A Study On The Impact Of Risk Disclosure In Listed Companies’ Annual Reports On The Cost Of Equity Capital

In the past decade,a series of events such as trade frictions,stock crashes have erupted,and market participants are paying increasing attention to the risks of listed companies.Risk information disclosure is the disclosure by listed companies in their financial reports of risk factors and countermeasures that affect the normal operation and strategic development of the company.Risk information disclosure paragraphs in annual reports include management discussion and analysis(hereinafter referred to as MD&A)and materiality alert paragraphs for significant risks.Most of the previous literature has focused on the full financial report and examined the economic consequences of risk information disclosure by measuring the quality of risk information disclosure in the whole financial report.However,MD&A,as a paragraph written by management rather than a template,is richer in risk information and provides more information for information users,which should be studied in depth.In addition,most of the existing studies simply reveal the impact of risk information disclosure on the cost of equity capital,and there is little relevant literature that examines the path of its effect from the perspective of analysts’ prediction accuracy.To this end,this paper selects listed companies from 2011 to 2018 as the research sample and empirically analyzes the impact of MD&A risk information disclosure on the cost of equity capital using a fixed-effects model,and the results show that the quality of MD&A risk information disclosure is inversely related to the cost of equity,and improving the quality of MD&A risk information disclosure quality can reduce the cost of equity capital.Second,the mediating effect model is applied to empirically test whether analyst forecast accuracy plays a mediating role in the relationship.The results show that MD&A risk disclosure reduces the cost of equity by improving analyst forecast accuracy,indicating that analyst forecast accuracy plays a full mediating role.Finally,the heterogeneity of the sample is examined by using the criteria of the company’s years of listing,supplier concentration,and whether the company is audited by a Big 4 accounting firm(hereinafter referred to as Big 4),and it is found that the disclosure of risk information is more significant in reducing the cost of equity capital for listed companies with short listing time,high supplier concentration,and not audited by Big 4.Accordingly,this study proposes the following recommendations: First,develop classification criteria for risk information.Specific classification standards should be formulated for different types of risk information to improve investors’ ability to identify risks and protect their interests.Second,provide different disclosure forms for different types of risks.The readability and comparability of risk information disclosure paragraphs should be improved to achieve the goal of being useful for investors’ decision-making.Third,disclosure risk categories should be developed by industry.Asset-heavy industries(e.g.,automotive and real estate)should focus on disclosing financial and operational risks,communications industries should focus on disclosing strategic risks,and high-tech industries should focus on disclosing R&D risks.