA is positive, value zero

if ROA is negative

WRDS Compustat Global

Dummy variables

Year YEAR_D A dummy variable which takes the value of 1 for firms with the same year

WRDS Compustat Global Industry INDUSTRY_D A dummy variable which takes the value

of 1 for firms with the same industry

WRDS Compustat Global Fiscal Year-end FY_END A dummy variable which takes the value

of 1 for firms with the same fiscal year-end

WRDS Compustat Global

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5. Results

5.1 Descriptive Statistics

In this research we made use of one sample, which is used for all the hypotheses. The average SHAREPRICE in this sample is 10.816, the average IFRS7_Q is 0.378, which means that companies still have a lot to do to improve risk disclosure. Some companies score very high, 0.936, but most of the companies can still perform much better. 42% of the boards have audit committee members on it who have a tenure for longer than 10 years. The average AC_SIZE in this sample is 4.422. The minimum required board size by the FRC (Financial Reporting Council) for UK listed companies is three, which means that the board size of UK listed companies is larger than the minimum required by the FRC. 0.649% of the boards have at least one qualified board member on it.

TABLE II, Sample 2

Variable Obs Mean Std.Dev. Min Max

SHAREPRICE 1096 10.816 14.286 .03 112.95 IFRS7_Q 1096 .392 .18 0 .936 AC_TENURE 1096 .42 .494 0 1 AC_SIZE 1096 4.422 1.283 2 10 AC_QUALIF 1096 .649 .478 0 1 PROF 1096 .059 .107 -1.324 1.051 LEV 1096 .218 .166 0 .892 LOSS 1096 .915 .279 0 1 F_SIZE 1096 6.328 .772 4.442 8.49 5.2 Correlation Analysis

The Pearson correlation matrix is the test statistics that measure the statistical relationship or association between variables. A positive correlation indicates that the variable increases or decreases together. A negative correlation shows that if one variable increases, the other will decrease. The correlation statistics show that SHAREPRICE is positively associated with IFRS7_Q, AC_TENURE AC_SIZE, and with all the control variables. According to the Pearson correlation matrix board qualifications aren’t associated with SHAREPRICE. Gujarati (1995) concluded that the maximum accepted threshold concerning multicollinearity is 0.7. All variables however have a correlation lower than 0.7. The highest correlation is F_SIZE with SHAREPRICE, which shows a correlation of 0.416. Therefore, I can conclude that there is no presence of multicollinearity in this research. To ensure no multicollinearity exists, also a

VIF-22

test is conducted. If the VIF score is higher than 10, or lower than 0.10, multicollinearity exists. As we can see in table 5, All the VIF scores are between 10 and 0.10, which shows that no multicollinearity exists.

TABLE III, Pearson correlation matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) SHAREPRICE 1.000 (2) IFRS7_Q 0.069* 1.000 (3) AC_TENURE 0.061* -0.029 1.000 (4) AC_SIZE 0.181** 0.110** 0.016 1.000 (5) AC_QUALIF 0.034 -0.050 -0.029 0.050 1.000 (6) PROF 0.196** -0.012 -0.029 0.043 0.028 1.000 (7) LEV 0.112** 0.203** -0.114** 0.159** -0.065* -0.116** 1.000 (8) LOSS 0.132** -0.006 0.007 0.016 -0.032 0.513** -0.005 1.000 (9) F_SIZE 0.416** 0.258** 0.037 0.360* 0.027 -0.010 0.220** 0.081** 1.000 * shows significance at the 0.05 level

** shows significance at the 0.01 level.

TABLE IV, Variance Inflication Factor

VIF 1/VIF PROF 1.398 .715 LOSS 1.383 .723 F_SIZE 1.203 .832 AC_SIZE 1.168 .856 LEV 1.103 .907 AC_TENURE 1.022 .978 AC_QUALIF 1.013 .987 Mean VIF 1.184

23 5.3 Regression Analysis

Table V presents the results of the regression analysis. Model I show the control variables, and show that that PROF, LEV and F_SIZE are significant and are impacting the firm value, which is consistent with our expectations. However, according to Cheng & Tzeng (2011), leverage should be positively associated with firm value, which is the opposite according to the findings of this research. Model II, Model III, Model IV and Model V are used to test hypothesis 1, 2a, 2b, 2c respectively. In this research we made us of interaction variables, to examine the moderating effects of audit committee qualifications, tenure and size on the relationship between disclosure quality and firm value.

Our first hypothesis is looking at the impact of risk disclosure quality on the firm value of the company. This effect was hypothesized as a higher quality of risk disclosure is related with better risk management, and companies may signal its underlying risk management quality in order to reduce uncertainties and attract more investors. Model II shows that IFRS7_Q is not significantly impacting the share price, and thus the firm value, which is in contrast with our expectations. Also, in model III and model V IFRS 7 is not significant, only model IV shows significance. Therefore, not enough evidence is found to support our hypothesis that IFRS 7 risk disclosure has a positive effect on the firm value. Hypothesis 1 will be rejected.

In Model III we test hypothesis 2a, which suggests that the positive relationship between the quality of risk disclosure and firm value may be stronger, if AC-members are more qualified. This was expected as long tenured AC-members have greater expertise and more experience to effectively monitor financial reporting processes. However, Model III shows no evidence that there is a significant interaction between this effect. Therefore, hypothesis 2a is rejected.

Model IV was used to test hypothesis 2b, which suggests that an audit committee with long tenured AC-members positively mediates the positive relationship between the quality of risk disclosure and firm value. This was expected as longer-serving AC-members may accumulate firm-specific expertise, enabling them to more effectively oversee the financial reporting process. In Model IV no significant interaction is found to substantiate hypothesis 2b. Therefore, hypothesis 2b is rejected.

Model V also suggests no relationship between IFRS 7 disclosure quality and firm value. Hypothesis 2c suggested that a larger audit committee may strengthen the positive relationship

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between the quality of risk disclosure, and firm performance. According to literature in the hypothesis development, a larger board is likely to bring more diversity of views, experience, expertise and skills to the board. Model V shows no significant correlation that board size is a positive moderator for the negative relationship between IFRS 7 disclosure quality and firm value. Therefore, hypothesis 2c is rejected.

TABLE V, Regression Analysis

(1) (2) (3) (4) (5)

VARIABLES SHAREPRICE SHAREPRICE SHAREPRICE SHAREPRICE SHAREPRICE

IFRS7_Q -1.354 -1.005 -15.38* -1.932 (2.234) (2.712) (8.141) (2.835) AC_TENURE 1.980 (1.708) IFRS7Q_ACTENURE -0.611 (4.220) AC_SIZE -1.126 (0.791) IFRS7Q_ACSIZE 3.161 (1.947) AC_QUAL 0.169 (1.583) IFRS7Q_ACQUAL 1.010 (3.807)

PROF 29.03*** YES YES YES YES

(9.899)

LEV 6.878** YES YES YES YES

(2.959)

LOSS 0.687 YES YES YES YES

(1.743)

F_SIZE 8.117*** YES YES YES YES

(0.721)

YEAR_D YES YES YES YES YES

FY_END YES YES YES YES YES

INDUSTRY_D YES YES YES YES YES

Constant -57.28*** -57.00*** -57.70*** -50.36*** -57.33*** (5.197) (5.191) (5.200) (6.018) (5.350)

Observations 1,096 1,096 1,096 1,096 1,096

R-squared 0.281 0.281 0.284 0.284 0.282

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

25 5.4 Additional Analyses

5.4.1 Different proxy for firm value

As stated in the literature before, there is no agreement about an ideal measure for firm value (Albassam, 2014). The study of Alotaibi & Hussainey (2016) made use of different proxies to measure the impact of accounting information on firm value: the ROA, Tobin’s Q and market capitalization. They found inconsistent results for the different proxy’s which in theory should have given the same outcomes. In this research, to verify that the quality of risk disclosure does not impact the firm value, regression analysis for all of these proxies have been done. Table VI shows the regression analysis for the different proxies of firm value. All of these different proxies show no significant results that firm value is impacted by the quality of risk disclosure. Which suggests that no relationship exists between disclosure quality and firm value. Therefore, we can ensure that hypothesis 1 must be rejected.

TABLE VI, Regression Analysis

(1) (2) (3) (4) VARIABLES SHAREPRIC E MARKETC AP TOBINSQ ROA IFRS7_Q -1.354 0.0759 -0.225 0.392 (2.234) (0.0515) (0.160) (0.465) PROF 29.03*** 1.400*** 4.959*** 83.05*** (9.899) (0.345) (1.243) (6.720) LEV 6.878** -0.192*** -0.257 2.388*** (2.959) (0.0676) (0.187) (0.682) LOSS 0.687 0.0403 -0.271 1.787** (1.743) (0.0603) (0.196) (0.880) F_SIZE 8.117*** 0.913*** -0.315*** -0.522*** (0.721) (0.0129) (0.0452) (0.187)

YEAR_D YES YES YES YES

FY_END YES YES YES YES

INDUSTRY_D YES YES YES YES

Constant 0.404*** 3.070*** -57.00*** 3.814***

(0.0932) (0.332) (5.191) (1.026)

Observations 1,096 1,096 1,096 1,094

R-squared 0.874 0.325 0.281 0.925

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

26 5.4.2 Components IFRS 7 risk disclosure index

In this study evidence is found that IFRS 7 risk disclosure quality does not impact the firm value. However, it could be that risk disclosure quality have components that have different impact on the firm value, which makes it interesting to research the different components of risk disclosure quality. According to Karaibrahimoglu & Porumb (2019) the IFRS 7 risk disclosure index can be divided in the following three different components: disclosure_quality_assurance, disclosure_quality_risk, disclosure_quality_other To measure the different aspects of risk disclosure quality on the firm value of a company, regression analysis has been performed for the two proxies of firm value: SHAREPRICE and TOBINSQ.

TABLE VI shows the different results for the different components of the IFRS 7 risk disclosure index. When we look at SHAREPRICE, index_quality_risk has a significant positive impact on SHAREPRICE. index_quality_other has a significant negative impact on the SHAREPRICE. And index quality assurance has a negative, however not significant impact on the SHAREPRICE. This may explain the non-significant relationship between IFRS7_Q and SHAREPRICE, as the different components of IFRS7_Q may impact the firm value differently.

TABLE VII shows the different results of the different components for TOBINSQ. No significant relations have been found, which shows that no relationship exists between any component of risk disclosure quality and TOBINSQ as proxy for firm value. However, TOBINSQ may not be an appropriate way to measure the firm value, as will be explained in the discussion.

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TABLE VII, Regression of components with SHAREPRICE

(1) (2) (3)

VARIABLES SHAREPRICE SHAREPRICE SHAREPRICE index_quality_risk 3.192** (1.431) index_quality_other -5.009*** (1.837) index_quality_assurance 0.226 (1.924)

PROF YES YES YES

LEV YES YES YES

LOSS YES YES YES

F_SIZE YES YES YES

YEAR_D YES YES YES

FY_END YES YES YES

INDUSTRY_D YES YES YES

Constant -57.00*** -57.70*** -50.36*** (5.191) (5.200) (6.018)

Observations 1,096 1,096 1,096

R-squared 0.281 0.284 0.284

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

TABLE VIII, Regression of components with TOBINSQ

(1) (2) (3)

VARIABLES TOBINSQ TOBINSQ TOBINSQ

index_quality_risk -0.0919 (0.108) index_quality_other -0.159 (0.113) index_quality_assurance -0.0705 (0.122)

PROF YES YES YES

LEV YES YES YES

LOSS YES YES YES

F_SIZE YES YES YES

YEAR_D YES YES YES

FY_END YES YES YES

INDUSTRY_D YES YES YES

Constant 3.041*** 3.040*** 2.973*** (0.331) (0.335) (0.325)

Observations 1,096 1,096 1,096

R-squared 0.324 0.324 0.325

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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6. Discussion and Conclusion

This chapter will conclude and discuss the main findings of this research. It will also provide a clear answer to the research question.

In this study the effect of risk disclosure quality on the firm value of a company is investigated. Deumes & Knechel (2008) emphasizes that risk disclosure is needed to reduce investors’ uncertainties about the performance and the prospect of firms. Reducing these uncertainties may attract more investors which may have a positive influence on the firm value. Also, a higher quality of risk disclosure is related with better risk management, and companies may signal their better risk management to give a positive signal to investors. Therefore, I hypothesized as the main research question of this paper, that risk disclosure quality may have a positive impact on the firm value of a company. The main proxy for firm value is share price. The regression analysis shows that risk disclosure quality does not significantly impact the firm value. To ensure that firm value is not impacted by risk disclosure quality, three other proxies have been used. Tobin’s Q, ROA and market capitalization. All of these proxies for firm value show that risk disclosure quality is not significantly impacting the firm value of a company. Therefore, we can conclude that no positive relationship exists between risk disclosure quality and firm value. To answer the research question, what is the impact of IFRS7 risk disclosure quality on the firm value of a company, we can conclude that IFRS7 risk disclosure quality does not impact the firm value of a company.

However, risk disclosure quality can be divided in several components. According to this research, different components of risk disclosure quality may have a different impact on the firm value of a company, which could not be shown by analyzing IFRS 7 risk disclosure quality as a whole. The different components of risk disclosure quality are investigated for two proxies of firm value, share price and Tobin’s Q. For the first proxy of firm value, share price, evidence was found that component index_quality_risk has a significant positive impact on firm value, and component index_quality_other has a significant negative impact on the firm value. Index_quality_assurance does not significantly impact the firm value. Therefore, we can conclude that a higher quality of risk exposure, concentration and impairment affects the firm value positively. A higher quality of exposure about sensitivity and maturity analysis affects the firm value negatively. This also implicates that for further research the components of IFRS 7 risk

29

disclosure quality should be taken into account separately, as the components as a whole may be cancelling each other’s effect.

However, the different components of risk disclosure quality show no significant impact on another proxy of firm value, Tobin’s Q, therefore it is debatable to make implications. According to Barlett & Partnoy (2018) Tobin’s Q may not be an appropriate proxy for measuring firm value. In the study of Bartlett & Partnoy (2018) evidence was found that if in a regression analysis, the dependent variable consists of a ratio with book value in the denominator, it is more likely to produce biased estimates. These biased estimates arise as omitted assets and time-varying firm-specific characteristics may systematically alter the firm’s book value. Therefore, Tobin’s Q causes non-classical measurement error in regression specifications that seek to estimate the relationship between firm value and regulatory phenomena (Bartlett & Partnoy 2018). This may implicate that the results of the regression analysis that used Tobin’s Q as the proxy for firm value might not be valid, and that different components of IFRS 7 risk disclosure quality may impact firm value differently as the regression analysis that used share price as a proxy of firm value suggests.

There may be more reasons for finding no significant relationship between firm value and risk disclosure quality. Firm value is a complex thing and is influenced by a lot of factors. Although risk disclosure quality might have an overall impact on the firm value, the influence could be too small to be substantial and significant. Beatie & Smith (2010) show on the contrary of the expectations that more disclosure could have a downside. Companies should avoid giving away information that harm their competitive position. Also disclosing more than is needed by IFRS 7 may result in attracting unwanted scrutiny by regulators and other stakeholders. Mousa and Elamir (2013) and Vandemelle (2009) found a negative relationship between corporate risk disclosure quality and profitability, and profitability is enormously associated with firm value according to the research of Chen & Chen (2011). Moreover, Jankensgard & Hoffmann & Rahmat (2014) found that companies may have a desire to comply with regulations and to claim transparency speaks for a high level of disclosure, however that these desires may lead to investor concerns about the amount of resourced devoted to financial risk management.

Hypothesis 2a, 2b, and 2c were looking at the characteristics of an audit committee, and how the size, tenure, and qualifications of a risk committee were impacting the relationship between

30

risk disclosure quality and firm value. However, no relationship was found between the quality of risk disclosure and firm value, and also no relationship has been found with the moderating variables like size tenure and qualification on this relationship. The literature also states that many statisticians would not even test an interaction term as it would have little meaning if no relationship exists between the two main factors (Kempthorne 1975). To answer the second research question, how are the characteristics of an audit committee moderating the impact of managements risk disclosure quality and the firm value of a company, we can conclude that the characteristics of an audit committee do not impact that relationship.

7. Implications, limitations and further research

7.1 Implications

As no positive relationship has been found between IFRS 7 risk disclosure quality and firm value, companies should not use too many resources on risk disclosure quality, as a higher quality of risk disclosure may cost more than it would benefit the firm value. However, it could be interesting to spend more resources on disclosure about risk exposure, concentration and impairment as it affects the firm value positively. Disclosing too much information may harm the competitive position of the company, which managers should be aware of. Disclosing more than is needed may also result in attracting unwanted scrutiny by regulators and other stakeholders. (Beatie & Smith 2010). However, it is very important that firms don’t economize on risk disclosure quality either, as not complying to regulations may impact the firm value negatively. Furthermore, we can’t make implications about how a company should choose their audit committee as no significant relationship has been found between these characteristics. An important implication to make is that in further research the components of IFRS 7 risk disclosure quality should be taken into account separately, as the components as a whole may be cancelling each other’s effect.

7.2 Limitations

Although this research has been conducted with care, several limitations should still be considered. A lot of annual reports could not be collected, as some companies have ceased to exist, some companies became active on the UK Listed Stock exchange after 2010, but before 2016 thus taken into consideration, and some annual reports simply could not be found. Also, a lot of data has been hand collected by several persons, which implies that there could be some

31

forms of subjectivity. To diminish the risk of subjectivity, an explicit risk disclosure index was used, which defined how things should be measured and collected in lots of detail (Karaibrahimoglu & Porumb 2019). This subjectivity could be further diminished by hand picking the data with 2 persons together, however this may not be realistic as it is very time consuming. One of the limitations of this research may be its generalizability, as it takes a sample of UK Listed Companies only. Therefore, the results might not be applicable to other countries with other accounting, social and political environments.

7.3 Further Research

There are some gaps in the literature which might be really interesting to research. First of all, it may be interesting to study the best proxy for firm value to measure the impact of accounting information. This may be important as a lot of studies find it difficult and find inconsistent results for different proxies for firm value which should give the same outcomes. Also new literature suggests that Tobin’s Q may not be appropriate as a proxy for firm value, which should be further investigated to support that claim. It may also be interesting to further investigate the different aspects of risk disclosure quality. Risk disclosure quality comprises a lot of different components, which could have different impacts on the firm value than disclosure quality as a whole. Furthermore, it may be interesting to investigate how other characteristics of the audit committee may impact these different components, so companies can use that information to better pick the audit committee that suits their company. The research of Moumen & Othman & Hussainey (2015) suggests that it may also be interesting to differentiate risk disclosure that provides favorable or unfavorable earnings news, which may also be interesting to research when analyzing the impact of risk disclosure quality on firm value.