Abstract
Flexibility is often defined in terms of autonomy of actions, freedom of expression, balancing in competing opposites and agility in actions. Such flexibility assumes greater significance in the dynamic system in which business operates. In this mutually reinforcing system, Indian regulators have accorded flexibility to companies to decide the nature, type, tone and time orientation of risk disclosures (in annual reports) based on their competitive position. Accordingly, the paper strives to ascertain how this regulatory flexibility is leveraged by Indian companies. For the purpose, content analysis and textual analysis are employed on over 4000 annual reports of NIFTY500 companies, covering a period 10-year period from 2005 to 2015. In tune with agency theory, proprietary cost theory, duality theory and contingency theory, the findings indicate that companies that are in a better competitive position tend to make greater and more comprehensive risk disclosures. The results are robust at company level, industry level and sectoral level. Further, the results unambiguously reflect how this flexibility affected the strategic decision making during the time of global financial crisis. Amidst calls for increasing regulations, particularly in the domain of disclosures, these findings clearly highlight the need for regulatory flexibility in decisions that have strategic implications for firms.
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Notes
Listing agreement is an agreement between a company that desires to be listed or is listed on a stock exchange and the concerned stock exchange.
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Appendices
Appendix 1: List of Items/Themes Constituting Risk Disclosure Index (RDI)
S. no. | |
|---|---|
Items rated on a scale of 6–29* (possible sources of risks) | |
1 | Interest rates |
2 | Exchange rates |
3 | Commodity prices |
4 | Liquidity |
5 | Credit/default |
6 | Capital adequacy/insolvency |
7 | Equity prices |
8 | Financial derivatives/instruments |
9 | Counterparty default |
10 | Funding risk |
11 | Investment risk |
12 | Executive compensation/bonus/employee pension commitments |
13 | Customer concentration risk |
14 | Overdependence on a division/diversification |
15 | Industry conditions |
16 | Assets portfolio |
17 | Competition |
18 | IPR |
19 | Business processes and procedures/operations |
20 | Technology/information technology |
21 | Health and safety |
22 | Environment |
23 | Reputation/goodwill/image/brand name |
24 | Quality |
25 | Compliance |
26 | Legal |
27 | Sourcing/raw material |
28 | New segment/product development |
29 | Marketing/customer satisfaction/boycott |
30 | Social contribution/community support |
31 | Internal audit and control |
32 | Human resources/employee/labour turnover/unrest |
33 | Integrity/management and employee fraud |
34 | Governance/leadership and management |
35 | Existing product/service/division failure |
36 | Business ethics/corruption |
37 | Stock/service obsolescence and shrinkage inventory |
38 | New product/service/expansion |
39 | Distribution network |
40 | Power |
41 | Pricing policy of company |
42 | Wages |
43 | Mergers and acquisitions/partnerships |
44 | Supply chain |
45 | Freight rates |
46 | Location/ geographic risk |
47 | Sovereign/politics |
48 | Government policies |
49 | Public/budget deficit |
50 | Regulation (absence/delay) |
51 | Taxation |
52 | GDP growth/market demand/aggregate demand |
53 | Unemployment rate |
54 | Inflation rate |
55 | Natural disasters/terrorism |
56 | Money supply/quantitative easing |
57 | Oil price |
58 | Contract duration risk |
59 | Economic slowdown |
Items rated on binary scale (items pertaining to risk management) | |
60 | Disclosure of existence of risk management policies |
61 | Disclosure of risk governance existence |
62 | Disclosure of risk committee existence |
63 | Disclosure of risk committee composition |
64 | Disclosure of name of risk committee members |
65 | Disclosure of risk committee members’ meetings |
66 | Disclosure of risk committee members’ meetings attendance |
67 | Disclosure of risk committee remittances |
68 | Disclosure on existence of enterprise risk management (ERM) |
69 | Risk management section |
Items not included in index, but studied separately | |
70 | Absence of risks and concerns section in MDandA |
71 | Absence of threats and opportunities section in MDandA |
Appendix 2: Industry by Industry Comparison of Various Elements of Disclosure Quality
Sample 1-sample 2 | Test statistics | Adj. sig. | Sample 1-sample 2 | Test statistics | Adj. sig. |
|---|---|---|---|---|---|
Number of risk items are same across industries | Proportion of both forward- and backward-looking statements is same across industries | ||||
Capital goods-housing and construction | − 281.828 | 0.026 | Textile-housing and construction | 261.546 | 0.006 |
Capital goods-transport | − 419.94 | 0.006 | Textile-metals | 413.159 | 0.000 |
Capital goods-chemical | − 621.025 | 0.000 | Textile-media | 436.486 | 0.000 |
Capital goods-oil and gas | − 785.404 | 0.000 | Textile-power | 440.79 | 0.000 |
Health care-chemical | 511.672 | 0.000 | Textile-transport | − 597.671 | 0.000 |
Health care-oil and gas | − 674.141 | 0.000 | Miscellaneous-housing and construction | 246.098 | 0.046 |
FMCG-chemical | 503.314 | 0.000 | Miscellaneous-metals | 397.711 | 0.000 |
FMCG-oil and gas | − 667.693 | 0.000 | Miscellaneous-media | 421.038 | 0.000 |
Textile-chemical | 497.182 | 0.000 | Miscellaneous-power | − 425.342 | 0.000 |
Textile-oil and gas | 661.56 | 0.000 | Miscellaneous-transport | − 582.223 | 0.000 |
ICT-chemical | 461.549 | 0.000 | Oil and gas-housing and construction | 218.732 | 0.023 |
ICT-oil and gas | − 625.928 | 0.000 | Oil and gas-metals | 370.345 | 0.000 |
Media-chemical | 438.647 | 0.001 | Oil and gas-media | 393.672 | 0.000 |
Media-oil and gas | − 603.025 | 0.000 | Oil and gas-power | − 397.976 | 0.000 |
Metals-chemical | 436.187 | 0.002 | Oil and gas-transport | − 554.857 | 0.000 |
Metals-oil and gas | − 600.566 | 0.000 | FMCG-metals | − 312.295 | 0.000 |
Power-chemical | 419.133 | 0.001 | FMCG-media | − 335.622 | 0.000 |
Power-oil and gas | 583.511 | 0.000 | FMCG-power | − 339.927 | 0.000 |
Miscellaneous-chemical | 400.588 | 0.028 | FMCG-transport | − 496.808 | 0.000 |
Miscellaneous-oil and gas | − 564.967 | 0.000 | Capital goods-metals | − 306.193 | 0.000 |
Diversified-oil and gas | − 555.159 | 0.000 | Capital goods-media | − 329.521 | 0.000 |
Housing and construction-chemical | 339.197 | 0.042 | Capital goods-power | − 333.825 | 0.000 |
Housing and construction-oil and gas | − 503.575 | 0.000 | Capital goods-transport | − 490.706 | 0.000 |
Number of risk management items are same across industries | Diversified-metals | − 281.394 | 0.034 | ||
Diversified-media | − 304.721 | 0.007 | |||
Diversified-oil and gas | − 382.995 | 0.002 | Diversified-power | − 309.026 | 0.002 |
Diversified-media | − 392.395 | 0.002 | Diversified-transport | − 465.907 | 0.000 |
Diversified-miscellaneous | − 472.049 | 0.000 | Health care-transport | − 387.465 | 0.002 |
Metals-oil and gas | − 321.995 | 0.005 | ICT-media | − 217.032 | 0.031 |
Metals-media | 331.395 | 0.005 | ICT-power | − 221.336 | 0.004 |
Metals-miscellaneous | − 411.049 | 0.001 | ICT-transport | − 378.217 | 0.000 |
Power-oil and gas | 320.732 | 0.000 | Agriculture-transport | − 363.752 | 0.006 |
Power-media | 330.132 | 0.001 | Chemical-transport | − 353.373 | 0.008 |
Power-miscellaneous | 409.786 | 0.000 | Housing and construction-transport | − 336.126 | 0.002 |
Capital goods-oil and gas | − 274.87 | 0.014 | Proportion of neutral statements is same across industries | ||
Capital goods-media | − 284.27 | 0.015 | |||
Capital goods-miscellaneous | − 363.924 | 0.002 | Transport-textile | 204.007 | 0.047 |
Housing and construction-miscellaneous | − 317.19 | 0.017 | Transport-chemical | 231.233 | 0.021 |
FMCG-miscellaneous | − 312.491 | 0.032 | Transport-diversified | 261.602 | 0.003 |
Total number of risk items are same across industries | Transport-oil and gas | 336.948 | 0.000 | ||
Miscellaneous-oil and gas | − 267.375 | 0.000 | |||
Capital goods-housing and construction | − 284.184 | 0.024 | Housing and construction-oil and gas | − 231.566 | 0.000 |
Capital goods-agriculture | 346.906 | 0.049 | Media-oil and gas | − 226.673 | 0.000 |
Capital goods-transport | − 421.647 | 0.005 | Power-oil and gas | 226.479 | 0.000 |
Capital goods-chemical | − 594.167 | 0.000 | Metals-oil and gas | − 221.759 | 0.000 |
Capital goods-oil and gas | − 790.393 | 0.000 | Agriculture-oil and gas | − 217.207 | 0.004 |
FMCG-chemical | 466.003 | 0.000 | ICT-oil and gas | − 205.703 | 0.000 |
FMCG-oil and gas | − 662.23 | 0.000 | Health care-oil and gas | − 202.955 | 0.011 |
Textile-chemical | 450.911 | 0.002 | FMCG-oil and gas | − 202.284 | 0.000 |
Textile-oil and gas | 647.138 | 0.000 | Capital goods-oil and gas | − 181.207 | 0.001 |
Health care-chemical | 446.946 | 0.01 | Proportion of good statements is same across industries | ||
Health care-oil and gas | − 543.173 | 0.000 | |||
Metals-chemical | 419.835 | 0.005 | Transport-ICT | 415.886 | 0.000 |
Metals-oil and gas | − 616.062 | 0.000 | Transport-metals | 432.359 | 0.000 |
Metals-chemical | 419.835 | 0.005 | Transport-agriculture | 461.133 | 0.001 |
Metals-oil and gas | − 616.062 | 0.000 | Transport-diversified | 471.266 | 0.000 |
Power-chemical | 404.096 | 0.002 | Transport-miscellaneous | 484.99 | 0.000 |
Power-oil and gas | 600.322 | 0.000 | Transport-FMCG | 493.709 | 0.000 |
ICT-chemical | 400.137 | 0.002 | Transport-chemical | 504.709 | 0.000 |
ICT-oil and gas | − 596.364 | 0.000 | Transport-oil and gas | 510.757 | 0.000 |
Diversified-oil and gas | − 578.186 | 0.000 | Transport-housing and construction | 539.505 | 0.000 |
Media-oil and gas | − 536.584 | 0.000 | Transport-textile | 561.156 | 0.000 |
Housing and construction-oil and gas | − 506.209 | 0.000 | Transport-capital goods | 656.631 | 0.000 |
Miscellaneous-oil and gas | − 478.812 | 0.000 | Health care-housing and construction | − 307.614 | 0.200 |
Proportion of forward-looking statements is same across industries | Health care-textile | − 329.265 | 0.024 | ||
Health care-capital goods | 424.74 | 0.000 | |||
Capital goods-housing and construction | − 284.184 | 0.024 | Media-FMCG | 249.754 | 0.049 |
Capital goods-agriculture | 346.906 | 0.049 | Media-oil and gas | − 266.802 | 0.018 |
Capital goods-transport | − 421.647 | 0.005 | Media-housing and construction | 295.55 | 0.002 |
Capital goods-chemical | − 594.167 | 0.000 | Media-textile | − 317.2 | 0.004 |
Capital goods-oil and gas | − 790.393 | 0.000 | Media-capital goods | 412.676 | 0.000 |
FMCG-chemical | 466.003 | 0.000 | Power-oil and gas | 229.267 | 0.041 |
FMCG-oil and gas | − 662.23 | 0.000 | Power-housing and construction | 258.015 | 0.004 |
Textile-chemical | 450.911 | 0.002 | Power-textile | − 279.666 | 0.009 |
Textile-oil and gas | 647.138 | 0.000 | Power-capital goods | 375.141 | 0.000 |
Health care-chemical | 446.946 | 0.01 | ICT-capital goods | 240.745 | 0.014 |
Health care-oil and gas | − 543.173 | 0.000 | Proportion of bad statements is same across industries | ||
Metals-chemical | 419.835 | 0.005 | |||
Metals-oil and gas | − 616.062 | 0.000 | Oil and gas-housing and construction | 285.136 | 0.012 |
Metals-chemical | 419.835 | 0.005 | Oil and gas-metals | 314.372 | 0.014 |
Metals-oil and gas | − 616.062 | 0.000 | Oil and gas-media | 353.943 | 0.001 |
Power-chemical | 404.096 | 0.002 | Oil and gas-agriculture | 359.078 | 0.015 |
Power-oil and gas | 600.322 | 0.000 | Oil and gas-ICT | 375.479 | 0.000 |
ICT-chemical | 400.137 | 0.002 | Oil and gas-miscellaneous | 399.412 | 0.001 |
ICT-oil and gas | − 596.364 | 0.000 | Oil and gas-power | − 497.392 | 0.000 |
Diversified-oil and gas | − 578.186 | 0.000 | Oil and gas-transport | − 678.821 | 0.000 |
Media-oil and gas | − 536.584 | 0.000 | Textile-power | 352.575 | 0.001 |
Housing and construction-oil and gas | − 506.209 | 0.000 | Textile-transport | − 534.004 | 0.000 |
Miscellaneous-oil and gas | − 478.812 | 0.000 | Diversified-power | − 340.144 | 0.016 |
Proportion of backward-looking statements is same across industries | Diversified-transport | − 521.573 | 0.000 | ||
Capital goods-power | − 327.03 | 0.000 | |||
Transport-oil and gas | 203.356 | 0.029 | Capital goods-transport | − 508.459 | 0.000 |
Transport-textile | 206.219 | 0.05 | Chemical-transport | − 481.527 | 0.002 |
Transport-ICT | 206.761 | 0.014 | Health care-transport | − 474.506 | 0.003 |
Transport-health care | 262.665 | 0.004 | FMCG-transport | − 423.573 | 0.002 |
Transport-agriculture | 264.568 | 0.004 | Housing and construction-transport | − 393.686 | 0.005 |
Transport-miscellaneous | 267.99 | 0.002 | Metals-transport | − 364.45 | 0.046 |
Transport-capital goods | 307.741 | 0.000 | Proportion of both good and bad statements is same across industries | ||
Transport-diversified | 329.321 | 0.000 | |||
Metals-oil and gas | − 194.936 | 0.003 | Power-housing and construction | 236.709 | 0.025 |
Metals-textile | − 197.799 | 0.008 | Power-textile | − 279.724 | 0.015 |
Metals-ICT | 198.341 | 0.001 | Power-diversified | 290.314 | 0.05 |
Metals-health care | 254.246 | 0.001 | Power-oil and gas | 387.744 | 0.000 |
Metals-agriculture | 256.148 | 0.001 | Power-health care | 438.724 | 0.000 |
Metals-miscellaneous | − 259.57 | 0.000 | |||
Metals-capital goods | 299.321 | 0.000 | |||
Metals-diversified | 320.901 | 0.000 | |||
Media-miscellaneous | − 184.471 | 0.042 | |||
Media-capital goods | 224.221 | 0.000 | |||
Media-diversified | 245.802 | 0.001 | |||
Power-miscellaneous | 182.868 | 0.018 | |||
Power-capital goods | 222.618 | 0.000 | |||
Power-diversified | 244.199 | 0.000 | |||
FMCG-capital goods | 203.061 | 0.000 | |||
FMCG-diversified | 224.642 | 0.002 | |||
Housing and construction-capital goods | 149.952 | 0.026 | |||
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Shivaani, M.V. Does Regulatory Flexibility Affect Risk Disclosures in Annual Report?. Glob J Flex Syst Manag 19, 321–336 (2018). https://doi.org/10.1007/s40171-018-0196-6
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DOI: https://doi.org/10.1007/s40171-018-0196-6