AAA Spark Meeting of the Regions

Are Firm Performance and the Quality of Corporate Governance Leading Indicators of Proactive COVID-19 Risk Disclosure

• In Event: Corporate Disclosure Influences

Abstract

This study examines whether firm financial performance and the strength of corporate governance are leading indicators of a firm’s decision to proactively disclose coronavirus risk. In addition, we examine whether firms that proactively disclose this risk are more likely to provide updates to their initial risk disclosures than those that do not.
We are motivated by the need to understand factors that drive the disclosure of unexpected and unusual risks caused by events over which managers have little control. We find a negative association between firm performance, measured as Return on Assets (ROA) and Return on Equity (ROE), and the proactive disclosure of COVID-19 risk. In addition, we find a negative association between the strength of corporate governance and proactive COVID-19 risk disclosure. These results suggest that firms with weaker performance, measured through ROA and ROE, and firms with weaker corporate governance, measured using a composite index of governance quality, are more likely to proactively disclose coronavirus risk. Finally, we find that firms that proactively disclose coronavirus risk in their Item 1A are more likely to update those disclosures and disclose even more coronavirus related risk compared to those that do not. These findings are robust to alternative measure for the disclosure of coronavirus risk as well as to alternative performance measures.
This study provides insight into the characteristics of firms that are more forthcoming in their disclosures. The findings are also informative for regulators in terms of the need for further enforcement mechanisms as risk factor disclosures may not be sufficiently timely to inform users of the annual report.

Authors

• Abiodun Isiaka, University of Regina

• Chima Mbagwu, Wilfrid Laurier University