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Does graphical reporting improve risk disclosure? Evidence from European banks

Jones, MJ and Melis, A and Gaia, S and Aresu, S (2018) 'Does graphical reporting improve risk disclosure? Evidence from European banks.' Journal of Applied Accounting Research, 19 (1). 161 - 180. ISSN 0967-5426

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Abstract

Purpose: This study examines the voluntary disclosure of risk-related issues, with a focus on credit risk, in graphical reporting for listed banks in the major European economies. It aims to understand if banks portray credit risk-related information in graphs accurately and whether these graphs provide incremental, rather than replicative, information. It also investigates whether credit risk-related graphs provide a fair representation of risk performance or a more favourable impression than is warranted. Design/Methodology/Approach: A graphical accuracy index was constructed. Incremental information was measured. A multi-level linear model investigated whether credit risk affects the quantity and quality of graphical credit risk disclosure. Findings: Banks used credit risk graphs to provide incremental information. They were also selective, with riskier banks less likely to use risk graphs. Banks were accurate in their graphical reporting, particularly those with high levels of credit risk. These findings can be explained within an impression management perspective taking into account human cognitive biases. Preparers of risk graphs seem to prefer selective omission over obfuscation via inaccuracy. This probably reflects the fact that individuals, and by implication annual report’s users, generally judge the provision of inaccurate information more harshly than the omission of unfavourable information. Research limitations/implications: This study provides theoretical insights by pointing out the limitations of a purely economics-based agency theory approach to impression management. Practical implications: The study suggests annual reports’ readers need to be careful about subtle forms of impression management, such as those exploiting their cognitive bias. Regulatory and professional bodies should develop guidelines to ensure neutral and comparable graphical disclosure. Originality/Value: This study provides a substantive alternative to the predominant economic perspective on impression management in corporate reporting, by incorporating a psychological perspective taking into account human cognitive biases.

Item Type: Article
Uncontrolled Keywords: Banks, Impression management, Corporate reports, Credit risk graphs, Incremental information, Omission strategy
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Accounting Centre
Depositing User: Elements
Date Deposited: 08 Mar 2018 15:49
Last Modified: 08 Mar 2018 16:15
URI: http://repository.essex.ac.uk/id/eprint/21317

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