Corporate risk reporting: A content analysis of narrative risk disclosures in prospectuses

This study examines whether companies report risk-relevant information to prospective investors. While corporate risk communication is important for the well-functioning of capital markets, our current understanding of risk reporting practices is limited. The sample consists of dutch companies raising capital on the amsterdam stock exchange in the late 1990s. In this setting, companies had much discretion in writing the risk section of the prospectus. After a detailed content analysis of the risk sections, the author demonstrates that a measure of risk extracted from these texts successfully predicts the volatility of companies' future stock prices, the sensitivity of future stock prices to market-wide fluctuations, as well as severe declines in future stock prices. Overall, these results support the view that prospectuses of dutch companies provide adequate information about material investment risks

Economic incentives for voluntary reporting on internal risk management and control systems

This paper investigates managers' economic incentives for voluntary reporting on risk management and internal control using a sample of publicly traded firms in The Netherlands in the late 1990s. In this particular setting, internal control reporting was voluntary and covered a wide business-based approach as defined in key internal control frameworks. We create an index to measure the extent of disclosure by identifying six reportable items related to internal control. Regarding managers' incentives to report, we hypothesize that voluntary disclosure increases with the extent of information and agency problems, as proxied by management and block holder ownership and financial leverage. Supporting our hypotheses, we find a negative relationship between the extent of internal control disclosure and management and block holder ownership, and positive relationship between the extent of disclosure and financial leverage. We interpret these findings as evidence for a conscious trade-off by managers, which is linked to the costs and benefits of making internal control disclosures. Additionally, we find some evidence that the extent of disclosure varies with firms' inherent risk exposure, as proxied by a number of firm operating characteristics. One implication of our findings is that regulators may wish to allow firms flexibility in their internal control reporting choice, as firms take a broad approach to internal control that goes beyond SOX-based regulations, and tailor their internal control reports to suit their specific environments

Audit firm governance: Do transparency reports reveal audit quality?

As a result of legal and regulatory requirements, audit firms in certain jurisdictions have recently started issuing transparency reports containing information on audit firm governance. In this study we investigate whether audit firm governance disclosure is associated with actual audit quality. Based on a sample of transparency reports of 103 audit firms in a number of EU countries, we find that there is variation in the extent and type of governance disclosures across audit firms. We, however, do not find an association with actual audit quality, apart from a weak association with an audit firm's statement on the effectiveness of its internal quality control system