Assessing the extent to which risk information in annual reports can predict the future performance of banks

Abstract

The aim of this thesis was to examine the extent to which risk information in the annual reports of banks reflects their future performance. Although research and recommendations have emphasised that risk disclosures should be informative, prior research has not arrived at any firm conclusions on the relevance of risk disclosures on bank performance. In the first paper, this thesis examined the extent of adumbrative risk reporting practice (i.e., vague, partial or circuitous disclosure prior to negative events) by banks. Using institutional theory and upper echelons theory to understand risk reporting practice by banks, an in-depth investigation was conducted on the annual reports of two UK resident banks that performed very differently during and after the global financial crisis.
This identified that adumbrative risk reporting was practiced more by the failed bank. Subsequently, the second paper examined the impact of risk reporting systems on bank performance. Using accounting and market based measures, the relationship of voluntary, adumbrative and mandatory risk disclosure practice were separately examined with performance of all UK resident banks during and after the financial crisis. Panel data regression analysis was used. While no relationship was found between adumbration and performance, the results showed that mandatory risk disclosure negatively affects performance while voluntary risk disclosure positively affects performance. The researcher found less disclosure on securitisation activity after the financial crisis. Financial leverage was negatively related to bank performance, while the number of board sub-committees and income diversity were found to be positively related to bank performance. The differences in the risk reporting practices of banks within the same environment led to the quest to examine the variability of risk disclosure practice across banks resident in different cultural environments. Hence, the third paper examined the impact of national cultural dimensions on risk reporting transparency of European banks. Using voluntary disclosure theory and national culture theory as respective guides to understanding risk reporting transparency and national cultural dimensions, a longitudinal analysis was conducted of the risk information provided in annual reports of European banks prior to actual adverse events. These results were compared with uncertainty avoidance, power distance and long term orientation cultural dimensions using weighted least square regression analysis. The results showed that while uncertainty avoidance was negatively related to risk reporting transparency, power distance was positively related to risk reporting transparency. The thesis contributes to risk disclosure research, particularly in the banking industry, by highlighting the need to study (a) adumbrative risk reporting, (b) the potential drawbacks of categorised risk disclosure regulations, and (c) national cultural differences in order to better understand the variability in risk disclosures relating to actual events at banks. This thesis also demonstrates that valuable risk information (related to bank specific circumstances) can be identified using qualitative content analysis which otherwise may be neglected with the use of quantitative content analysis as used in prior studies. With this, several evidence informed recommendations have been developed for better risk disclosure practices.

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Identifiers

ORCID for Oliver Marnet: orcid.org/0000-0001-9450-2332

ORCID for Ian Dawson: orcid.org/0000-0003-0555-9682

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