The effects of multi-layer governance on risk disclosures: EU evidence

Disclosure of risks provides information on current and potential risks that firms are facing that may affect their continuity, which is a critical issue for stakeholders. Despite this, most studies examining the impact of firm-level governance structures on risk disclosure are generally rare and focus only on a single country and the amount of information disclosed. Consequently, this study examines how corporate governanceis related to the quantity and quality of risk disclosure by EU firms and whether national governance quality (NGQ) reinforces this relationship.

Using one of the largest datasets of corporate governance and risk disclosures to date, research sample includes 4851 observations from firms in the UK, Germany, France, and Italy,covering the period 2012-2018. In this study, an automated content analysis method is used to measure the quantity and quality of risk disclosure practices. The estimation results indicate that firms report risk disclosures with a large degree of variability and inconsistency. In addition, risk disclosures tended to be qualitative, positive, and historical during the seven-year period covered. Furthermore, the multivariate analysis indicates that independent directors, board gender diversity, female leadership, audit quality, institutional ownership, and corporate governance quality are positively associated with the extent and quality of risk disclosures at the firm level. In contrast, concentrated ownership and managerial ownership are negatively related to the extent and quality of risk disclosures.

At the country level, the evidence suggests that the NGQ, particularly voice and accountability, control of corruption, and government effectiveness, have a positive impact on risk disclosure. Furthermore, theresults indicate that NGQ has a moderating effect on the relationship between corporate governance and risk disclosures. These findings are largely consistent with the multi-theoretical framework that has been adopted, which integrates agency, resource-dependence, stakeholder, legitimacy and institutional theories. Overall, the results suggestthat firms' disclosure decisions are not only influenced by firm-level governance, but also by country-level governance structures. This study has important implications for firms, policymakers, and other stakeholders in regard to the development of the firm and national governance.