This research evaluates the level of mandatory and discretionary disclosure of risk management in financial statements of Vietnamese financial listed firms. Using the content analysis method, this study has revealed that the level of information disclosure on risk management by those firms is relatively low.
ISSN 1859-3666 journal of Trade Science 6:4 (2018) 25 - 35 TMU’S JTS Nguyen Huu Cuong Danang University of Economics - The University of Danang Email: cuonghien@due.edu.vn Vo Hoang Tung Asia Dragon Audit and Appraisal Firm Email: vohoangtung1992@gmail.com Riceved: 28th August 2018 Rivised: 10th September 2018 Approved: 17th September 2018 o the best of our knowledge, there have been no studies to assess the level of risk management disclosure (RMD) by listed companies in the financial sectorin Vietnam This research evaluates the level of mandatory and discretionary disclosure of risk management in financial statements of Vietnamese financial listed firms Using the content analysis method, this study has revealed that the level of information disclosure on risk management by those firms is relatively low The regression analyses demonstrate that RMD level is affected by firm size, solvency, leverage and independent directors Key words: disclosure, risk management, risk management disclosure, factor analysis Introduction level of RMD and itsassociated factors will be Globalization has posed a challenge to the field meaningful not only to financial reporting preparers, of risk management in the financial sector information users, but also for state management Enterprises in general and financial firms in partic- agencies To fill the gap of RMD, this study has ular always want to expand their business, so the focused on assessing the level of RMD on financial risk also increases proportionally with the expan- statements of financial listed firmsin Vietnam for sion In addition, financial institutions are facing three years (from 2014 to 2016) and the factors increased risk because they are funding higher-risk affecting the disclosure level Deriving from the projects In this context, investors, shareholders and findings, this study proposes some policy and man- other stakeholders have the right and desire to know agement implications with the expectation that the all the information about risk and risk management stock market will have financial reports with high of the business to make the relevant decisions levels of disclosure compliance, which are more Meanwhile, research on RMDby enterprises in meaningful to users and contributing to promoting Vietnam is scarce.Therefore, the assessment of the transparency infinancial market JOURNAL OF TRADE SCIENCE " 25 ISSN 1859-3666 Journal of Trade Science TMU’S JTS Theoretical framework and research method to improve investor confidence by providing higher 2.1 Theoretical framework quality disclosure of risk management to reduce polit- Although there are almost non-existing in-depth ical sensitivity (Hassan, 2009) studies examining RMDby enterprises, the kind of Proprietary cost theory, developed by Watner and information disclosure is part of the financial reporting later developed by Verrecchia, has been used as a disclosure Prior research recognises that financial theoretical framework for much of the later disclo- reporting disclosure is influenced by many factors and sure literature (see Watner, 1982; Verrecchia, 1983) is explained by different theories This theory suggests that the cost will arise when Agency theory was developed by Jensen and there is a decline in cash flow in the future due to the Meckling in 1976 when investigating the relationship firm's disclosure Proprietary cost theory is the basis between the principals (owners) and the agents (man- for explaining that RMD by firms may not be useful ager) of the firm (see Jensen & Meckling, 1976) Both to users because managers find that the disclosing sides in this relationship want to maximize their inter- more information will not bring more benefits than ests; So, they tend to seek personal gain Largerfirms the potential costs of disclosure (Amran et al., 2009) will often face more risk, so they may disclose more In addition, according to Healy and Palepu (2001), information on risk management in order to give share- highly profitable firms may not want to disclose their holders confidence in their ability to cope with risk, proprietary information to competitors, since such then reducingagency cost In addition, high risk firms information can undermine those firms' competitive lead to high information asymmetry between managers position and investors (Deumes & Knechel, 2008), and risk Information economics theory is based on three reporting can reduce the agency cost as well as the classic studies, including Akerlof (1970), Spence information asymmetry between managers and share- (1973), and Rothschild and Stiglitz (1976) This the- holders (Watts & Zimmerman, 1983) ory implies that when engaging in business transac- Signalling theory, developed by Spence (see tions or potential transactions there may be one party Spence, 1973), suggests that information asymmetry with an informational advantage over the others between insiders and investors will cause adverse Managers not make the same decision with the selection for investors This theory provides an expla- disclosure extent because there are differences when nation for the behaviour of managers as they demon- considering trade - offs between costs and benefits strate their ability to identify, measure, and manage Firms will only provide additional information if risk through the release of more risk information, to they find that the benefits of disclosure exceed the differentiate costs associated with the disclosure Nguyen Huu themselves from other managers (Elshandidy, Fraser, & Hussainey, 2013) Political framework theories commonly used in information Zimmerman (see Watts & Zimmerman, 1978), argues disclosure research and identified that information that state management agencies make decisions that economy theory is most appropriate to explain the are relevant to the firms' interestsbased on their infor- variations in the level of information disclosure in mation disclosure Large firms often have the incentive the firms' financial reporting JOURNAL OF TRADE SCIENCE proposed by Cuong (2017) compared the commonality of the and 26 theory, Watts " ISSN 1859-3666 journal of Trade Science 2.2 Research Method TMU’S JTS Consistent with agency theory and signal theory, as 2.2.1 Hypothesis Development well as empirical findings from previous studies, it is Hypothesis one (H1) - Firm Size hypothesised that: Kolmatsui, Legenzova, and Seilius (2016) applied- H2 - Firm leverage has influence on RMD mixed methods to assess the difference between risk Hypothesis three (H3) - Firm Profitability and RMD at Nasdaq OMX Baltic and Euronext Managers of well - performing firms tend to dis- Brussels and identifiedits associate factors They found close more information on risk management in order to that firm size has influence on RMD Similarly, show shareholders the ability to manage and cope with Linsley and Shrives (2006) have also applied a content risks that affect their profitability Investors can also analysis approach to examine risk disclosure in the appreciate the firms' risk management capacities when annual report of the UK non-financial firms in 2000 they perceive that the high profitability of firms is due and also documented the influence of firm size on risk to the ability to manage business risks Regarding disclosure empirical evidence, Samanta and Dugal (2016) evalu- Consistent with agency theory and signal theory, as ated the nature and characteristics of risk reporting as well as empirical findings from previous studies, it is required by banks in India by examing the 2012-2013 hypothesised that: annual reports of 38 banks and showed that net profit H1-Firm size has positive influence on RMD Hypothesis two (H2) - Firm Leverage High-debt firms often have higher levels of riskbecause when the firms have a growing number of creditors, managers will provide more information on risk management as a way to show creditors the ability to is correlated with the level of information disclosure Consistent with agency theory and signal theory, as well as empirical findings from previous studies, it is hypothesised that: H3 - Firm profitability has positive influence on RMD cope with risk, thereby turning risk into managers' Hypothesis four (H4) - Firm Liquidity opportunities This is consistent with agency theory, Disclosing more information on risk management signal theory and some empirical evidence from prior when the firm's solvency is low will solve the infor- studies For example, Khlif and Hussainey (2016) mation asymmetry problems between managers (the investigated the relationship between risk disclosure agents) and shareholders (the principals) Shareholders and company characteristics, by using meta - analysis, will know the management policies to deal with the and concluded that financial leverage was related to risks from which to increase trust, reduce the agency risk reporting cost Investors will be more secure when investing in On the other hand, the high debt ratio means the enterprises when they understand the firm's manage- risk that enterprises are facing is also high These ment policies in general and risk management in par- risks can affect the ability of companies to attract ticular Prior research has found that liquidity has a investment, but benefit competitors so that managers negative effect on the level of risk disclosure (see, for have temptation to withhold information about the example, Elzahar & Hussainey, 2012) This negative risks; therefore, reducing the level of risk manage- influence is also can explain by the information eco- ment disclosure (see, for example, Jia, Munro & nomics theory, providing that the firm pursues to pro- Buckby, 2016) vide more information to enjoy more benefit JOURNAL OF TRADE SCIENCE " 27 ISSN 1859-3666 Journal of Trade Science TMU’S JTS Consistent with agency theory and information of board members is measured by the proportion of economics theory, as well as empirical findings from non-executive directors, and the chairman duality (i.e previous studies, it is hypothesised that: whether or not the chairman is also the chief executive H4 - Firm liquidity has negative influence on RMD Hypothesis five (H5) - Auditor In order to maintain a reputation and avoid the cost of reputation losses, large auditing firms have the advantage of being able to require higher levels of disclosure Therefore, the firms are audited by independ- officer) Consistent with agency theory and empirical findings from previous studies, it is hypothesised that: H6a - Firms with a higher percentage of independent directors has higher level of RMD H6b - Firms without the duality of chairman has higher level of RMD ent auditing companies with high prestige tend to pro- 2.2.2 Research Design vide more information Kolmatsui, Legenzova, and Research Model Seilius (2016) also found that the presence of auditing This study was conducted to evaluate the risk man- firms was an important factor influencing the disclo- agement practices by measuring the level of RMD, and sure of risk and vulnerability of companies This identify the associated factors The level of disclosure impact is also confirmed in Achmad et al (2017)'sre- is measured by the content analysis method based on search on the voluntary disclosure (including risk dis- the checklist of risk management disclosure items; The closure) by Indonesian firms influencing factors are identified by analysing two Consistent with agency theory and empirical findings from previous studies, it is hypothesised that: H5 - Firms audited by Big - auditor has higher level of RMD Hypothesis six (H6) - Independence of Board of Directors regression models with the alternatives of the two related independent variables:mandatory risk management disclosure (MRMD) (refer toEquation 1) and discretionary risk management disclosure (DRMD) (refer to Equation 2) Equation 1: bers, the more likely they are to release more informa- MRMDit = E0 + E1SIZEit + E2LEVERAGEit + + E4SOLVENCYit + E3PROFITABILITYit tion about risk management as the result of the inde- E5AUDITORit+ pendent members' supervision The board independ- E7DUALITYit+ Hit ence may have an impact on disclosure level in the Equation 2: The higher the number of independent board mem- E6INDEPENDENCE it + Agency theory implies that the ownership structure DRMDit = E0 + E1SIZEit + E2LEVERAGEit + + E4SOLVENCYit + E3PROFITABILITYit influences the level of supervision, and that affects the E5AUDITORit+ level of disclosure This may explain why the degree of E7DUALITYit+ Hit same direction as the independent shareholders' effect E6INDEPENDENCE it + shareholder independence can affect the level of risk The influence of factors on the RDM level was ver- disclosure Previous studies have shown that share- ified through three regression models including ordi- holder independence has a negative impact on the level nary least square (OLS), fixedeffects model (FEM), of RMD (Jia, Munro & Buckby, 2016) Independence and random effects model (REM) Based on the 28 JOURNAL OF TRADE SCIENCE " ISSN 1859-3666 journal of Trade Science TMU’S JTS regression analyses the three models, this study per- sensitivity analysis Thus, the total number of indexes formed the Hausman test to confirm which model was to evaluate the discretionary RMD is 30 more appropriate to explain the variations in RMD by Based on information disclosedon financial state- financial listed firms in Vietnam Finally, this study ments provided by each firm, the level of RMD dis- also carried out a statistically significant exclusion closure is determined as follow from the most appropriate model and performed a reestimation of the model to determine the optimal regression equation for the effect of factors to the level of RMD Where Measurememt of Risk Disclosure Management (MRMDitand DRMDit) The risk management of listed firms in Vietnam has not been specifically defined Circular MRMDi and DRMDi are indices of mandatory and discretionary RMD of firm i(0