Empirical evidence on disclosure and risk-taking of banks in Ghana

Author:Lydia Kuranchie-Pong, Godfred Alufa Bokpin, Charles Andoh
Position:Department of Finance, University of Ghana Business School, Accra, Ghana
Pages:197-212
SUMMARY

Purpose This paper aims to empirically examine the relationship between disclosure and risk-taking of banks in Ghana. The study also aims to gain an insight into the general risk-taking behaviour of banks in Ghana for the period 2007-2011. Design/methodology/approach The study used panel regression model and relate risk-taking to disclosure, controlling for bank size,... (see full summary)

 
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Empirical evidence on
disclosure and risk-taking of
banks in Ghana
Lydia Kuranchie-Pong, Godfred Alufa Bokpin and Charles Andoh
Department of Finance, University of Ghana Business School, Accra, Ghana
Abstract
Purpose This paper aims to empirically examine the relationship between disclosure and
risk-taking of banks in Ghana. The study also aims to gain an insight into the general risk-taking
behaviour of banks in Ghana for the period 2007-2011.
Design/methodology/approach – The study used panel regression model and relate risk-taking to
disclosure, controlling for bank size, protability, liquidity and treasury bill rate. Disclosure scores from
a disclosure index are used as a measure of disclosure, likewise Z-score as a measure of total risk. Also,
the ratio of provisions for loan losses to gross loans by each bank for each year was used to examine the
general risk-taking behaviour of Ghanaian banks.
Findings The study revealed that the election year and the immediate subsequent year are
characterized by an increase in non-performing loans. Greater disclosure is associated with more
risk-taking and vice versa. This implies that market discipline is not effective in Ghana. Treasury bill
rate, protability and liquidity were found to be economically meaningful and statistically signicant in
inuencing risk-taking of banks in Ghana.
Originality/value – As there are relatively few studies conducted in this area, specically among
banks in Ghana, this study will broaden the scope of the literature on disclosure and risk-taking by
providing empirical evidence.
Keywords Disclosure, Liquidity, Z-score, Banks in Ghana, Market discipline,
Risk-taking behaviour
Paper type Research paper
1. Introduction
Financial information is needed by all stakeholders so as to make an informed
judgement and decision. According to Putu et al. (2012), information disclosure forms an
integral part of nancial reporting. Conceptually, the process of accounting to present
information in the form of a full set of nancial statements ends with disclosure of
information. The information disclosed in annual reports is basically grouped into two
main categories, namely, mandatory disclosure and voluntary disclosure (Putu et al.,
2012). Mandatory disclosure is the minimum information that must be disclosed and
compulsory as stipulated by the regulations. The “voluntary disclosure regards
information made public through the rm’s free choice” (Papo, 2008). According to
Huiyun and Peng (2012), voluntary disclosure refers to the activity of voluntarily
revealing information in addition to that required by regulators.
Market discipline has become a prominent topic in discussions of the banking
industry in recent years. Market discipline is the idea that the actions of shareholders,
creditors and counterparties of banking companies can inuence the investment,
The current issue and full text archive of this journal is available on Emerald Insight at:
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Disclosure and
risk- taking of
banks in Ghana
197
Journalof Financial Regulation
andCompliance
Vol.24 No. 2, 2016
pp.197-212
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-05-2015-0025
operational and risk-taking decisions of bank managers (Flannery, 2001;Bliss and
Flannery, 2002;Hirtle (2007). Bank supervisors have embraced the concept of market
discipline as a supportive measure to supervisory and regulatory tools for monitoring
risk at individual banks and systemic risk in the banking system as a whole (Hirtle,
2007). According to Mullineux (2006), good corporate governance of banks will be
facilitated by more disclosure of properly audited and internationally comparable
accounts. Sufcient information disclosure is a necessary condition for efcient market
discipline. Effective risk management is critical to sustaining banks growth and
protability. Shareholders and other interested parties are expected to contribute to
effective risk management in the banking industry through market discipline. This
therefore calls for stakeholders to assess the risk prole of a bank. Stakeholders need
sufcient disclosure of risk-related information by banks so as to assess the risk prole
of the banks to make an informed decision in contributing to effective risk management.
There is a concern as to whether the banks are disclosing sufcient risk information to
the marketplace.
Existing theory establishes a disciplining mechanism of transparency on banks’
risk-taking either through market monitoring and pricing or through limiting
regulatory forbearance of captured regulators (Flannery, 2001). Theory of disclosure
indicates that greater disclosure and enhanced market discipline lead to reduced
risk-taking. However, little empirical work have been done to examine the inuence of
disclosure on risk-taking in the banking industry (Nier and Baumann, 2003;Hirtle, 2007;
Bischof and Daske, 2012).
Over the years, researchers have focused on factors inuencing voluntary
disclosure (Huiyun and Peng, 2012), voluntary disclosure and earnings management
at bank (Putu et al., 2012), determinants and consequence of voluntary disclosure
(Wang et al., 2008), the extent of disclosure in annual reports of banking companies
(Hossian, 2008), mandatory supervisory disclosure, voluntary disclosure and
risk-taking of nancial institutions (Bischof and Daske, 2012), public disclosure,
risk and bank performance (Hirtle, 2007), market risk disclosures of banks (Savvides
and Savvidou, 2012), bank governance, regulation and risk-taking (Laeven and
Levine, 2009), transparency and the disclosure of risk information in the banking
sector (Linsley and Shrives, 2005), and efciency and risk-taking behaviour of
Ghanaian banks (Isshaq et al., 2012). Arguably, there is little empirical work on
disclosure in general and risk-taking. Therefore, one of the research gaps that this
study seeks to ll is to examine the inuence of disclosure on risk-taking of banks in
Ghana. Also, there exist a contextual gap in that most of these related empirical
research are conducted in the developed countries using the setting pertaining there,
whereas the phenomena is widespread. There is therefore the need to investigate
this aspect in a developing region like Africa, laying particular emphasis on Ghana.
This research will help to enrich the literature in the area of disclosure of
information and risk-taking in the banking industry. The remainder of the paper is
organised as follows. The next section discusses the relevant literature on issues
pertaining to disclosure and risk-taking, which guides the development of
hypotheses. Section 3 explains the research method followed by a discussion of the
results in Section 4. The paper ends with a summary and the conclusion of the
research.
JFRC
24,2
198

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