Risk disclosure and risk governance characteristics: evidence from a developing economy

• Pages: 577-605
• Date: 20 April 2020
• DOI: https://doi.org/10.1108/IJAIM-07-2019-0083
• Published date: 20 April 2020
• Author: Shamsun Nahar,Mohammad Istiaq Azim,Md Moazzem Hossain
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Risk disclosure and risk

governance characteristics:

evidence from a

developing economy

Shamsun Nahar

Department of Accounting, Finance and Economics, Griffith University,

Queensland, Australia

Mohammad Istiaq Azim

Department of Accounting and Finance, North South University,

Dhaka, Bangladesh, and

Md Moazzem Hossain

School of Business and Governance, Murdoch University, Perth, Australia

Abstract

Purpose –The purpose of this paperis to explore to what extent risk disclosure is associated withbanks’

governance characteristics. The research also focuses on how the business environment and culture may

create a bank’s awarenessof risk management and its disclosure. This study is conductedin a setting where

banks are notmandated to follow international standards fortheir risk disclosures.

Design/methodology/approach –Using 300 bank-yearobservations comprising hand-collected private

commercial bank data, the study uses regression analysis to investigate the influence of risk governance

characteristicson risk disclosure.

Findings –This paper reports a positive relationship between risk disclosure and banks’governance

characteristics,such as the presence of various riskcommittees and a risk management unit.

Practical implications –Because studies are lacking onrisk disclosure and risk governance conducted

in developing countries, it is expected that thisresearch will make a significant contribution to the literature

and providea foundation for further research in this field.

Social implications –This study complementsthe corporate governance literature, more specificallythe

risk governanceliterature, by incorporating agency theory, institutionaltheory and proprietary cost theory to

provide robustevidence of the impact of risk governance practices in the context of a developing economy.

Originality/value –Previous studies on risk disclosure and governancedeterminants primarily involve

developed countries. This paper’s contribution is to examine risk disclosure and risk governance

characteristics in a developingcountry in which reporting according to international standardsis effectively

voluntary.

Keywords Basel II, Corporate governance, Agency theory, IFRS 7, Risk disclosure

Paper type Research paper

1. Introduction

Risk disclosure has been of increasing importance in international policy arenas and raised

significant interest around the world sincethe major corporate collapse in 2007-2008. Given

this importance, earlier literatureon risk disclosure has focused on developed countries, for

example, the UK (Abraham and Cox, 2007;Linsley and Shrives, 2006;Solomon et al.,2000),

Risk disclosure

and risk

governance

577

Received18 July 2019

Revised6 November 2019

24February 2020

Accepted8 March 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 4, 2020

pp. 577-605

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2019-0083

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

the USA (Hodder et al.,2006) and Canada (Lajili, 2009). However, less attention has been

placed on developing countries.The dearth of studies is even more pronounced for the issue

of voluntary adoption of international standards in a developing country context. It is

commonly argued that implementation of international standards is motivated primarily

according to countries’institutionalsettings, along with their economic, political and social

framework. The purpose of this paper is to examine the association between risk

governance characteristics and the extent of risk disclosure in a developing country in

which risk reportingaccording to international standards is effectivelyvoluntary.

Developing economies are often characterized by family dominance, a high level of

corruption and significantpolitical interference and, therefore, are not conduciveto adopting

and implementing Western-style governance models (Uddin and Choudhury, 2008). A

growing number of studies (Hassan, 2009;Islam and Khaled, 2005;Khan et al., 2013)draw

attention to the argument that the institutional setting, accounting technologies and

regulatory framework in developing countries differ from those in developed countries.

Therefore, one logical questionis whether the findings from developed markets concerning

risk disclosure hold for a considerably different institutional setting and disclosure regime.

In this paper, we empirically examine this question using the context of an emerging

market: Bangladesh.

Bangladesh has one of the fastest-growing economies and is expected to move up from

the status of an emerging economy to a developingcountry by 2024 (UN, 2018). As per the

result of GDP growth in the first quarter of 2019, Bangladesh’seconomy is considered to be

the seventh fastest-growing globally with a growth rate of 7.3 per cent. As of 2019,

Bangladesh’s GDP per capita income is estimated to be US$4,992 (PPP) and US$1,888

(nominal) (IMF, 2019). Continuation of this growth in Bangladesh is not possible without a

sound banking sector.

In Bangladesh, there are scores of financial scandals where poor corporate governance

was the main issue. Non-performing loans (NPL), among others, put some pressure on

Bangladesh’s growing economy.Although 2.5 to 3 per cent NPL is considered normal in the

global scenario, unfortunately,in the case of Bangladesh the rate is 27.10 per cent from 2012

to 2015. Lack of an effective monitoring mechanism by the Bangladesh Bank worsens the

situation. In addition, like the central banks of other countries, Bangladesh Bank does not

hold the sole authority to make independent decisions. Rather, the Bangladesh Bank needs

to comply with the decisions of the Ministry of Finance (Hossaini, 2018). Because of the

presence of a large number of banks in the country, there is high competition to attract

customers. In spite of having weak regulatory and monitoring frameworks, banks are

voluntarily disclosingtheir corporate governance and risk management information in their

annual reports. The research focuses on how the above-mentioned business environment

and culture may create a bank’s awareness of risk managementand its disclosure and open

their minds to understand and acceptthe importance of risk disclosure. In other words, what

are incentives for banking companies to disclose bank’s risk and to what extent is risk

disclosure associatedwith banks’governance characteristics.

Bangladesh is chosen as an ideal research location in which to investigate how

international standards in a non-mandated environment are associated with the extent of

risk disclosure by banking institutions and including the relationship with governance

mechanisms. A study of this nature would provide meaningless results if conducted using

data from a country where the rule of law is evident, or where enforcement of governance,

accounting and prudential standardsis mandated. As Mulherin (2007) notes, examiningthe

impact of the regulation when it is ubiquitously applied, generally makes examining

regulatory impactschallenging to undertake.

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