Financial Risk Disclosure: Evidence from Albanian and Italian Companies

In recent years standard setters, regulators and professional bodies worldwide have shown an increased interest in risk reporting. This has reflected the fallacy of the financial reporting model to communicate a company’s risk profile, the recent scandals and the financial crisis. In the EU, the Accounting Modernization Directive (AMD, 2003) requires companies to highlight the principal risks and uncertainties that they face, whereas the international accounting standards (IFRS 7 – Financial Instruments: Disclosure) requires companies to disclose their exposures, objectives and policies for each type of risk arising from financial instruments. Recently, the Financial Stability Board (FSB) has also developed new guidelines to improve risk reporting. High quality risk disclosures help investors and other market participants by providing a better understanding of the risk exposures and risk management practices of companies. In the literature, the four main areas of investigation of risk disclosure are: i) risk reporting practices and the level of risk disclosure; ii) the relationship between voluntary and mandatory risk disclosure; iii) the determinants of voluntary risk disclosure; iv) the economic consequences of risk disclosure, in terms of the impact on the cost of capital (cost of equity and cost of debt). However, these have focused mainly on corporate disclosure or risk disclosure rather than on financial risk disclosure. The aim of this research project is twofold. Firstly, we examine the level of compliance with IFRS 7 disclosure requirements on financial risks in order to understand how Albanian and Italian listed companies have implemented the risk reporting introduced by the IASB. IFRS 7 requires companies to disclose qualitative and quantitative information on their exposure to risks arising from financial instruments, including disclosures about credit risk (the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation), liquidity risk (the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset) and market risk (this risk includes currency risk, interest rate risk and other price risks). To verify the degree of compliance with regulation we use content analysis. Secondly, we investigate the determinants of financial risk disclosure in order to test whether size, leverage, industry and ownership affect the level of financial risk disclosure. To this end, we use a regression model.