Board’s Financial Incentives, Competence, and Firm Risk Disclosure

• In Event: Financial Accounting Issues

Abstract

This paper examines the impact of Non-Executive Board Members’ Financial Incentives and Competence Related Determinants on risk disclosures among index listed Finnish companies. Firms’ risk disclosures are analysed from two perspectives: quantity and coverage. We focus on three novel board characteristics not previously examined in the context of firms’ risk reporting behaviour. These are (1) non-executive board members’ self-interested financial motives, measured by their share ownership or options as well as yearly compensation, (2) non-executive board members’ competence in terms of their experience and perseverance to focus on firms’ businesses and risk profiles, measured by the attrition rate of these directors, and (3) non-executive board members’ competence in terms of their educational capability to increase the relevance of firms’ risk disclosures to investors, proxied by the level of their prior education. The sample is composed of the OMXH25-listed firms representing most traded and followed group of firms among Finnish publicly listed companies. We find that the risk disclosures of these firms can be explained by different board characteristics (wealth, compensation, attrition rate, education) and also by ownership related factors (foreign ownership, insider ownership). The results indicate that among the ‘best disclosers’ the narrative risk disclosures are, on average, on a high level and the quality of board working as well as board and ownership characteristics are significant drivers for firms providing high-quality risk reports. This paper contributes to the existing literature by demonstrating the impact of previously unexamined board characteristics on the quality of highly followed firms’ narrative risk disclosures. Overall, the results suggest for these firms that their risk disclosure decisions are driven by insider and ownership –related factors rather than by their economic fundamentals.

Authors

• Juha Kinnunen, Aalto University School of Business

• Minna Martikainen, Hanken School of Economics

• Antti Miihkinen, Aalto University School of Business

• Pontus Troberg, Hanken School of Economics