Investigating the Effect of Financial Risk Reporting on Stock Returns with the Moderating Role of Competition in the Product Market
Subject Areas : • Emerging technology in the field of Accounting and its future
1 - Department of Financial Management, qom Branch, Islamic Azad University, Qom, Iran
Keywords: Financial Risk Reporting, Stock Returns, Product Market Competition.,
Abstract :
Objectives: This study investigates the effect of financial risk reporting on stock returns, with a focus on the moderating role of product market competition among firms listed on the Tehran Stock Exchange. It aims to demonstrate how competitive pressure can enhance voluntary disclosure and improve investor confidence in financial information.
Methodology/Design/Approach: The research employs a causal-correlational design. A sample of 120 firms was selected from listed firms using the systematic elimination method. The study covers the period from 2015 to 2019. Financial risk reporting was assessed through content analysis of annual reports, while product market competition was measured using industry-based concentration ratios. Hypotheses were tested using multivariate regression models.
Findings: The findings indicate that product market competition significantly increases the extent of financial risk disclosure. Furthermore, financial risk reporting has a significant positive effect on stock returns. Importantly, product market competition also moderates the relationship between financial risk reporting and stock returns, strengthening the impact of disclosure on market performance.
Innovation: This study contributes to the literature on voluntary disclosure by highlighting the strategic role of product market competition in shaping firms’ disclosure behavior and its implications for stock returns. It provides empirical evidence from an emerging market context, emphasizing the value of transparency under competitive pressure.
Abraham, S., & Shrives, P. J. (2014). Improving the relevance of risk factor disclosure in corporate annual reports. The British Accounting Review, 46(1), 91–107.
Acharya, V. V., & Richardson, M. P. (Eds.). (2009). Restoring financial stability: How to repair a failed system (Vol. 542). John Wiley & Sons.
Ahmed, S., Bu, Z., & Ye, X. (2023). Product market competition, labor mobility, and the cross-section of stock returns. The Review of Asset Pricing Studies.
Ali, A., Klasa, S., & Yeung, E. (2014). Industry concentration and corporate disclosure policy. Journal of Accounting and Economics, 58(2-3), 240–264.
Baggs, J., & De Bettignies, J. E. (2007). Product market competition and agency costs. The Journal of Industrial Economics, 55(2), 289–323.
Balakrishnan, K., & Cohen, D. A. (2014). Competition and financial accounting misreporting. Available at SSRN 2447882.
Birt, J. L., Bilson, C. M., Smith, T., & Whaley, R. E. (2006). Ownership, competition, and financial disclosure. Australian Journal of Management, 31(2), 235–263.
Bravo, F. (2017). Are risk disclosures an effective tool to increase firm value? Managerial and Decision Economics, 38(8), 1116–1124.
Campbell, J. L., Chen, H., Dhaliwal, D. S., Lu, H. M., & Steele, L. B. (2014). The information content of mandatory risk factor disclosures in corporate filings. Review of Accounting Studies, 19, 396–455.
Chen, S., Wang, K., & Li, X. (2012). Product market competition, ultimate controlling structure and related party transactions. China Journal of Accounting Research, 5(4), 293–306.
Elshandidy, T., Fraser, I., & Hussainey, K. (2013). Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies. International Review of Financial Analysis, 30, 320–333.
Hassanein, A. (2022). Risk reporting and stock return in the UK: Does market competition matter? The North American Journal of Economics and Finance, 59, 101574.
Huang, Y., Jennings, R., & Yu, Y. (2017). Product market competition and managerial disclosure of earnings forecasts: Evidence from import tariff rate reductions. The Accounting Review, 92(3), 185–207.
Ibrahim, A., Habbash, M., & Hussainey, K. (2019). Corporate governance and risk disclosure: Evidence from Saudi Arabia. International Journal of Accounting, Auditing and Performance Evaluation, 15(1), 89–111.
Kamarudin, K. A., Mohamad Ariff, A., & Wan Ismail, W. A. (2020). Intensity of product market competition, institutional environment and accrual quality. Pacific Accounting Review, 32(3), 391–419.
Khalif, H., & Hussainey, K. (2016). The association between risk disclosure and firm characteristics: A meta-analysis. Journal of Risk Research, 19(2), 181–211.
Kitzmuller, M., & Licetti, M. M. (2013). Competition policy: Encouraging thriving markets for development. ViewPoint Public Policy for the Private Sector Series, (331).
Lee, S. (2019). Profitability, product market competition, and stock returns. Applied Finance Letters, 8, 36–46.
Li, F. (2010). The information content of forward‐looking statements in corporate filings—A naïve Bayesian machine learning approach. Journal of Accounting Research, 48(5), 1049–1102.
Makhlouf, M. H., Oroud, Y., & Soda, M. Z. (2020). Does the board independence influence the association between risk disclosure and firm value? Evidence from Jordan. Humanities and Social Sciences Reviews, 8, 46–54.
Markarian, G., & Santalo, J. (2014). Product market competition, information and earnings management. Journal of Business Finance & Accounting, 41(5–6), 572–599.
Oliveira, J., Lima Rodrigues, L., & Craig, R. (2011). Voluntary risk reporting to enhance institutional and organizational legitimacy: Evidence from Portuguese banks. Journal of Financial Regulation and Compliance, 19(3), 271–289.
Shivaani, M. V., & Agarwal, N. (2020). Does competitive position of a firm affect the quality of risk disclosure? Pacific-Basin Finance Journal, 61, 101317.