Impact of risk disclosure on the volatility, liquidity and performance of the UK and Canadian insurance companies

Abstract

Purpose This paper aims to investigate the impact of risk disclosure practices (voluntary, mandatory and risk disclosure index) on stock return volatility, market liquidity and financial performance for insurance companies in the UK and Canada, before and after the International Financial Reporting Standards (IFRS) adoption. Design/methodology/approach The panel data analysis covers 14 insurance companies in the UK and 12 in Canada over a six-year period, three years before and three years after the implementation of IFRS. The authors collected risk disclosure data manually from the annual reports and analyzed it through QSR NVivo software for each country. The other variables are secondary data collected from Thomson Reuters Eikon and Datastream. Findings The results reveal that mandatory risk disclosure practices positively influence stock return volatility for UK insurers but not Canadian ones. Moreover, both mandatory and voluntary risk disclosures increase market liquidity for UK insurers. The outcomes also show a negative influence of risk disclosure practices on financial performance for both the UK and Canadian insurers. The adoption of IFRS enhances the impact of risk disclosure practices in both countries on market liquidity and financial performance. Research limitations/implications The findings rationalize the impact of risk disclosure practices on volatility, liquidity and financial performance of UK and Canada insurers, and the effect of IFRS in triggering those results. Practical implications The findings highlight the diverse effects of voluntary and mandatory risk disclosure practices in enhancing market discipline and mitigating information asymmetry problems to investors. Regulators and policymakers could rely on the findings to amend and develop disclosure standards more frequently to assure their effectiveness. The authors also offer insights to managers to determine the levels of mandatory and voluntary disclosure practices and disclosure strategies to gain their stakeholders’ confidence. Originality/value This study contributes to the literature of risk disclosure in the insurance industry for both the UK and Canada where scarce studies are conducted. It also offers interesting implementations to investors, managers and policymakers.

The effect of IFRS convergence on risk disclosure: an investigation into the Indian accounting system

“…Overall, the results confirm that convergence with IFRS results in a significant increase in the quantity of risk disclosure. These findings are consistent with previous research (Höring and Gründl, 2011; Kassamany et al , 2021) and support H1 , which posits a positive association between IFRS convergence and increased risk disclosure. The possible reason for this outcome could be the general underlying risk disclosure requirements of IFRS and the strong coercive pressure from regulators brought on by mandatory IFRS convergence (Tauringana and Chithambo, 2016), which collectively serves to encourage firms to provide greater levels of risk-related information in corporate reports.…”

“…In the current literature, there are two opposing views regarding the impact of IFRS on the extent of risk information disclosures. Proponents argue that IFRS enhances risk disclosure by mandating more detailed and comprehensive risk disclosure requirements (Kassamany et al , 2021; Tauringana and Chithambo, 2016). To be more specific, IFRS 7 and IFRS 9 are designed to encourage disclosure regarding the significance of financial instruments to a firm and the degree of risk originating from those instruments, both in qualitative and quantitative dimensions (Deloitte, 2019).…”

“…Their findings revealed that the number of risk committees and separate risk management units is positively related to the degree of IFRS-mandated risk disclosures. More recently, Kassamany et al (2021) investigated the impact of IFRS adoption on firms IFRS convergence and risk disclosure listed in the UK and Canada. The findings of this study showed that adopting IFRS not only triggers an increase in voluntary risk disclosures but also amplifies the benefits of mandatory disclosures, leading to higher market liquidity.…”

Guest editorial: Sustainability reporting in different institutional and regulatory environments

“…Finally, the three pillars follow heterogeneous patterns (El Khoury et al , 2022a). Kassamany et al (2022) study examined the relationship between risk disclosure practices on stock return volatility, market liquidity and financial performance for insurance companies in the UK and Canada. The results indicated that the compulsory risk disclosure practices positively affect the volatility of stock returns for insurance companies in the UK, but not for Canadian companies.…”

Management Characteristics, Risk Disclosure Quality and Liquidity: A Practical Evidence from the Egyptian Business Environment

“…Risk disclosure quality is measured using an index consisting of (50) items that have an equal importance, this index was prepared based on the accounting standards and prior relevant studies (Mokhtar and Mellett, 2013;Martikainen et al, 2015;Kassamany et al,2022).…”