CG and Voluntary Disclosure in India

Managerial Auditing Journal
Corporate governance and risk reporting: Indian evidence

Ridhima Saggar, Balwinder Singh,
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MAJ
32,4/5 Corporate governance and risk
reporting: Indian evidence
Ridhima Saggar and Balwinder Singh
Department of Commerce, Guru Nanak Dev University, Amritsar, India
378
Abstract
Purpose – This study aims to measure the extent of voluntary risk disclosure and examine the relationship
between corporate governance firm level quality in the form of board characteristics and ownership
concentration’s impact on risk disclosure in the annual reports of Indian listed companies.
Design/methodology/approach – The method adopted in this study is automated content analysis,
which is applied to a sample of 100 listed Indian non-financial companies to find out the extent of risk
disclosure. Further, multiple linear regressions have been applied to find out the relationship between
corporate governance firm level quality in the form of board characteristics, ownership concentration and risk
disclosure.
Findings – The findings reveal that the total number of positive risk keywords surpasses negative risk
keywords disclosure. The corporate governance mainsprings, namely, board size and gender diversity have a
positively significant effect on risk disclosure, whereas ownership concentration in the hands of the largest
shareholder insignificantly affects risk disclosure, but identity of the largest shareholder having ownership
concentration negatively affects disclosure of risk information in the case of Indian promoter body corporate,
foreign promoter body corporate and non-institutions in comparison to family ownership.
Research limitations/implications – This study relied on a set of 39 risk keywords for measuring the
extent of risk disclosure. Further, it uses a sample of 100 companies to examine the effect of corporate
governance on risk disclosure at one point of time. However, a longitudinal study can help in understanding
risk disclosure adopted by Indian listed companies in a better manner.
Practical implications – The findings have implications for regulatory bodies such as the Securities and
Exchange Board of India, which needs to strengthen corporate governance norms with respect to board
characteristics and keep a check on ownership concentration for improving risk disclosure by companies.
Originality/value – To best of the authors’ knowledge, this study is a preliminary attempt linking two
research lines in India, that is, corporate risk disclosure and corporate governance quality in the form of board
characteristics and ownership concentration. The study identifies corporate governance firm level qualities
which lead to divulgation of risk information by the companies pointing towards strengthening of regulatory
regime in the country for improved corporate governance regulations adopted by listed companies.
Keywords Disclosure, Corporate governance, Risk, Information
Paper type Research paper
Introduction
Major corporate scams and failures at the international level such as Enron, Worldcom and
Adelphia, involving accounting irregularities, highlighted the need for good corporate
governance regulations to be implemented by the corporations worldwide (Rajab and
Handley-Schachler, 2009). In the year 2007/2008, the world got confronted with the biggest
credit crunch, that is, Global financial crises, followed by the Satyam computer scam in India
in 2009 which re-kindled the debate on weak corporate governance regulations exhibiting a
lack of transparency by the corporations. The improved risk reporting possesses potential to
Managerial Auditing Journal contribute towards steadier environment for investment activity by regaining the lost
Vol. 32 No. 4/5, 2017
pp. 378-405 confidence of investors. Institute of Chartered Accountants in England and Wales (1999)
© Emerald Publishing Limited
0268-6902
envisage that companies should benchmark the information in their annual reports against
DOI 10.1108/MAJ-03-2016-1341 their known risks, and then divulge adequate information which will allow users to decide
about the magnitude and significance of each risk disclosure. It also suggests that the listed Corporate
companies who need new capital should not hesitate to disclose relevant information to the governance
investors.
The past events have channelised studies towards analysing risk disclosures by
and risk
corporations in developed countries, such as UK (Linsley and Shrives, 2000, 2006; Abraham reporting
and Cox, 2007; Linsley and Lawrence, 2007; Abraham and Shrives, 2014; Elshandidy and
Neri, 2015) and USA (Kamal Hassan, 2009), and in developing countries, such as Malaysia
(Amran et al., 2008), Nigeria (Adamu, 2013) and Egypt (Baroma, 2014). These studies have
379
documented benefits accruing by divulgating information on risks. According to Beretta and

Bozzolan (2004) and Abraham and Cox (2007), risk information disclosure caters to massive
needs of the investors, that is, determining the risk profile of the company, estimation of
market value and meticulously forecasting the company’s security prices. It also helps to
reduce cost of capital (Linsley and Shrives, 2000, 2006) and aid in managing change
(Abraham and Cox, 2007). Further need for risk management was highlighted for
maximisation of shareholders wealth, elevating profitability and simultaneously reducing
probability of financial failure (Solomon et al., 2000). Besides these advantages, the Institute
of Chartered Accountants in England and Wales (1997) in the discussion document
“Financial reporting on Risk-Proposal for statement of Business risk” put forth key
hindrances in providing risk information by companies: its commercial sensitivity leading to
proprietary and non-proprietary costs and forward looking information is inherent to
unreliability which can lead to claim by investors on acting on such information (Linsley and
Shrives, 2005).
Within this perspective, managers may indulge in voluntary risk information divulgation
for strategic reasons. The agency theory (Jensen and Meckling, 1976) argues that information
disclosure will reduce agency cost. The interest of the manager (insider) and principal
(outsider) diverges leading to agency problems, involving expropriation of outsider’s interest
by insider of company. In a similar manner, the signalling theory by Akerlof (1970)
underpins that investors may not be able to demarcate high-quality companies, that is, those
who are able to identify and manage risk efficiently than low-quality companies. It is vital
that companies voluntarily disclose information by signalling to the markets various efforts
taken to reap the benefits accruing from such disclosure. Consistent with these theories, the
stakeholders theory (Freeman, 1984) also supports voluntary disclosure, because managers’
job is to escalate the interest of various stakeholders overtime.
In the wake of increasing need for risk information disclosure and advantages from such
disclosure has motivated prior research (Amran et al., 2008; Oliveira et al., 2011; Adamu,
2013; Baroma, 2014; Madrigal et al., 2015) to study the relationship between general firm
characteristics and risk disclosure. These studies suffer from some limitations that pave a
way for further research in this area. Firstly, existing studies have mainly studied general
firm characteristics such as firm size, profitability, level of risk and industry. Previous
studies investigating the impact of corporate governance characteristics on risk disclosure
are scarce (Abraham and Cox, 2007; Oliveira et al., 2011; Elshandidy and Neri, 2015)
especially in developing countries (Ntim et al., 2013; Said Mokhtar and Mellet, 2013). It limits
our understanding as to which corporate governance characteristics lead to divulgation of
risk information. Corporate disclosure decisions including risk disclosure is in the hands of
the company board (Beretta and Bozzolan, 2004). Secondly, most of the studies have
examined risk disclosure by analysing the accounting standard, that is, Financial
Instruments: Disclosure (Kamal Hassan, 2009; Said Mokhtar and Mellet, 2013; Atanasovski
et al., 2015), accounting for financial risk, but companies confront innumerable non-financial
risks which are still unaccounted for and need to be studied for a broader perspective.
MAJ Thirdly, mostly prior risk disclosure studies perform content analysis of annual reports of
32,4/5 companies using a sentence as a coding unit (Beretta and Bozzolan, 2004; Linsley and
Shrives, 2006; Amran et al., 2008; Oliveira et al., 2011); it has a certain limitation that the
present study will overcome by using word count.
Given this background, the present study attempts to make contribution to risk
disclosure literature and bridges the research gap. Firstly, it extends our knowledge of risk
380 disclosure by the Indian listed companies in the absence of mandatory accounting standard
on risk disclosure, namely, Financial Instruments: Disclosure, accounting for financial risk.
The term financial risk accounts for major changes in interest rates; commodity/equity
prices; financial instrument derivatives; credit default risk and liquidity risk; and capital
adequacy/insolvency risk (Ntim et al., 2013). The non adoption of this accounting standard is
a challenge for the study for capturing risk disclosure. Secondly, the study analyses various
corporate governance board characteristics (board size, gender diversity on the board,
presence of independent directors on board, CEO duality and board activity) and ownership
concentration effect on risk disclosure. Dobler et al. (2011) suggests to study risk disclosure
in countries with weak risk reporting legislation and to examine the impact of corporate
governance on risk disclosure. Finally, the study contributes to risk disclosure literature in
the Indian context after Berger (2012) conducted a study using a small sample of 26
companies on risk disclosure. In particular, India’s position as an emerging economy
deserves utmost attention because of common law origin country (Laporta et al., 1998). Poor
law enforcement arising from an irrational delay in the justice delivery system thus
aggravates the role of other internal governance mechanism in reducing agency costs for
shareholders (Ganguli and Guha Deb, 2016). It propels to analyse risk disclosure in the Indian
context.
This study is structured in six sections. After the introduction, the second section reviews
previous risk disclosure literature and sheds light on the current situation of corporate
governance and risk regulations for Indian listed companies. Section 3 proposes the research
hypotheses. Section 4 discusses the research methodology adopted in the current study.
Section 5 assimilates the multivariate regression findings, and finally, the last section draws
conclusion with the implications of the findings.
Prior literature on risk disclosure

Previous studies have analysed quantity and quality of corporate risk disclosure on the basis
of the accounting standard followed within their national scope, that is, mandatory
disclosure and beyond the scope of mandatory accounting standard, that is, voluntary
disclosure.
In Europe, the context of risk disclosure was highly researched in UK. Linsley and Shrives
(2000) threw light on various benefits and obstacles in the way of risk information disclosure
discussed by the Institute of Chartered Accountants in England and Wales (ICAEW) (1999),
pointing towards the need for forward looking risk disclosure as against backward historical
disclosure. In an empirical study of UK companies, it was found that listed companies were
making general and repetitive disclosure over a period of time (Abraham and Shrives, 2014)
and the level of readability was very difficult in annual reports questioning the emphasis on
additional disclosure (Linsley and Lawrence, 2007). A good risk disclosure was reported
more as against bad risk disclosures (Linsley and Shrives, 2006). Abraham and Cox (2007)
found that firms publish internal control risk and financial risk but not business risk. Also,
firms with higher levels of systematic, financing risk and risk adjusted returns exhibited
highest level of aggregated and voluntary risk disclosure (Elshandidy et al., 2013). These
studies were conducted in a country where the accounting standard on Financial
Instruments: Disclosure was mandatorily followed by the companies. It leaves the room open Corporate
to study risk disclosure in those countries where this accounting standard is not mandatory, governance
primarily risk disclosure is in its preliminary stage to find out principle factors underlying and risk
such disclosure.
With respect to Finland, in 2006, the Finnish Accounting Practice Board (FAPB) reporting
published a comprehensive standard on risk disclosure to ascertain significant risks in
operating and financial reviews. The quality of risk disclosure was high with respect to the 381
Finnish companies after the release of comprehensive standards on risk disclosure
(Miihkinen, 2012, 2013). It draws attention that in a country where the exclusive standard on
risk exists better is divulgation of risk information. In Italy, Beretta and Bozzolan (2004)
found that risk information disclosure by the Italian companies was vague, generic,
backward-looking and qualitative which coincides with the finding of the studies
(Combes-Thuélin et al., 2006; Lajili and Zeghal, 2005; Linsley and Shrives, 2006). In the
context of the Malaysian and the Canadian companies, risk information was qualitative, and
it was found that the Canadian companies disclose financial risks, whereas Malaysian
companies reveal strategic risk the most (Amran et al., 2008; Lajili and Zeghal, 2005). In the
Indian perspective, Berger (2012) found that no separate section in the annual report of
companies exists where the users can directly access the risk information. Lack of
compulsory regulation on risk disclosure led to very-low-quality and dispersed information
disclosure.
Past studies that have analysed the relationship between corporate governance quality in
the form of board characteristics and ownership concentration and its effect on divulgation
of risk disclosure are compiled in Table I.
Corporate governance and risk reporting – Indian context

Corporate risk disclosure has gained attention because of major financial scandals which
have shaken the confidence of present and potential investors, propelling towards the need of
strict norms to be implemented by the regulatory bodies through adoption of effective
corporate governance regulations.
Corporate governance in India gained impetus at the time of liberalisation during 1990s.
It was introduced by the Confederation of Indian Industry on voluntary basis to be followed
by Indian companies. Very shortly, it acquired mandatory status in 2000s through the
introduction of Clause 49 of listing agreement to the Indian Stock Exchange. The Birla
Committee was set up by Securities and Exchange Board of India for promoting and
upgrading the standard of corporate governance, and amendments were incorporated in
Clause 49. From time to time, amendments are being introduced for strengthening corporate
governance practices to keep pace with the international standards.
The risk reporting practices in Indian companies are driven by three statutes, namely,
The Companies Act, 1956, Securities and Exchange Board of India and the Institute of
Chartered Accountants in India. The Companies Act, 1956 through the Ministry of Corporate
Affairs defines the role, power and responsibilities of directors and set the guidelines for the
companies, but lacks regulations for the directors of the company with respect to risk
management. The Companies Act, 1956 has been replaced by Companies Act, 2013 in the
partial manner after receiving assent of the President of India on 29th August, 2013. The Act
incorporates the role and functions of independent directors and emphasises that directors
should satisfy themselves on the integrity of financial information and systems of risk
management. It also highlights that a statement should be laid before a company in a general
meeting, a report by board of directors incorporating a statement indicating development
disclosure
concentration and risk
and ownership
(board characteristics)
corporate governance
relationship between
Prior studies on the
Table I.
382
32,4/5
MAJ
Sample Method of content
Authors (year) period Sample size Country analysis Accounting standard adopted
Abraham and Cox 2002 71 UK Word count FRS-13 (Financial Instrument: Disclosure)
(2007)
Oliveira et al. (2011) 2005 81 Portugal Sentence count IAS-1 (Presentation of Financial statements), IAS-32
(Financial Instruments: Presentation), IAS-39
(Financial Instruments: Recognition and
Measurement), IAS-37 (Provisions, Contingent
liabilities and Contingent Assets) and IFRS-7
(Financial Instruments: Disclosure)
Authors (year) Sample Sample size Country Method adopted using Accounting standard adopted for risk disclosure/
period content analysis legal framework
Ntim et al. (2013) 2002-2011 50 (500) firm South Sentence Count and Kings II Committee 2002 Report (Financial risk
year observ Africa Disclosure Indices definition)
Mokhtar and Mellett 2013 2007 Egypt Sentence count and EAS-25 (Financial Instruments: Presentation and
(2013) disclosure index Disclosure)
Elshandidy and Neri 2005-2010 290 UK Sentence count IAS-37 (Contingencies), IAS-14(Segment Reporting),
(2015) IAS-21(Foreign Exchange), IAS-16 (Investments)
and IFRS-7 (Derivatives or Financial Instruments)
Authors (year) Sample Sample size Country Method adopted using Accounting standard adopted for risk disclosure/
period content analysis legal framework
Elshandidy and Neri 2005-2010 88 Italy Sentence count IAS-37 (Contingencies), IAS-14(Segment Reporting),
(2015) IAS-21(Foreign Exchange), IAS-16 (Investments)
and IFRS-7 (Derivatives or Financial Instruments)
Notes: Presence of Exe Dir–presence of executive directors; Presence of Non-Exe Directors–presence of non-executive directors; Presence of Indep Non-Exe directors –presence of
independent non-executive directors; Presence of Dep Non-Exe directors–presence of dependent non-executive directors; OwnCon– ownership concentration; GovOwn– government
ownership; InstitOwn–institutional ownership; Blockholder with 5%– ordinary shares held by shareholders with atleast 5% of total company ordinary shareholdings; InsOwn_In-house
MPF–institutional ownership in house managed pension funds; InsOwn_OutsideMPF–institutional ownership outside managed pension plans and InsOwn_Life Ass Funds–institutional
ownership life assurance funds
Source: Compiled from various studies
(continued)
Authors (year) Theoretical framework CG impact on mandatory risk disclosure CG impact on voluntary risk disclosure CG impact on aggregate risk disclosure
Abraham and Cox Agency theory – – Presence of Exe Directors (+) sig,
(2007) Presence of Indep Non-Exe Directors (+)
sig, Presence of Dep Non-Exe Directors
(insig), InsOwn_In-house MPF (—) sig,
InsOwn_OutsideMPF-(insig),
InsOwn_Life Ass Funds (+) sig
Oliveira et al. (2011) Agency, legitimacy and – – Indep Non-Exe Directors (+) sig, Audit
resource-based perspective Committee Indep (insig), Auditor type
theory (+) sig OwnCon(insig)
Authors (year) Theoretical framework CG (board characteristics and ownership CG (Board characteristics and ownership CG (board characteristics and ownership
concentration) variables’ impact on concentration) variables’ impact on concentration) variables’ impact on
mandatory risk disclosure voluntary risk disclosure aggregate risk disclosure
Ntim et al. (2013) Agency, resource dependency, – – BoardSize (+) sig, Indep Non-Exe (+)
legitmacy, stakeholders and sig, CEO duality(insig), GovOwn (+) sig,
institutional theory InstitOwn (—) sig, Blockholder with 5%
(—) sig
Mokhtar and Mellett Agency, stakeholders, Board Size (+) sig, Role duality (—) sig, Board Size (+) sig, Role duality (insig), –
(2013) political cost, sigalling, and OwnCon(—) OwnCon(insig)
legitimacy theory
Elshandidy and Neri Agency theory Board Size (insig), Presence of Non-Exe Board Size (+) sig, Presence of Non-Exe –
(2015) directors(insig), Presence of Indep Non- directors (+) sig, Presence of Indep Non-
Exe directors (insig), CEO duality (insig) Exe directors (insig), CEO duality (insig)
and Dividend yield (—) sig, audit quality and Dividend yield (—) sig, audit quality
(—) sig, OwnCon(insig) (insig), OwnCon(insig)
Authors (year) Theoretical framework CG (board characteristics and ownership CG (board characteristics and ownership CG (board characteristics and ownership
concentration) variables’ impact on concentration) variables’ impact on concentration) variables’ impact on
mandatory risk disclosure voluntary risk disclosure aggregate risk disclosure
Elshandidy and Neri Agency theory Board Size (+) sig, Presence of Non-Exe Board Size (insig), Presence of Non-Exe
(2015) directors (+) sig, Presence of Indep Non- directors(insig), Presence of Indep Non-
Exe directors (insig), CEO duality (+) Exe directors (insig), CEO duality (insig)
sig and Dividend yield (insig) and audit and Dividend yield (insig) and audit
quality (—) sig, OwnCon(insig) quality (—) sig, OwnCon(insig)
governance
Corporate
reporting
and risk
Table I.
383
MAJ and implementation of risk management policy, including identification of risk that
32,4/5 threatens the existence of a company.
The second regulatory body, that is, Securities and Exchange Board of India, prime stock
market regulator, issued the Revised Clause 49 listing agreement to the Indian Stock
Exchange on 31st December, 2005, which defines that a company shall lay down the
procedure to inform board members about risk assessment and the minimisation procedure
384 adopted to deal with such risks along with the periodical review procedure followed by the
company. Further, it stated that a company should also discuss risk as a part of the director’s
report or management discussion and analysis report under the head “Risk and Concerns”. In
the wake of enhancing the disclosure on risks, SEBI has issued Listing Obligation and
Disclosure Requirements, 2015 which encompasses guidelines for setting up a separate Risk
Management Committee by the company.
Finally, the Institute of Chartered Accountants in India (ICAI) has issued accounting
standards, AS-30 Financial Instruments: Recognition and Measurement, AS-31 Financial
Instruments: Presentation and AS-32 Financial Instruments: Disclosure, which accounts for
financial risk and have been made applicable on the companies in the year 2015-2016 on
voluntary basis and will be applicable from 2016-2017 compulsorily.
Despite the various initiatives taken by the regulatory bodies in India, divulgation of the
information on the issue of corporate risk disclosure is still in its primary stage. The
information disclosure on risk by the Indian listed companies in their annual reports is a
small chunk of discussion based primarily on the SEBI’s Clause 49 till the time it is
mandatorily enforced by The Companies Act 2013, SEBI’s Listing obligations and
Disclosure Requirements, 2015 and Accounting Standards on Financial risk disclosure
issued by ICAI.
Corporate risk disclosures, corporate governance and hypothesis

development
Past studies (Abraham and Cox, 2007; Oliveira et al., 2011; Ntim et al., 2013, Elshandidy and
Neri, 2015) have identified variables that can affect corporate risk disclosure. This study
draws from this the corporate governance (Nandi and Ghosh, 2013; Subramanyam and
Dasaraju, 2014; Madhani, 2015), the voluntary disclosure (Chau and Gray, 2002;
Akhtaruddin et al., 2009; Dashti et al., 2014) and corporate social responsibility literature
(Ibrahim and Angelidis, 1995; Barako and Brown, 2008; Khan et al., 2013; Majeed et al., 2015;
Muttakin and Subramaniam, 2015) to identify potential drivers of corporate risk disclosure
in the Indian settings. The present study centres around firm level corporate governance,
quality in the form of board characteristics (i.e. board size, independent non-executive
directors on the board, gender diversity, CEO duality, board activity and board meetings)
and ownership concentration. It also investigates the influence of general firm
characteristics, namely, firm size, firm profitability, level of firm risk, capital structure and
firm growth, on the extent of risk disclosure in the annual reports following previous studies.
Corporate governance: board characteristics

Board size. The stakeholder theory (Freeman, 1984) underpins that large boards are
representative of greater stakeholders and are enriched with greater diversity in terms of
expertise (Branco and Rodrigues, 2006). On similar lines, the agency theory argues that an
increase in managerial monitoring associated with larger boards can have a positive
influence on corporate disclosures, including risk disclosure (Elzahar and Hussainey, 2012).
A contrary theoretical perspective put forth by the agency theory is that large boards are
ineffective, whereas small boards are effective and good at improving corporate disclosures
(Jensen and Meckling, 1976).
Large boards encompass varied experience and diffused opinions which strengthens Corporate
monitoring capabilities and enhances firm’s disclosure policy (Adam et al., 2005). In the governance
Indian context, prior studies have found that board size is positively related to voluntary
disclosure of information (Akhtaruddin et al., 2009), corporate governance and disclosure
and risk
practices (Madhani, 2015) and firm’s performance (Ganguli and Guha Deb, 2016). The reporting
diversity in the members derived by an increase in board members leads to more divulgation
of quantity and quality of information (Domínguez and Gamez, 2014). Contrarily, dispersed
opinions and non-integrated viewpoints are associated with large boards resulting in
385
diminished monitoring capabilities (Jensen, 1993; Lipton and Lorsch, 1992). According to
Cheng and Courtenay (2006), board size insignificantly affects voluntary disclosure. With
specific reference to India, the Securities and Exchange Board of India, Clause 49, do not
specify the number of directors that the board should have, but suggests that the board of
directors of a company shall have an optimum combination of executive and non-executive
directors, denoting board size is a crucial element of corporate governance structure. Based
on the above discussion of the relevant theory and supporting literature, it is expected that
board size will significantly affect the extent of risk disclosure.
The study hypothesises as follows:
H1. There is a significant relationship between board size and the extent of risk
disclosure in the Indian listed companies.
Board independence. Donnelly and Mulcahy (2008) demonstrate that voluntary disclosure
increases with the number of non-executive directors. Independent, non-executive directors
are associated with offering utmost important supervision necessary to improve the
effectiveness of a board in advising, monitoring and disciplining top management.
Independent, non-executive directors have greater incentives to demand transparency and
accountability from top management because of higher risk of their personal reputation
(Lopes and Rodrigues, 2007).
Higher level of disclosure can be expected from companies with high proportion of
independent directors. To reduce agency costs, firms with high level of independent directors
would disseminate more information. According to Freeman and Reed (1983), independent,
non-executive directors represent corporate stakeholders. Both the agency and stakeholder
theories suggest that the presence of independent, non-executive directors plays a pivotal
role in corporate governance structure to resolve agency problems between managers and
shareholders (Linsley and Shrives, 2006; Oliveira et al., 2011). It adds to the interest of other
stakeholders such as employees and local communities (Amran et al., 2008). Consistent with
the theoretical predictions, various studies support that there is a positive effect of the
presence of independent, non-executive directors on risk disclosure (Lopes and Rodrigues,
2007; Elzahar and Hussainey, 2012).
Studies have found insignificant effect of independent directors with voluntary disclosure
(Wan Mohamad and Sulong, 2010) including corporate social responsibility disclosure
(Majeed et al., 2015). To ensure sound corporate governance practices in Indian companies,
SEBI Clause 49, 2005, has enacted that for the listed companies where the chairman of the
board is a non-executive director, atleast one-third of the board should comprise of
independent directors and in case of an executive director (including non-executive promoter
chairman), at least half of the board should comprise of independent directors. In any case,
the board must have 50 per cent of non-executive directors. Further, SEBI issued a circular on
September, 2014 incorporating revision with respect to independent directors, that is, if
the chairman of the board is a regular non-executive director who is also a promoter of the
company or related to promoter or person occupying management position acting on the
MAJ board, atleast half of the board shall comprise independent directors. It also stated the
32,4/5 maximum limit for the tenure of independent directors and performance evaluation of these
directors, thus emphasising on separate meetings of such directors. All these initiative by
SEBI are to promote board independence; so, it is of paramount interest to study corporate
governance, pivotal component of board independence, prior to application of these
provisions. This indicates that presence of independent, non-executive directors promotes
386 autonomy among the board members which is likely to have a positive effect on disclosure
including corporate risk disclosure.
Based on the above discussion of the relevant theories and mixed findings of supporting
literature, the study assumes that independent, non-executive directors’ presence on the
board will be significantly related to the extent of risk disclosure. We hypothesise as follows:
H2. There exists a significant relationship between firms with a high proportion of
independent, non-executive directors on the firm’s board and the extent of risk
Gender diversity. Board diversity refers to varying profiles that may exist in the board
members and how the diversity can affect decision-making by the board. The characteristics
to be considered for measuring diversity include gender, age, professional experience and
education (Walt and Ingley, 2003). Among these, gender is arguably the most debated
element of board composition. Gender diversity in the board rooms refers to the presence of
female directors on the boards of the company (Dutta and Bose, 2006). Recruiting women on
corporate board might carry diversity of opinion and different prospects to board discussion
(Barako and Brown, 2008). According to Mahadeo et al. (2012), women are innovative and
community minded and have knowledge of consumer markets and customers.
The agency theory (Jensen and Meckling, 1976) suggests that board with diverse genders
can increase board independence and improve managerial monitoring (Cabedo and Tirado,
2004). The signalling theory concurs that firms use female representation on the board as
signal to build public image and it also enhances firm’s performance. Studies have found a
positive relation between boards with diverse genders and corporate social responsibility
disclosure (Barako and Brown, 2008; Ibrahim and Angelidis, 1995). In contrast, Bianco et al.
(2013) questions womens’ ability to contribute extra value to the board. Similarly, Cox and
Blake (1991) argue that cost exists for a firm to integrate a diverse workforce. Evidence with
respect to risk disclosure studies and gender diversity is scarce. SEBI, Clause 49 is silent
about presence of women on the corporate board, whereas SEBI vide in the circular dated
15th September 2014 issued amendment in Clause 49 directing that the listed companies with
effect from 1st April 2015 shall require atleast one woman director on the board. It will be
beneficial to study gender diversity in the boardrooms and its effect on divulgation of risk
information because it is a key corporate governance firm level board component. Based on
prior studies and theoretical support, we hypothesise as follows:
H3. There is a significant relationship between gender diversity and the extent of risk
CEO duality. Role duality comes into being when one person simultaneously holds the
position of chairman of the board and CEO of the company. The agency theory (Fama and
Jensen, 1983) supports the view of division between decision management and control of
decision. Ho and Wong (2001) suggest that separation of the two positions prevents holding
back of bad information. Gul and Leung (2004) found that in case of firms where these roles
are combined, disclosure of information is less in contrast to the firm’s where roles are
separated between two different persons. Clause 49 does not discuss about the dual role of
CEO of a company. It is essential to find out, in the absence of any guidelines regarding CEO Corporate
duality, what is the scenario in the Indian listed company and how it effects vital decisions governance
including risk disclosures made by the company. Based on the discussion, we therefore
hypothesise as follows:
and risk
reporting
H4. There is a negatively significant relationship between CEO duality and the extent of
risk disclosure in the Indian listed companies.
Board activity. The agency theory posits that board activity has a positive effect on 387
disclosure of risk information. Board activity in the form of number of meetings of the board
is pertinent because it can aid in reducing information asymmetry between managers and
directors and raise management monitoring (Dominguez and Gamez, 2014). Banghøj and
Plenborg (2008) found a positive relation between board meetings and volume of information
disclosure. On the contrary, García Sánchez et al. (2011) found a negative relationship
between the two. Clause 49 clearly states that the board shall meet at least four times in a year
and maximum time gap of three months between any two meetings. Board meeting is an
essential element of corporate governance, and it can have a significant impact on risk
information divulgation. For this study, we hypothesise as follows:
H5. There is a significant relationship between board activity and the extent of risk
Ownership concentration. The agency theory (Fama and Jensen, 1983) propounds that a high
level of ownership concentration will lead to less information asymmetry and lower the
conflict between principal and agent. On the contrary if there is greater diffusion in
ownership, more is the demand for disclosure as shareholders have less access to
management board. Agents disclose more information to signal the markets that they are
acting in best interest (Mckinnon and Dalimunthe, 1993). The more the concentration of the
company’s ownership by the promoters, greater the power they are likely to have in
decision-making (Muttakin and Subramaniam, 2015). Firms with a concentrated ownership
structure may have less voluntary corporate disclosure because the controlling shareholders
can monitor the actions of management and have access to the required information which in
turn does not necessitate additional divulgation of information (Khan et al., 2013).
Past studies have departed from the agency theory based on the assumption of
substantive homogeneity, that is, emphasising that different types of owners will differ in
their expectations they set for firm strategy, leading to different types of strategic choices
and outcomes (David et al., 2010 and Ramaswamy et al., 2002). Type of controlling
shareholder influence voluntary disclosure, that is, concentrated family-owned firms will
have less voluntary disclosure to safeguard from the outside stakeholders having access to
company information. In addition, firms having institutions as controlling shareholders
have less incentive for voluntary disclosure, that is, being major financiers they have access
to relevant information (Khan et al., 2013). The significance of corporate reporting to
institutional investors highly depends on their investment planning horizon, information
assembling capabilities and government activities (Bushee and Noe, 2000). Managers will
not be expected to make disclosures, including corporate risk disclosures to meet the
informational needs of institutional investors as powerful corporate stakeholders (Amran
et al., 2008).
On the similar line, firms owned by the government are also likely to have less
voluntary disclosure because of extensive government monitoring (Khan et al., 2013).
Whereas the agency theory suggests that increased risk disclosures practices can reduce
agency problems between managers and government as an influential stakeholder
MAJ (Jensen and Meckling, 1976). Hou and Moore (2012) witness government ownership as
32,4/5 aggravating agency problems; this implies that a strong political bond associated with
the high level of government ownership provides a shield against more scrutiny by weak
regulatory authorities and dishonest public officials, leading to inadequate disclosure by
such firms (Ntim et al., 2013). On the other hand, with respect to ownership concentration
in the hands of foreign shareholders, Mohobbot (2005) argues that if the number of
388 foreign shareholders’ concentration is high, the pressure builds on the directors for risk
disclosure. Past studies (Haniffa and Cooke, 2005; Muttakin and Subramaniam, 2015) put
forth the view that foreign shareholders are multinational businesses that make
investments in local firms and possess wide knowledge because of exposure in foreign
markets, so they demand for high level of corporate disclosure.
The empirical studies (Chau and Gray, 2002; Mohd Ghazali, 2007) have found a negative
association between ownership concentration and voluntary disclosure. With regard to risk
information disclosure and ownership concentration, the relationship between the two is
indeterminate. Said Mokhtar and Mellet (2013) have found a negative association between
ownership concentration and mandatory risk reporting and an insignificant association
between ownership concentration and voluntary risk reporting, whereas other risk
disclosure studies (Mohobbot, 2005; Konishi and Ali, 2007) have found an insignificant
relationship between the two. SEBI has prescribed a maximum permissible ownership by
promoter shareholder to be 75 per cent of the listed Indian firms. It is crucial to study this
corporate governance practice with regard to ownership concentration and its impact on risk
disclosure in the Indian context. For the purpose of the present study, we hypothesise as
follows:
H6. There is a significant relationship between ownership concentration and the extent
of risk disclosure by the listed Indian companies.
Other variables. Previous literature about corporate disclosure has emphasised the
significance of other important factors that may affect dissemination of risk information;
amongst them, features which stand out are firm size, firm profitability, level of firm risk,
capital structure of the firm and firm’s growth.
Firm size. Firm size motivates disclosure of higher volume of information to procure
external funds, maintaining good company image at the time of procuring funds from the
capital market (Dominguez and Gamez, 2014). According to Leftwich et al. (1981), external
capital tends to be greater in the case of large companies, which are more prone to disclosure
to cater to the informational needs of the lending party (Jensen and Meckling, 1976). Large
companies are more visible and answerable to society towards which they have to act
responsibly by being transparent in their operations. Prior risk disclosure literature has
found a positive association between risk disclosure and size of the corporation (Beretta and
Bozzolan, 2004; Mohobbot, 2005; Linsley and Shrives, 2006; Abraham and Cox, 2007; Amran
et al., 2008, Oliveira et al., 2011; Miihkinen, 2012; Baroma, 2014; Elshandidy et al., 2013;
Elshandidy and Neri, 2015). On the other side, Kamal Hassan (2009) and Atanasovski et al.
(2015) found an insignificant effect of company size on risk disclosure. For the purpose of the
current study, firm size is measured using market capitalisation.
Firm profitability. According to the agency theory, managers of profitable companies use
this profitability information to their personal advantage. From the perspective of the
signalling theory, profitability indicates the quality of investment, which leads to greater
incentive to disclose information and reduces the risk of negative market image. Profitable
companies disseminate information to stand out from less profitable firms (Giner, 1997).
Contrary to the theoretical perspective, empirical studies on risk disclosure have found an
insignificant relationship between risk disclosure and firm’s profitability (Mohobbot, 2005; Corporate
Elshandidy et al., 2013; Dominguez and Gamez, 2014; Madrigal et al., 2015; Atanasovski governance
et al., 2015; Elshandidy and Neri, 2015).
To measure profitability of a firm, return on assets, that is the ratio of operating income to
and risk
total assets, is used. reporting
Level of firm risk. Elshandidy and Neri (2015) found that relatively riskier firms will have
to disclose more risk information to meet investors’ need about various kinds of risk
confronted by companies and various initiatives taken to measure and manage risk. Deumes
389
(2008) and Elshandidy et al. (2013) support that riskier firms have more incentives to disclose
voluntary information than less riskier firms to avoid misinterpretations by various market
participants. With respect to capital structure of a firm, some risk disclosure studies (Deumes
and Knechel, 2008; Kamal Hassan, 2009; Oliveira et al., 2011; Miihkinen, 2012; Elshandidy
et al., 2013; Madrigal et al., 2015) have found that firm’s leverage positively and significantly
affects the level of risk disclosure, whereas Dobler et al. (2011) has found a negative
association between firm leverage and risk disclosure. On the other hand, some studies
(Mohobbot, 2005; Abraham and Cox, 2007; Amran et al., 2008; Ntim et al., 2013; Adamu, 2013;
Rajab and Handley-Schachler, 2009; Baroma, 2014; Atanasovski et al., 2015; Elshandidy
et al., 2015) have found an insignificant relationship.
The level of firm risk is measured using beta, which is the covariance of a company’s
market return relative to the market index. The calculation for this study is on the basis of 12
consecutive months’ end firm price, relative to market returns on National Stock Exchange
National Stock Exchange F’ifty (NIFTY) in India. Capital structure of the firm is measured
using a total debt equity ratio.
Firm growth. Khurana et al. (2006) argue that disclosure leads to firm’s ability to obtain
external financing by reducing information asymmetry, and firm’s growth is likely to have a
positive impact from such disclosures. This argument is supported by empirical evidence
(Chavent et al., 2006; O’ Sullivan et al., 2008). In line with this, Elshandidy et al. (2013)
hypothesised that there will be a positive relationship between high growth firms and
corporate risk disclosure, but the results were contrary to the prediction.
Firm’s growth is measured by the difference in the earning in the period t1 and t0 to
earning in the year t0.
Dependent variable measurement. Studies on risk disclosure have adopted content
analysis to analyse risk information in a complete annual report as opposed to specific
section (Beretta and Bozzolan, 2004 and Abraham and Cox, 2007). There are two principal
methods of content analysis, which were primarily adopted in risk disclosure literature: the
manual method as adopted in studies (Beretta and Bozzolan, 2004; Lajili and Zeghal, 2005;
Mohobbot, 2005; Linsley and Shrives, 2006; Abraham and Cox, 2007; Miihkinen, 2013; Said
Mokhtar and Mellet, 2013; Ntim et al., 2013) and the automated method (Elshandidy et al.,
2013, 2014; Elshandidy and Neri, 2015; Allini et al., 2016). The automated method has an edge
over the manual method as there are less chances of error of omission leading to accuracy.
Either method may adopt word, sentence or line as a unit of analysis. Prior risk disclosure
studies have adopted content analysis with sentence as a unit of analysis (Mohobbot, 2005;
Linsley and Shrives, 2006; Amran et al., 2008; Oliveira et al., 2011). Although Milne and Adler
(1999) persuasively argue that sentence is a reliable unit of analysis, they admit that few
errors are likely to arise in counting sentences than counting words. Using sentences as a unit
of measurement seems to overlook the fact that the possibility that differences in the use of
grammar might result in two different writers conveying the same message by using similar
number of words and using similar amount of space but using different number of sentences
(Unerman, 2000). Beretta and Bozzolan (2004) argue that relevance of risk information
MAJ disclosed in narrative reporting is influenced by how much it is diluted into the mass of other
32,4/5 piece of information revealed. From the reader’s point of view, finding a low number of
risk-related pieces makes it difficult to acknowledge the system of risk affecting firm
prospects. From the company’s perspective, diluting risk-related information in a thick
document such as the annual report may reveal the strategy of “hiding a needle in a
haystack”, that is, important information is communicated but in a way that is difficult for
390 readers to find; this limits the risk-related information at the sentence level of analysis.
This study adopts the automated method (Elshandidy et al., 2013, 2014; Elshandidy and
Neri, 2015; Allini et al., 2016) and word as a unit of analysis, following prior disclosure studies
(Arnold et al., 2006; Abraham and Cox, 2007; Li, 2010; Campbell et al., 2014; Nelson and
Pritchard, 2016), using the Nvivo (10) software. One of the key assumptions underlying all
quantitative content analysis studies is that the quantity of disclosure within each category
manifests the importance of the category (Deegan and Rankin, 1996; Gray et al., 1995). The
adoption of word as a unit of measurement has the advantage of lending themselves to
exclusive analysis (are categorised more easily) and has a logical advantage that a database
can be scanned for a specified word (Gray et al., 1995), and words add precision in
measurement (Milne and Adler, 1999). This study is based on the definition adopted by
Linsley and Shrives (2006) in their study of identifying risk disclosure. This broad definition
of risk includes “good” and “bad” “risks” and “uncertainties”:
Disclosures have been judged to be risk disclosure if the reader is informed about any opportunity,
or prospect, or of any hazard, danger, harm, threat, or exposure, that has impacted upon the
company or may impact upon the company in the future or of the management of any such
opportunity, prospect, hazard, harm, threat, exposure.
The automated content analysis steps. A firm risk information divulgation is captured in
three steps: firstly, we compile a comprehensive list of risk-related keywords to arrive at the
final risk word list. The list is based on the following principal source: prior studies on risk
disclosure (Table II), and the words adopted by these studies were identified. Secondly, the
Roget’s Thesaurus is used to find all relevant synonyms for words already identified.
Thirdly, other words indicative of risk were found by thoroughly studying annual report
narratives. After thoroughly analysing all sources, we arrived at a list of 78 words indicative
of word risk. To examine the extent to which words in the initial list are used, an intensive
text search is conducted by using the NVivo (10) software on a random sample of 30 annual
report narratives. The words that appeared with frequency less than five were eliminated to
arrive at the final list of 39 risk keywords. Further, these words were categorised into
positive, negative and statistical risk keywords, following Elshandidy (2011).
Second, using the specific instructions from the Nvivo (10) software, which is the latest
version of the Nudist (6) software, we designed a programme to search for risk-related
keyword list, as adopted in prior studies in the complete annual report.
Third, all scores were cross checked to ensure reliability; it involved counting of
individual scores of each word in a PDF document and then adding all scores together for
each category of risk, that is, positive, negative and statistical. These scores were then
matched with the scores given by the Nvivo (10) software for checking reliability.
Research methods
Sample selection and data collection
The present study analyses the impact of corporate governance firm level quality, in the form
of board characteristics and ownership concentration on the extent of voluntary risk
disclosure, after controlling the impact of other important factors for a sample of non-
financial Indian listed companies. The data have been collected for the financial year
Abraham Ismail Kravet and Ali and Elshandidy Elshandidy Allini

Li and Cox Meijer Elshandidy et al. Muslu Taylor et al. (2013) and Neri et al.
Risk disclosure studies (2010) (2007) (2011) (2011) (2012) (2013) (2014) and (2015) (2015) (2016)
Risk Keywords
Negative words
Against    
Challenges    
Decline   
Decrease   
Exposure  
Less    
Loss       
Lower  
Offset 
Potential disadvantage 
Risk         
Reduce  
Uncertain          
Delay  
Low  
Reverse    
Failure    
(continued)
adopted from prior
governance
Risk keywords
Corporate
reporting
and risk
Table II.
391
studies
Table II.
392
32,4/5
MAJ
Abraham Ismail Kravet and Ali and Elshandidy Elshandidy Allini
Li and Cox Meijer Elshandidy et al. Muslu Taylor et al. (2013) and Neri et al.
Risk disclosure studies (2010) (2007) (2011) (2011) (2012) (2013) (2014) and (2015) (2015) (2016)
Positive words
Changes   
Differ   
Differences  
Diversified    
Fluctuations       
Growth 
Highest   
Increase     
Opportunity    
Over 
Sufficient 
Advantage    
Volatility    
Variation     
Expected  
Future  
Gain   
High 
Statistical Words 
Significant   
Possible  
Likely   

Note: These words along with their stemmed words (ing, s, es and ly)
2013-2014 aiming at post global financial crisis, risk disclosures made by the Indian Corporate
companies and precedent to mandatory implementation of Companies Act 2013, SEBI governance
amendment (Listing Obligations and Disclosure Requirements, 2015) and ICAI accounting
standards AS-30, AS-31 and AS-32. The study uses annual reports to analyse the extent of
and risk
risk disclosure, because external investors perceive them to be an integral and reliable source reporting
of data (Donnelly and Mulcahy, 2008). Following prior literature on risk disclosure, the study
excludes financial firms because of their special nature and because they fall under a
different pronouncement (Said Mokhtar and Mellet, 2013; Ntim et al., 2013; Elshandidy and 393
Neri, 2015). The sample for the study consists of 100 Indian listed companies which are
randomly selected from Business Today’ top 500 companies. These companies are ranked on
the basis of marketcapitalisation by the Business Today group, representing best report of
the business profile of India[1].
Data analysis
The study proceeds towards testing of proposed hypotheses. With respect to this, it analyses
the influence of corporate governance quality in the form of board characteristics and
ownership concentration that may have an impact on the extent of risk disclosure using
multiple regressions. It also controls for the effect of a set of variables, whose impact on
corporate disclosure is evidenced in the prior literature (firm size, firm profitability, level of
firm risk, capital structure and firm’s growth). The study proposes a model (1) in which the
quantity of risk information will be a function of corporate governance in the form of board
characteristics, ownership concentration and some control variables:
Total risk disclosure = f (corporate governance board characteristics

and ownership concentration, control variables) (1)
To estimate the model (2) empirically, the study obtains the following models:
TRD = þ0 + þ1BoardSize + þ2IndNon-exe directors + þ3Gender diversity

+ þ4CEO_Duality + þ5Board_Meetings + þ6OwnConc_Institutions
+ þ7OwnConc_NonInstitutions + þ8OwnConc_IndianPromoter_BodiesCorp
+ þ9OwnConc_IndianPromoter_CentralGov
+ þ10OwnConcPromoter_Foreign_ownership_BodiesCorp
+ þ11OwnConc_Largest_ownership + þ12Firm size + þ13Firm Profitability
+ þ14Level of firm risk + þ15Capital structure + þ16Firm growth + U (2)
PRD = þ0 + þ1BoardSize + þ2IndNon-exe directors + þ3Gender diversity

+ þ4CEO_Duality + þ5Board_Meetings + þ6OwnConc_Institutions
+ þ9OwnConc_IndianPromoter_CentralGov
+ þ10OwnConcPromoter_Foreign_ownership_BodiesCorp
+ þ11OwnConc_Largest_ownership + þ12Firm size + þ13Firm Profitability
MAJ NRD = þ0 + þ1BoardSize + þ2IndNon-exe directors + þ3Gender diversity
32,4/5 + þ4CEO_Duality + þ5Board_Meetings + þ6OwnConc_Institutions
+ þ9OwnConcIndianPromoter_CentralGov
394 + þ10OwnConcPromoter_Foreign_ownership_BodiesCorp
+ þ11OwnConc_Largest_ownership + þ12Firm size + +þ13Firm Profitability
where:
• TRD is the total risk word count, including positive, negative and statistical risk keywords;
• PRD is the positive risk word count; and
• NRD is the negative risk word count.
Corporate governance board characteristics and ownership concentration variables are as

follows:
• BoardSize is measured by the total number of directors on the board;
• Ind Non-exe directors is the proportion of independent, non-executive directors on the
board;
• Gender Diversity – dummy variable, if women are present on the board = 1, 0 otherwise;
• CEO_Duality – if same person is the chairman of the board and CEO = 1, 0 otherwise;
• Board_Meeting – number of meetings of the board;
• OwnConc_Largest_ownership – percentage of shares with the largest shareholders;
• OwnConc_Institutions – dummy variable if largest shareholders are institutions, 0
otherwise;
• OwnConc_Non-Institutions – dummy variable if largest shareholders are non-institutions,
0 otherwise;
• OwnConc_Indian_Promoter_BodiesCorp – dummy variable if largest shareholders are
Indian Promoter bodies corporate, 0 otherwise;
• OwnConcPromoter_CentralGov – dummy variable if the largest shareholder is Indian
Promoter Central Government, 0 otherwise; and
• OwnConcPromoter_Foreignownership – dummy variable if largest shareholders are
Promoter foreign bodies corporates, otherwise 0.
Control variables are as follows:

• Firm size is measured by marketcapitalisation.
• Profitability of a firm measured by return on assets (ROA).
• Level of firm risk is measured by Beta.
• Capital structure is the leverage of a firm measured by the ratio of total debt to equity.
• Firm growth is measured by profit after tax growth (PAT growth).
Models (2), (3) and (4) are estimated using multiple linear regression analysis.
Results and discussion Corporate
Descriptive and bivariate results governance
Table III shows the main descriptive statistics of the variables in the study. From the result
fetched for the year 2013-2014, it can be ascertained that positive risk keywords (which is the
and risk
aggregation of the all the risk keywords which depicts risk as an opportunity) have a mean reporting
score 431 approximately with maximum of 1,266 words and minimum of 90 words, whereas
negative risk keywords (which is aggregation of all risk keywords which depict risk as
threat) have a mean score of 307, with maximum of 806 and minimum of 52 words in a 395
voluntary risk disclosure. This manifests that the Indian companies furnish positive risk
disclosure more in contrast to negative risk disclosure. Additionally, the board of a company
has ten members on an average with independent, non-executive directors on an average five
and board meetings held during a year have been four approximately. The shareholding of
the largest shareholder is 51.87 per cent on an average which points towards high ownership
concentration in the listed Indian companies. Similar to the findings of previous studies,
ownership concentration in other developing countries was as follows: Malaysia, 61.5 per
cent (Haniffa and Hudaib, 2006); Jordan, 52 per cent (Jaafar and El Shawa, 2009); and Turkey,
49.8 per cent (Karaca and Eksi, 2012).
Multivariate regressions
Ordinary least squares multiple regression has been applied to test the relationship between
dependent, independent and control variables. The various tests have been conducted to
check the accuracy of the regression analysis, which includes multicollinearity,
heteroscedasticity and normality of residuals (Haniffa and Cooke, 2005). After estimating the
models using the multiple regressions, the results have been presented in Table IV. It shows
that regression model for total risk, positive risk and negative risk which are statistically
significant (p-value < 0.01), for risk disclosure with Adj.R2 38.5, 31.5 and 40.9 per cent,
respectively. This implies that total contribution of the variables chosen in the study in
explaining the dependent variable (risk disclosure) is good enough.
In Models (2), (3) and (4) explaining the dependent variable, that is, total risk, positive risk
and negative risk, respectively, board size and gender diversity on the board is positively
significant which leads to the acceptance of H1 and H3. However, proportion of independent,
non-executive directors; board activity (board meetings); and CEO duality insignificantly
Variables Unit of measurement N Mean SD Min Max
Total risk Number of words 100 786.55 378.74 156 2,059

Positive risk Number of words 100 431.83 217.57 90 1,266
Negative risk Number of words 100 307.27 156.96 52 806
Statistical risk Number of words 100 47.45 31.74 4 169
Board size Count 100 10.21 3.09 3 18
Independent non-executive Count 100 5.44 1.91 0 10
directors
Board meetings Count 100 4.37 1.26 3 15
Ownership_Conc_Largest Percentage of largest 100 51.87 13.77 24 80
Shareholder shareholdings
Market capitalization Rupees (crores) 100 33,230.92 58,429.25 577.32 41,6860.3
Return on equity (RO) ROA ratio 100 10.31 9.14 —23.44 36.94
Beta nifty Beta ratio 100 0.698 0.400 0.018 1.847
Profit after tax (PAT) growth PAT ratio 100 17.53 96.79 —647.57 479.16 Table III.
Total debt equity Debt ratio 100 0.47 0.20 0.000 3.33 Descriptive statistics
results
Multivariate analysis
Table IV.
396
32,4/5
MAJ
Item/variable name Total risk (2) Positive risk (3) Negative risk (4)
2
R (%) 48.4 42.6 50.4
Adjusted R2 (%) 38.5 31.5 40.9
F 4.87 3.85 5.29
Sig <0.01 <0.01 <0.010 <<00000 0.0
Coefficient t-value Sig VIF Coefficient t-value Sig VIF Coefficient t-value Sig VIF
(Constant) 5.819 13.994 0.00 5.409 12.086 0.000 4.488 10.121 0.000
Board Size 0.041 2.833 0.005*** 1.318 0.037 2.390 0.019*** 1.318 0.048 3.118 0.002*** 1.318
Gender diversity 0.179 2.141 0.035** 1.147 0.159 1.768 0.080* 1.147 0.195 2.186 0.031** 1.147
Prop of Indep Non-Exe directors 0.322 0.707 0.481 1.449 0.335 0.682 0.496 1.449 0.347 0.713 0.477 1.449
Board meetings 0.015 0.451 0.652 1.240 0.010 0.272 0.785 1.240 0.029 0.794 0.429 1.240
CEO duality —0.023 —0.221 0.824 1.474 —0.045 —0.405 0.686 1.474 —0.023 —0.209 0.834 1.474
Ownership
Conc_Largest_Shareholder 0.000 0.261 0.794 1.498 —0.001 —0.411 0.681 1.498 0.004 1.238 0.218 1.498
Ownership identity_Institutions —0.125 —0.765 0.445 3.034 —0.166 —0.945 0.347 3.034 0.000 0.003 0.997 3.034
Ownership
identity_Non-Institutions —0.511 —1.823 0.071* 1.520 —0.481 —1.593 0.114 1.520 —0.483 —1.613 0.110 1.520
Ownership conc_Indian_
Promoters_Bodies Corporate —0.312 —2.126 0.036** 3.399 —0.299 —1.896 0.061* 3.399 —0.311 —1.988 0.050** 3.399
Ownership conc_Central Govt —0.115 —0.538 0.591 2.231 —0.185 —0.806 0.422 2.231 —0.040 —0.176 0.860 2.231
Ownership conc_Foreign
Ownership_Bodies Corp —0.308 —1.916 0.058** 2.754 —0.293 —1.694 0.094* 2.745 —0.291 —1.697 0.093* 2.754
Beta Nifty 0.310 2.464 0.015*** 1.667 0.272 2.013 0.047** 1.667 0.361 2.694 0.008*** 1.667
Market capitalization 3.06-06E 4.020 0.000*** 1.299 3.58E-06 4.366 0.000*** 1.299 2.41E-06 2.972 0.003*** 1.299
PAT growth 0.001 3.070 0.002*** 1.441 0.001 2.453 0.016** 1.441 0.001 3.599 0.000*** 1.441
ROA —0.011 —1.757 0.082* 2.198 —0.009 —1.385 0.169 2.198 —0.014 —2.076 0.041** 2.198
Total debt_equity —0.090 —1.259 0.211 1.681 —0.084 —1.102 0.273 1.681 —0.090 —1.185 0.239 1.681
Note: Significant at * 0.10, ** 0.05, *** 0.01 level (two-tailed)

affects the extent of risk disclosure which leads to rejection of H2, H4 and H5, respectively. Corporate
With respect to H6, ownership concentration by the largest shareholder stands rejected, governance
whereas the identity of the largest shareholder concentration of shareholding with non-
institutions has a significantly negative impact on risk disclosure than ownership
and risk
concentration with family ownership in Model (2), but an insignificant impact in other two reporting
models. Ownership concentration with Indian promoter’s bodies corporate has a
significantly negative impact on risk disclosure in contrast to family ownership in all the
three models. Similarly, in all three models, ownership concentration with foreign promoter 397
body corporate has a significantly negative impact in comparison to family ownership,

whereas ownership concentration with institutions and central government insignificantly
affects risk disclosure.
In the control variables, level of firm risk (Beta), firm size and firm’s growth are positively
significant in all the three models. Profitability of the firm (ROA) is negatively significant in
Models (2) and (4), but insignificant in Model (3). Capital structure of the firm insignificantly
affects the extent of risk disclosure in all the three models.
Discussions of multivariate findings

Regarding the discussion of findings of the current study, results from second, third and
fourth model affirm that board size positively and significantly influences the disclosure of
voluntary risk information, which conforms to the findings of risk disclosure studies (Said
Mokhtar and Mellet, 2013; Ntim et al., 2013; Elshandidy et al., 2013). This signifies that large
board size helps to enjoy the advantage of diversified expertise and voluminous knowledge
(Luo, 2005; Branco and Rodrigues, 2006) which propels disclosure. The increase in the board
size leads to the board members’ alertness regarding their commitment to support financial
disclosure and is a key determinant for dissemination of risk information. The current
findings are also supported with the advantage put forth by the agency theory and the
stakeholder theory, respectively, which support the view that an increase in the managerial
monitoring associated with larger boards can have a positive influence on corporate risk
disclosures (Elzahar and Hussainey, 2012; Ntim et al., 2013) and stakeholders representation
(Ntim et al., 2013). According to Hou and Moore (2012), board size has a negative effect on the
incidence of fraud, and ameliorates in the eradication of corruption because of high
monitoring. The divulgation of information by a company is in the hands of board members,
so larger boards disseminate more risk information.
Another board characteristic, gender diversity (Presence of Female on the board of the
company), has a positively significant effect on the disclosure of risk information which is in
line with the findings of prior risk disclosure studies (Ntim et al., 2013; Allini et al., 2016). The
agency theory suggests that boards with diverse gender can propagate board independence
and strengthen monitoring (Cabedo and Tirado, 2004). Further, the stakeholder theory
reinforces that boards with a diverse background can promote growth opportunities (Amran
et al., 2008). On the other hand, the study did not find any significant relationship between
board independence and risk disclosure, refuting the theoretical perspective put forth by the
agency theory, although supported by the findings of the studies on corporate governance
and voluntary disclosure (Ho and Wong, 2001; Mohamed and Sulong, 2010; Chen and Jaggi,
2001). Madhani (2015) found that higher proportion of independent directors on the board did
not result in better corporate governance and disclosure practices in the Indian context. The
promoters who are the owners and controllers of Indian firms negatively influence
performance of the independent directors. Kesner et al. (1986) argue that independent
directors themselves do not indulge in illegal acts, but they cannot reduce the illegal
activities. According to Patton and Baker (1987), independent directors are linked to the CEO
MAJ and have arrangements with management of the company rather than inclination
32,4/5 towards the stakeholders. Ganguli and Guha Deb (2016) found that boarded
independence insignificantly affects performance of Indian listed companies, the reason
being, in India, independent directors being mostly selected by promoters; hence,
investors assume that independent directors ultimately act in the interest of blockholders, as
such they are not truly independent. Another board’s vital feature, body activity, that is,
398 number of board meetings has an insignificant impact on the divulgation of risk information
disclosure which is similar to the finding of risk disclosure studies (Dominguez and Gamez,
2014; Allini et al., 2016). This implies that whether the information on risk is to be revealed or
not is independent of frequency of the board meetings. A probable reason could be that
discussions in the meetings are kept confidential due to strategic reasons. The coefficient of
CEO duality is negative but has an insignificant effect on risk disclosure, similar to prior risk
disclosure studies (Said Mokhtar and Mellet, 2013; Elshandidy et al., 2013 and Elshandidy
and Neri, 2015). In the Indian corporate setting, these two positions are mostly shared by the
same person, whereas the agency theory suggests separating the role of CEO and chairman
to improve managerial monitoring.
Corporate governance, another firm level quality in terms of ownership concentration,
that is, shareholdings with the largest shareholder, insignificantly affects the divulgation of
risk information which is consistent with the findings of prior risk studies (Mohobbot, 2005;
Oliveira et al., 2011; Said Mokhtar and Mellet, 2013; and Elshandidy and Neri, 2015). On the
other hand, identity of the largest shareholder affects the divulgation of risk information.
Compared with ownership concentration in the hands of promoter family, ownership
concentration with non-institutions effects disclosure of risk information negatively,
followed by ownership concentration with Indian promoter body corporates and ownership
concentration in the hands of foreign promoter body corporates. The more the concentration
of ownership in the hands of the promoter, the greater is the power they possess to influence
decision-making. Prior studies have found a negative relation between ownership
concentration and voluntary disclosure (Chau and Gray, 2002; Mohd Ghazali, 2007). The
relationship between foreign share ownership and corporate risk disclosure is inverse
consistent with the findings of Bokpin and Isshaq (2009) which points that more foreign
owners firm has, less is the disclosure by a firm.
In the control variables of the study, corporate size is positively significant in all the three
models, which is in agreement with the findings of risk disclosure studies (Beretta and
Bozzolan, 2004; Mohobbot, 2005; Linsley and Shrives, 2006; Abraham and Cox, 2007; Amran
et al., 2008; Oliveira et al., 2011; Miihkinen, 2012; Baroma, 2014; Elshandidy et al., 2013;
Elshandidy and Neri, 2015). It is supported by the signalling theory which argues that
managers of larger firms have greater incentives to divulgate risk information to signal their
enhanced ability to identify and manage risk which builds investors’ confidence (Elshandidy
et al., 2013). Managers are expected to disclose more information to justify higher level of
returns and to exhibit their ability to pay more cost for larger and detailed disclosure
(Baroma, 2014).
Firm’s profitability is negatively significant, projecting that less profitable firm disclose
more risk information about the various business risks to justify their position, which is in
line with the findings of Miihkinen (2012). A higher risk disclosure by such firms could be
because of the explanation of the reasons which led to less profitability. The level of firm risk
has a positively significant effect on risk disclosure, similar to the finding of Elshandidy et al.
(2013) and Madrigal et al. (2015), demonstrating that firms with higher systematic risk
disseminate more risk information. They are transparent in their actions undertaken and
programme planned to deal with such risks (Miihkinen, 2012). Higher sensitivity to
systematic risk in stock markets may motivate managers to disclose risk (Linsley and Corporate
Shrives, 2006). Both the agency and the signalling theories suggest that managers of governance
higher-risk firms have incentives by disclosing voluntary information (Elshandidy et al.,
2013). The firm growth has a positively significant effect on risk disclosure, which is in line
and risk
with Elshandidy et al.’s (2014) findings. High growth firms have positive incentives to reporting
divulgate risk information to manifest that they manage risk effectively (Elshandidy et al.,
2013). It is evident from the study that high growth firm embraces risk for the purpose of
advancement and divulgate such information to build investors confidence in them. Further, 399
capital structure proxied by leverage of a firm has an insignificant effect on risk disclosure,
conforming to the findings of other risk disclosure studies (Abraham and Cox, 2007; Ntim
et al., 2013; Dominguez and Gamez, 2014; Baroma, 2014). It could be presumed that the Indian
companies favour equity to debt in financing their assets.
Conclusion and limitations

The present study aims to find out the corporate governance firm level quality in the form of
board characteristics and ownership concentration which effects risk disclosure in the Indian
listed companies. In this endeavour, the study focuses on risk disclosures in the complete
annual report of 100 non-financial companies using automated content analysis for the
purpose of precision. It finds that positive risk keywords surpass negative risk keywords,
concluding that the information provided in the annual reports of the Indian listed companies
project risk as an opportunity rather than threat leading to discretionary disclosure. It
deprives the users of annual reports from reliable risk information for taking up a prudent
decision. In line with the prediction of the agency theory and signalling theory, it is suggested
that board characteristics such as board size and gender diversity are crucial determinants of
risk disclosure in the Indian context. Ownership concentration with the largest shareholder
effect risk disclosure insignificantly, whereas identity of the largest shareholder having
ownership concentration has a negatively significant effect on risk disclosure because
motives of each class of shareholder vary.
The study has implication for policy makers and regulators in developing countries such
as in the Indian context, Securities and Exchange Board of India to ensure the strengthening
of corporate governance norms at the firm level to discipline the board of a company and
keep track of ownership mechanisms as they play a vital role in divulgating risk information
in the annual reports of companies. Stringent corporate governance norms are crucial so that
companies do not overthrow investor’s interest over their own parsimonious interest. Along
with the authoritative approach, regulatory authorities can also encourage corporations to
disclose reliable risk information that is useful for stakeholders in decision-making, which
will build their confidence in the company reaping long-term benefits.
The research contributes by providing an initial understanding of the extent of risk
disclosure practices in India. It brings to light corporate governance elements which need to
be strengthened to promote risk disclosure. It contributes in widening the knowledge in the
Indian context where risk disclosure practice is at the infancy stage. However, the study has
certain limitations. The study relied on a set of 39 risk keywords for measuring the extent of
risk disclosure. This study used cross-sectional data of 100 listed non-financial companies;
future scope for large sample and longitudinal study exists for better understanding. In
future, the impact of corporate governance component such as audit quality and disclosure
of risk information can be analysed.
Note
1. www.indiatodaygroup.com/new-site/publications/bt-about.html
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Corresponding author
Ridhima Saggar can be contacted at: saggarridhima@gmail.com
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1. DellaportasSteven Steven Dellaportas steven.dellaportas@rmit.edu.au JoshiMahesh Mahesh Joshi

mahesh.joshi@rmit.edu.au School of Accounting, RMIT University, Melbourne, Australia . 2017.
Accounting, auditing and governance in the SAARC group of nations. Managerial Auditing Journal
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Corporate governance and risk reporting: Indian evidence

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documented benefits accruing by divulgating information on risks. According to Beretta and

Prior literature on risk disclosure

Corporate governance and risk reporting – Indian context

Corporate risk disclosures, corporate governance and hypothesis

Corporate governance: board characteristics

Abraham Ismail Kravet and Ali and Elshandidy Elshandidy Allini

Total risk disclosure = f (corporate governance board characteristics

TRD = þ0 + þ1BoardSize + þ2IndNon-exe directors + þ3Gender diversity

PRD = þ0 + þ1BoardSize + þ2IndNon-exe directors + þ3Gender diversity

+ þ14Level of firm risk + þ15Capital structure + þ16Firm growth + U (4)

Corporate governance board characteristics and ownership concentration variables are as

Control variables are as follows:

Variables Unit of measurement N Mean SD Min Max

Total risk Number of words 100 786.55 378.74 156 2,059

Note: Significant at * 0.10, ** 0.05, *** 0.01 level (two-tailed)

body corporate has a significantly negative impact in comparison to family ownership,

Discussions of multivariate findings

Conclusion and limitations

1. DellaportasSteven Steven Dellaportas steven.dellaportas@rmit.edu.au JoshiMahesh Mahesh Joshi

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Note: Significant at * 0.10, 0.05, * 0.01 level (two-tailed)