Risk Information Disclosure In Company Annual Report And The Cost Of Equity Capital

Fierce competition,high-speed capital movements and the increasingly complex market environment have brought the risks faced by enterprises to an unprecedented level.Therefore,Corporate risk reporting has received considerable attention from the theoretical and practical circles.Risk disclosure,as an important part of information disclosure,is a detailed explanation of the risk factors that are expected to have a significant impact on the company's development and the corresponding measures that have been or will be taken.Previous studies mainly focused on the internal factors affecting corporate risk disclosure behavior,or further explored the economic consequences of risk disclosure in developed countries.Some of the researches show that the improvement of risk disclosure can provide more information about a firm's risk profile,reduce investors' uncertainty of expected future earnings,and then reduce the cost of equity capital.However,there is little research investigating the risk disclosure of listed companies and the corresponding economic consequences in China.The literature highlighting the correlation between the risk disclosure and the cost of equity capital is even rarer.Considering the significant differences between developed countries and China in development stage of the capital market,the degree of perfection of the regulatory mechanism and the level of investor protection,the existing research conclusions based on developed capital markets remain to be tested.So,this paper will focus on testing and answering the key question of whether the high-level risk disclosure of listed companies in China can reduce the cost of equity capital.This article takes the listed companies of CSI 300 as research objects.The sample covers the five-year period,2012-2016.Firstly,establish a risk disclosure index and obtain data of risk disclosure in the annual report.Then,empirically test the impact of risk disclosure on the cost of equity capital.The results are listed as follows: firstly,the level of risk disclosure in different industries shows a big difference.Listed companies in water conservancy,environment and public facilities management have more detailed risk disclosure,while the level of risk disclosure in real estate is much lower.In the choice of risk information,listed companies are more inclined to disclose the identified risk factors and the corresponding measures,less to disclose their impact on the operation.In terms of the form of risk disclosure,they are more willing to use textual descriptions instead of quantitative disclosure.Secondly,the cost of equity capital is inversely associated with the level of risk disclosure.The higher the level of risk disclosure in the annual report,the lower the cost of equity capital.Thirdly,using the intermediary mechanism test,it is further found that the risk disclosure in the annual report affects the equity capital cost through improving the liquidity of the stock.Fourthly,after grouping the whole sample according to the transparency of information,analyst's attention and audit quality,it is found that the negative correlation is statistically more pronounced among firms with low information transparency,analyst's attention and audit quality.This shows that for these companies,risk disclosure in the annual report is a good supplement,which enhances the transparency of corporate information and reduces the cost of equity capital.Finally,based on the above research findings,this paper puts forward several specific suggestions on how to strengthen the construction of risk disclosure system and advises that the risk information of listed companies should be included in the scope of CPA assurance.The main innovations of this paper are as follows:(I)it provides new evidence for the usefulness of risk disclosure.Different from the existing research,which uses the quantity of risk information as the sole measurement of the level of risk disclosure,this paper establishes a risk disclosure index based on the comprehensive evaluation of the quantity and form of risk disclosure in the annual report and empirically investigates its relationship with the cost of equity capital.Thus,it provides further evidence for the usefulness of risk disclosure.(II)it also provides an alternative way to measure and evaluate the level of risk disclosure.According to the risk disclosure standards in China,this paper establishes the risk disclosure index from two aspects.Firstly,take the content of risk disclosure as the first criterion.It is divided into 3 parts(description of risk,the impact of each risk on the company's development and the corresponding measures that have been or will be taken).Secondly,take the form of risk disclosure as another criterion.In this way,it allows us to present the level of risk disclosure of listed companies in a more comprehensive way.It can also provide some references for future researches on risk disclosure.