The determinants of forward-looking risk disclosure and its impacts on firms’ risk and analyst forecast accuracy: Evidence from the UK

Abstract

This thesis represents the first attempt, to the best of my knowledge, to obtain a deeper understanding of firms’ forward-looking risk disclosure patterns, and their determinants from the perspective of corporate governance issues and ownership structure, and impact on firm risk and analyst forecast accuracy. In order to test these relationships, I manually coded a sample of non-financial institutions that were members of the FTSE100 and Mid-250 indices during 2010, as identified by Thomson Reuters.
Chapter 1 is the introduction of the whole thesis; it discusses the research background and motivation and briefly outlines theoretical development of risk disclosure research.
Chapter 2 investigates the determinants of forward-looking risk disclosure. I find that corporate boards with a higher presence of independent, non-executive directors, larger board sizes and higher audit committee effectiveness all contribute to more forward-looking risk disclosures. Conversely, share holdings by investment institutions and inside employees are negatively related to forward-looking risk disclosure.
Chapter 3 investigates the impact of forward-looking risk disclosure on firm risk. I report a significant negative association between the total quantity of forward-looking risk disclosure and level of firm risk; however, one standard deviation increase in disclosure only leads to a slight decrease of risk. The detailed risk construction reflects that more ‘operational’, ‘good’, ‘quantitative’ risks that are forward disclosed will impose stronger effects on reducing firm risk.
Chapter 4 investigates the impact of forward-looking risk disclosure on analyst forecast accuracy. I report a significant positive relationship between the quantity of forward-looking risk disclosures and analyst forecast accuracy; the reduction effect of forecast error appears strongest in the short-term horizon. In testing the relationship between forward-looking risk disclosure and analyst forecast accuracy, I control for earnings quality, the results show that there is a significant positive association between earnings quality and forecast accuracy. Additionally, earnings quality has long-term predictive power regarding earnings.
Chapter 5 is the conclusion of this thesis.