EFFECT OF CORPORATE RISK DISCLOSURES ON FIRM VALUE
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CHAPTER ONE
INTRODUCTION
The chapter presents an outline on the review of corporate risk disclosure and firm value. The chapter starts with an in-depth background of the founding elements of how disclosures come out emanating from risk, risk management, the behavior of firm value and regulatory roles. Then a problem statement specifies on the problem of the study followed by the study research objectives and questions to give direction of the study. The scope of the study shows the extent and coverage of the study and finally the significance of the study to various users and chapter summary.
1.1 Background of the Study
The rate of global economic development has slowed in both advanced and emerging nations due to rising trade disputes, erratic political conditions, and policy uncertainty (CBK, 2018). Growing legal requirements underscoring the necessity of corporate information openness, the financial crisis, and the advancement of accounting irregularities have defined the contemporary operating environment (Elshandidy & Neri, 2015). since of the nature of market relations, businesses must take on projects with a variety of possible outcomes since environmental uncertainty is increased.
The degree of risk associated with the organization’s operations is determined by the likelihood of these outcomes (Giner et al., 2020). In unpredictable business contexts, businesses must identify and disclose their risks in order to reduce the unfavorable effect of hazards on firm performance.
For Nigerian companies listed on the Nigerian Securities Exchange, achieving strong overall business success has proven difficult (Walela et al., 2022). According to empirical research, Nigerian enterprises are still plagued by challenges like financial distress, currency volatility, and liquidity issues even after numerous reforms and laws have been implemented (Charles et al., 2021). The general negative attitude across global markets was reflected in lower closing prices for shares in developed and emerging markets. An analysis of the trajectory of the Nigeria All Share Index and NSE 20 Share Index indicates an overall index fall throughout the second quarter of 2019. Financial difficulties can have a detrimental effect on an entity’s performance, which can lead to reduced returns for the business, according to Muigai (2016).
Financial difficulty never goes away. For instance, deficiencies in business risk assessment and credit risk management strategies were made clear by the 2008 financial crisis (Hernandez Tinoco & Wilson, 2013). According to Koske et al. (2019), a growing number of listed firms are being placed under statutory administration and are delisting due to financial difficulties. At least six NSE-listed companies experienced financial difficulties and entered liquidation between 2009 and 2018 (Walela et al., 2022).
According to the East African (2023) study, the NSE was the worst-performing market in Africa during the most recent quarter of 2023, with the blue-chip NSE 20 Share Index declining by 10% and the NSE All Share Index declining by 25.3%. Listed corporations have warned of profit declines in the past (17 companies in 2019; Business Daily, 13 firms in 2023), which has caused a greater decline in share prices. The long-term goal of corporations is to retain value, which is made necessary by these difficulties and calls for the deployment of macroeconomic and microeconomic actions (Susanti, 2023). Since it represents the market value of the business, firm value (FV), an economic estimate, is important to corporate stakeholders as well as external parties including lenders, acquirers, managers, and investors (Daferighe, 2014).
Moreover, exogenous external factors and endogenous firm-specific factors might have an impact on business value (Gharaibeh & Qader, 2017). A high share price increases shareholder wealth, meaning that the business’s value is typically equal to the market price of its shares, signaling potential opportunities for investors (Sudiyatno et al., 2021). Greater prosperity for shareholders is shown by higher business valuations (Susanti, 2023). Tobin’s Q, the Market-to-Book (MTB) value, and share price indicators can all be used to display the enterprise worth (Sudiyatno et al., 2021). Market-to-book ratios were employed by a number of researchers (Hassan et al., 2009; Sudiyatno et al., 2021).
Another group of researchers integrated estimates of corporate value, such as market-to-book ratios, return on assets (ROA), and Tobin’s Q (Siagian et al., 2013). Tobin’s Q is better suited to calculating FV than return on equity, which only demonstrates accounting efficiency over long-term business value (Fooladi et al., 2014). Tobin’s Q will be used to assess entity value in this study since it is widely accepted as the best measure of firm value in economic, accounting, and finance literature (Afriani & Utama, 2014; Alqatan et al., 2019; Enache & Hussainey, 2020). Given that business management has minimal control over external factors influencing its value, this study focuses on a firm-specific component called Corporate Risk Disclosure (CRD).
The importance of disclosing has been underlined following massive collapses worldwide, and diverse stakeholders require appropriate information to assess entity risk profile (Linsley & Shrives, 2006). According to Madhani (2016), reporting might be either mandatory or voluntary. To mitigate the negative impacts of risks on corporate performance, firms will need to communicate their risks in unpredictable business contexts.
Elshandidy and Neri (2015) discover that the current global business climate is characterized by an increase in accounting irregularities, a financial crisis, and increased regulatory requirements emphasizing the importance of risk disclosure. Non-Financial Risk Disclosures (NFRD) improve stock market performance and play an important role in achieving long-term advantages. Policymakers and regulators are encouraged to raise NFRD standards by developing, reviewing, and implementing NFRD rules (Mbithi et al., 2023).
Previous research (Agustia et al., 2022; Ibrahim & Aboud, 2023; Latif et al., 2022; Temiz, 2021) studied the relationship between CRD and firm value, and the results were significantly positive. Other research, however, have produced conflicting results that can be explained by a variety of circumstances. Contextual differences appear in an empirical study of the relationship between firm success and environmental and social disclosure in poor Morocco and highly developed South Africa. The results showed that reporting had a positive and significant impact on entity performance in South Africa exclusively (Khlif et al., 2015).
Haj-Salem et al. (2020) discover conceptual differences explaining why CRD has an unfavorable impact on entity value, as well as that the sample was limited to non-investment enterprises, excluding outliers with differing risk disclosure methods and governance policies. Methodological differences; using quantitative methodologies explains empirical evidence on Saudi enterprises that found no association between listed entities’ sustainability declarations and financial performance (Haidar & Sohail, 2021). Given the complexities of listed organizations’ activities and the wide range of risks involved, delivering complete and consistent risk disclosures becomes difficult in such circumstances (Nahar et al., 2016).
Furthermore, Scanella and Polizzi (2021) state that revealing sensitive information may expose listed organizations to competitive threats and potential market reactions, necessitating a fine balance between transparency and protecting private data. Few studies have studied the effects of corporate reporting on business value (Bravo, 2017). As a result, the study’s major goal is to provide verifiable information on the economic effects of risk disclosure by examining firm values in corporations. This study expands on earlier research by evaluating the benefits of corporate risk disclosure as described by financial and non-financial disclosures included in year-end reports of Nigerian listed businesses.
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