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Mandatory adoption of business risk disclosure: evidence from Japanese firms

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  • KIM, Hyonok
  • YASUDA, Yukihiro

Abstract

We take advantage of institutional changes and its characteristics in Japan to empirically examine mandatory business risk disclosure. We find that there is a negative impact on total risk from the introduction of mandatory business risk disclosure. This suggests that an increase in business risk disclosure reduces a firm's cost of capital, which is contrary to the results of previous research. However, we also find that there is a positive relationship across firms and years after inception between the amount of business risk disclosure and total risk, indicating that mandatory business risk disclosure has a negative impact on investors' assessment of firms' risk. Although these two effects offset each other, the positive effects of enhanced disclosure of business risks on the cost of capital overcome the negative effects.

Suggested Citation

  • KIM, Hyonok & YASUDA, Yukihiro, 2016. "Mandatory adoption of business risk disclosure: evidence from Japanese firms," Working Paper Series G-1-14, Hitotsubashi University Center for Financial Research.
  • Handle: RePEc:hit:hcfrwp:g-1-14
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27921/1/070hcfrWP_1_014.pdf
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    References listed on IDEAS

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    1. Mostafa Kamal Hassan, 2009. "UAE corporations-specific characteristics and level of risk disclosure," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(7), pages 668-687, July.
    2. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    3. Bryan Kelly & Alexander Ljungqvist, 2012. "Testing Asymmetric-Information Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1366-1413.
    4. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    5. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    6. Elshandidy, Tamer & Fraser, Ian & Hussainey, Khaled, 2013. "Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 320-333.
    7. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    8. Christine A. Botosan & Marlene A. Plumlee, 2002. "A Re‚Äźexamination of Disclosure Level and the Expected Cost of Equity Capital," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 21-40, March.
    9. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    10. Grantley Taylor & Greg Tower & John Neilson, 2010. "Corporate communication of financial risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 417-446, June.
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    More about this item

    Keywords

    Mandatory business risk disclosure; Total risk; Cost of capital;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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