THE EVALUATION OF FINANCIAL RISK PROFILE OF THE COMPANIES AND THE MANDATORY DISCLOSURE ON Liquidity AND Credit RISK E-Book

Olga Cucaro

• Herausgeber: ResearchFreelance
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2020

Beschreibung

THE EVALUATION OF FINANCIAL RISK PROFILE OF THE COMPANIES AND THE MANDATORY DISCLOSURE ON Liquidity AND Credit RISK is a work born from a careful study of the evolution of the Italian and European legislation on the subject of financial risk communication and in particular of IFRS 7, Finacial Instruments: Disclosure. Thanks to this international accounting standard, Italian listed companies have included a greater number of disclosures on financial risks in their financial statements, but while there is no doubt the quantitative increase in information, the qualitative value of this communication is doubtful. In this regard, the study analyzes the usefulness of the disclosure introduced by IFRS 7 for financial analysts. The choice of analysts is a natural choice due to the importance they hold as intermediaries in the communication channel between companies and the market. 
 

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Olga Cucaro

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Table of contents

Dedication

Index

Premise

Introduction

Chapter 1.

Chapter 2.

Chapter 3.

Chapter 4.

Chapter 5.

Final Considerations

Bibliography

Dedication

To my mother and father

"Today, the way we earn the means to live, the values of professionalism, the valuation that society gives to virtues and successes, intimate bonds and acquired rights, all of this is fragile, provisional and subject to revocation. And no one knows when and where the fatal blow will come from. While our ancestors knew well that it was necessary to be afraid of hungry wolves or bandits on the side of the road. It is therefore not the abstraction that makes the dangers seem more serious, but the difficulty of placing them, and therefore of avoiding and countering them. "

"Uncertainty is the natural habitat of human life, although the hope of escaping it is the engine of human activities." Zygmunt Bauman

Index

Index

PREMISE1INTRODUCTION TO RESEARCH3CHAPTER 1.8THE REFERENCE NORMATIVE BACKGROUND

1.1 Introduction

8

8

1.2 The evolution of Risk Reporting 11

1.3 The process of European harmonization of accounting rules 14

1.4 The international accounting standards on financial risk 16

1.5 A cross-country comparison of today's mandatory financial risk disclosure 28

CHAPTER 2. 34

EMPIRICAL EVIDENCE ON RISK DISCLOSURE 34

2.1 Business Risks: Literature Analysis 34

2.1.1 Information on corporate risks in the financial statements: analysis of the international literature 34

2.1.2 Information on corporate risks in the financial statements: analysis of the national literature 39

2.2 Financial Risks: Literature Analysis 42

2.2.1 Information on financial risks in the financial statements: International literature 42

2.2.2 Information on financial risks in the financial statements: Italian literature 47

CHAPTER 3. 50

APPLICATION METHODOLOGY 50

3.1 The experimental approach 50

3.1.1 Introduction to experiments 50

3.1.2 Experimental research in financial accounting: evidence

empirical 54

3.2 The research design 66

3.2.1 Research hypothesis 66

3.2.2 The choice of participants 71

3.2.3 The research design 73

3.2.4 The construction of the experiment 80

3.2.4.1 The choice of the company object of the study caseGod 80

3.2.4.2 Analysis of case indices Alpha 81

3.2.4.3 The creditworthiness analysis of the case of stuGod 83

3.2.4.4 The opinion of the equity analysts on the company's stock Alpha 94

3.2.5 The required evaluations: Feedback 103

3.2.6 The information entered in the tests to be evaluated 103

3.2.6.1 Financial information only (FIOR) 105

3.2.6.2 Positive financial risk information (P.FRI) 109

3.2.6.3 Negative financial risk information (NFRI) 111

3.2.6.4 Comparison between PFRI and NFRI 114

CHAPTER 4. 118

RESULTS RELATING TO THE GROUP OF SUBJECTS - ANALYSTS - 118

4.1 Statistical analysis 118

4.2 Analysis and comment of the dependent variables 125

4.2.1 Rating Analysis 125

4.2.2 Analysis of the judgment on liquidity risk 128

4.2.3 Analysis of the credit risk judgment 132

4.3 Manipulation checks 137

CHAPTER 5. 142

RESULTS FOR THE WHOLE SAMPLE - ANALYSTS VS STUDENTS -142

5.1 Statistical analysis 142

5.2 Analysis and comment of the dependent variables 154

5.2.1 Rating Analysis 154

5.2.2 Analysis of the judgment on liquidity risk 156

5.2.3 Analysis of the credit risk judgment 157

5.3 Manipulation checks 159

FINAL CONSIDERATIONS 165

BIBLIOGRAPHY 171

APPENDIX 178

Attachment n. 1 - Case Alfa (A) in Italian 178

Attachment n. 2 - Case Alfa (A) in English 185

Attachment n. 3 - Case Alfa (B) in Italian 193

Attachment n. 4 - Case Alfa (B) in English 202

Attachment n. 5 - Case Alfa (C) in Italian 212

Attachment n. 6 - Case Alfa (C) in English 222

THEINDEX OF THE FIGURES

Figure 1 Graphic representation of the review carried out by the Board ............... 16

Figure 2 Framework for Corporate Risk Disclosure ........................................... .. 37

Figure 3 Hunton and McEwen (1997) predictive model framework. ........... 52

Figure 4 Research design between subjects 2 X 2 + 1 by Coram P. (2004). ...... 57

Figure 5 Research design 2 x 3 between-subjects by Coram P. (2010). ............. 59

Figure 6 Differences in stock price estimation for professional and non-professional investors (Coram, 2009 and 2010). .................................................. ............. 61

Figure 7 Example of possible liquidity hypothesis graph ....................................... 67

Figure 8 Example of a chart for credit risk assumptions. ............................... 69

Figure 9 Example of a possible graph to verify the hypothesis on the Rating .............................. 70

Figure 10 Experiment framework based on Hunton's predictive model e

McEwen (1997). .................................................. .................................................. . 76

Figure 11 Research design between subject 3 matrices (3 dependent variables) 3

(3 independent variables) X 1 (1 group of subjects) ..................................... ........ 78

Figure 12 Research design between subject 3 matrices (3 dependent variables) 3

(3 independent variables) X 2 (2 groups of subjects). ............................................ 79

Figure 13 The pyramid from the risk assessment .......................................... .... 85

Figure 14 Graph of the trend of the averages of the valuations concerning

Rating. .................................................. .................................................. .............. 127

Figure 15 Graph of the absolute frequencies of the “Rating” variable. ................ 127

Figure 16 Graph of the relative frequencies of the “Rating” variable. ................. 128

Figure 17 Graph of the percentage concentration of the Rating according to the information given ...................................... .................................................. .......... 128

Figure 18 Graph of the trend of the averages of the valuations regarding the liquidity risk. .................................................. ............................................. 130

Figure 19 Graph of the absolute frequencies of the “Liquidity risk” variable.

.................................................. .................................................. .......................... 130

Figure 20 Graph of the relative frequencies of the variable defined as “Liquidity risk”. .................................................. .................................................. ......... 131

Figure 21 Graph of the percentage frequencies of liquidity risk according to the information given .................................... .................................................. ............ 131

Figure 22 Graph of the trend of the averages of the assessments regarding credit risk. .................................................. ............................................... 133

Figure 23 Graph of the absolute frequencies of the variable defined “Risk of

credit". .................................................. .................................................. ........... 134

Figure 24 Graph of the relative frequencies of the variable “Credit risk”. 134

Figure 25 Graph of the percentage concentration of credit risk according to the information given. .................................................. ........................................... 135

Figure 26 Graph of the trend of the variables for disclosures in the six groups

of subjects (Group1). .................................................. ........................................ 153

Figure 27 Graph of the trend of the averages of the valuations concerning

Rating. .................................................. .................................................. .............. 155

Figure 28 Rating chart for the six groups of subjects (Group1). ....................... 155

Figure 29 Graph of the trend of the averages of the valuations regarding liquidity risk. .................................................. ............................................. 157

Figure 30 Liquidity chart for the six groups of subjects (Group1). .................... 157

Figure 31 Graph of the trend of the averages of the credit risk assessments. .................................................. ............................................... 158

Figure 32 Credit risk chart for the six groups of subjects (Group1) ............. 159

THEINDEX OF TABLES

Table 1 Results Panel A and Panel B of Coram's Working Paper (2009) ......... 62

Table 2 Results Panel C and Panel D of Coram's Working Paper (2009) ......... 63

Table 3 Ratios for the identification of the Alpha Case ........................................ ...... 81

Table 4 classification of the financial assets of the Alfa group ....................... 83

Table 5 Rating and PD via EIC ........................................... ............................. 83

Table 6 Calculation of the EIC and identification of the Alfa Group Rating .............. 84

Table 7 Ratios for the calculation of the Z-SCORE of the Alfa group ............................ 88

Table 8 Calculation of the Z-SCORE of the Alfa group ........................................ ....... 88

Table 9 Probability of default identification table based on Z-SCORE ................................... .................................................. .............................. 89

Table 10 Identification table of the probability of default according to the Z'-SCORE .................................. .................................................. ............................... 89

Table 11 Identification of the Rating class through the EM-SCORE ................ 91

Table 12 Ratios for the calculation of the EM-SCORE of the Alfa group ........................ 92

Table 13 Calculation of the EM-SCORE of the Alfa group ....................................... ..... 93

Table 14 Meaning of the rating classes according to Standard & Poor's ............... 93

Table 15 Economic and financial data of the Company

Alpha according to analysts .............................................. .......................................... 95

Table 16 Quantitative indicators calculated by analysts ...................................... 96

Table 17 Input data of the DCF valuation model ..................................... 98

Table 18 DCF model values ............................................. ................................. 99

Table 19 DCF model output data .......................................... ................. 99

Table 20 Multiples ............................................... ................................................ 102

Table 21 Rating assigned by the Analysts. .................................................. ....... 102

Table 22 Market values of Alfa share .......................................... ............... 102

Table 23 RTA table for different risk and rating categories. ........ 103

Table 24 Credit Risk - Analysis by maturity of trade receivables ..................... 114

Table 25 Credit Risk - Concentration of receivables ........................................ 115

Table 26 Liquidity Risk - Maturity analysis for financial liabilities ................. 116

Table 27 Correlation between the three dependent variables ....................................... 119

Table 28 summary table on case studies .......................................... ........ 119

Table 29 Descriptive statistics of the experiment ........................................... ..... 120

Table 30 ANOVA table .............................................. ..................................... 121

Table 31 Contrast test. .................................................. ............................. 122

Table 32 Kruskal-Wallis non-parametric test ......................................... ... 123

Table 33 Descriptive manipulation checks statistics ......................................... 137

Table 34 Correlation between manipulation checks ........................................... .. 138

Table 35 ANOVA table .............................................. ..................................... 139

Table 36 Contrast Tests for Manipulation Checks ...................................... 140

Table 37 Descriptive statistics .............................................. ............................. 143

Table 38 Descriptive statistics rating liquidity credit confid transp * disclosure

.................................................. .................................................. .......................... 143

Table 39 Anova Group1 .............................................. .................................... 145

Table 40 Descriptive statistics rating liquidity credit confid transp * group1 145

Table 41 Anova Disclosure .............................................. ................................. 146

Table 42 Descriptive statistics rating liquidity credit confid transp * group2 147

Table 43 Anova Disclosure .............................................. ................................. 148

Table 44 Whole Sample Anova by Disclosure ........................................... ... 148

Table 45 Whole Sample Contrast Tests for Disclosure ............................. 149

Table 46 Anova by Group2 ............................................. ............................... 149

Table 47 Group2 Contrasts Test ............................................ ..................... 150

Table 48 Anova by Group1 ............................................. ............................... 150

Table 49 Tests of Contrasts for Group1 ........................................... ................ 151

Table 50 Descriptive manipulation checks statistics ......................................... 160

Table 51 ANOVA table for DISCLOSURE ............................................ ........ 161

Table 52 Contrast Test Table for Disclosure ........................................... ........ 162

Table 53 ANOVA table for Group1 ............................................ ................. 163

Premise

Premise

This research stems from an accurate study of the evolution of Italian and European legislation on the subject of financial risk communication and in particular of IFRS 7, Finacial Instruments: Disclosure. Thanks to this international accounting standard, Italian listed companies have included a greater number of disclosures on financial risks in their financial statements, but while there is no doubt the quantitative increase in information, the qualitative value of this communication is doubtful. In this regard, the study analyzes the usefulness of the disclosure introduced by IFRS 7 for financial analysts. The choice of analysts is a natural choice due to the importance they hold as intermediaries in the communication channel between companies and the market.

Some questions spontaneously arise from reading the accounting principle which we will try to answer with this paper.

Do financial analysts think this information on value risk is relevant?

Can this information change the analyst's judgment based

on the budget in the strict sense?

Do analysts also take this quantitative information into account in their assessments?

In this analysis we want to evaluate the impact of quantitative information regarding credit risk and liquidity risk on analysts' opinions. What better risk assessment tool can be used than the rating1 which summarizes the opinion on the company's risk profile (which includes both credit risk and liquidity risk). In light of the above, some questions are added to the previous ones:

Does the rating expressed by analysts increase with the addition of positive information on financial risks?

Does the same starting rating decrease when negative disclosure on financial risks is added?

1 To assess credit risk, the so-called "rating systems" are adopted, which are commonly understood as the set of methods, procedures, controls, data and information systems that support this assessment.

In short, we will firstly assess whether the financial risk disclosure may have an impact on analysts' assessments, and secondly we will try to understand if the sign of the information changes the rating in the same direction. To confirm the change in the rating expressed by the analyst, two other assessments have been added: a credit risk assessment and a liquidity risk rating.

The present work intends to study the phenomenon through an approach different from those usually used, which can be defined as the experimental one. From a vast international literature it is evident that the experiment is a method commonly used in Anglo-American countries and that this methodology is very useful for evaluating the cause-effect relationship in a controlled environment.2.

2 Andersson & Hellman, 2007.

Introduction

INTRODUCTION TO RESEARCH

The corporate communication process has acquired greater importance in recent years than in the past and has been the subject of study by the literature, professional associations and regulatory bodies. In particular, the debate concerned the increase in voluntary disclosure and the introduction of a more binding mandatory disclosure. The scandals that have occurred in recent years have led to incentives for discussions on the increase in mandatory communication by companies with particular reference to risk reporting by company managers.

Voluntary risk communication is a tradition of Anglo-Saxon countries that takes shape in 1998 with the publication by the Institute of Chartered Accountants in England and Wales (ICAEW) of the document called "Financial Reporting of Risk - Proposal for a Statement of Business Risk ".

ICAEW was not the only one to propose an implementation of risk reporting, since 1991 the Financial Accounting Standard Board (FASB) and the American Accounting Association (AAA) have sponsored an annual conference on the possible contents of the accounting standards that brings together academics, analysts, board members, regulators and financial officers around the same discussion table. In particular, the conference on "Risk and Financial Reporting" was organized in 1997 to identify the type of risk that companies had to communicate in their reports and what the right format / content of the information could be3.

To confirm the importance acquired over time by managers of corporate risks, other professional bodies, besides ICAEW, have issued discussion papers and guidelines for the compilation of risk reporting such as the Canadian Institute of Chartered Accountants (CICA) , the Fédération des Experts Comptables Européens (FEE), the International Accounting Standards Board (IASB), the Accounting Standards Board (ASB) and the American Institute of Certified Public Accountants Certified (AICPA). These professional bodies have taken over

3 Schrand CM & Elliot JA, 1998.

the need to include a narrative discussion on corporate risks in the report prepared by the directors4.

An analysis of the costs and benefits of voluntary disclosure shows that managers prefer not to give certain commercially sensitive information (proprietary costs) and it is not surprising that over time the voluntary disclosure approach has been

replaced by a mandatory approach (mandatory disclosure).

Since 1934 in the USA, American companies have had to annually insert disclosures on risk factors in Form 10-K and changes in the aforementioned factors in Form 10-Q on a quarterly basis. Also in European countries (Germany, France and UK) in recent times the national authorities require companies to publish a management report or a business review with the description of the main risks and uncertainties. Specifically, in Germany, with the issue by the German Accounting Standards Board (GASB) of GAS 5 (2000) which requires a risk report as a separate section of the management report, the emphasis was placed on the importance of this information in the process decision-making by users5.

With the establishment of the Economic and Monetary Union, a process of European harmonization began which also involved the regulation of the economic-financial communication of unlisted companies resident in the countries joining the Union. Specifically, with the implementation of directive 2003/51 / EC (directive on modernization), it became mandatory to include in the management report "a description of the main risks and uncertainties to which the company is exposed". This directive was implemented in Italy with the legislative decree 2 February 2007 n. 32 and became binding for financial statements closed as of 31 December 2009 and therefore relatively recently compared to other countries.

For listed companies, the harmonization was implemented through the immediate implementation of the international accounting standards in the financial statements as of December 31, 2005. In 2005, the IASB itself published the Management Commentary - discussion paper which provided for the MD&A as an essential component of the financial report and that it had to contain

a detailed discussion of the risks and uncertainties to which the entity

could be subject.

A mention should be made of the path followed by the mandatory disclosure of financial risks at international level; In the USA in 1997 with FRR No. 48 the communication of market risk was regulated by

4 Linsley P. & Shrives P. & Kaiuter P., 2008.

5 Linsley P., Shrives P. & Kajuter P., 2008.

part of the institutions, while in 1998 the UK made disclosure on the nature of financial risks (credit risk, liquidity risk, cash flow risk, interest rate risk, and other type of market price risk) and on the objectives, policies and strategies underlying the acquisition of financial instruments.

Having said this, we can understand the process that led the IASB to require, in 2005 first with IAS 32 and then with IFRS 7, companies to provide information on market risk in financial statements (starting from 2007), credit and liquidity. IFRS 7 provides for both qualitative and quantitative information which, in the objective of the IASB, is necessary for users so that they can express more informed opinions on the risk and returns associated with financial instruments issued by listed companies.

The discussion on the topic: “Voluntary or compulsory communication” was therefore also accepted by the regulatory bodies. The same has also been the subject of discussion at the doctrinal level, producing a large literature on the subject.

In this context, the international and Italian literature have focused both on compliance studies of some economic-financial communication vehicles (financial statements, half-yearly reports, IPO prospectuses, etc.) to the new regulation, with an in-depth analysis on the content of the information and on the analysis of the impact of this mandatory communication on some variables, such as the volume of trading, the cost of capital and share returns, which measure their participation in the decision-making process of users (investors).

This study is part of the second line of research, just described, which observes the impact of mandatory communication on the decision-making process of certain users, the research is oriented, in fact, towards demonstrating the usefulness for financial analysts of financial risk communication. provided for by IFRS 7 included in the annual report6 (in which

6 The annual report contains the financial Statement which in turn includes: Consolidated statement of income, Consolidated balance sheet (Consolidated balance sheet), Shareholders' equity - Statement of changes (Net equity - Statement of changes ), Statement of gains / (losses) recognized directly in shareholders 'equity (Statement of profits / (losses) directly to shareholders' equity), Consolidated cash flow statement (statement of consolidated cash flows) and notes and other statements and explanatory material - Explanatory notes (explanatory notes and other statements and explanatory material - Explanatory notes).The content of the financial statement is explained in paragraph 7 of the Framework for the Preparation and Presentation of Financial Statements approved by the IASC Board in April 1989 and adopted in April 2001. The annual report consists of: Chairman's statement (the report of the president), Chief executive's review (the opinion of the executive director), Finance director's review (the opinion of the financial director), Directors' report, Corporate Governance

the actual financial statements are included) which represent the main part of the financial information of listed companies.

In this study, we also want to ascertain whether positive information on financial risk (good news) implies a positive opinion on the part of analysts and on the other hand if negative information (bad news) implies a negative opinion on the part of analysts.

The judgment is both specific as it concerns the credit risk and the

liquidity risk than a generic judgment on the company's risk profile. The latter is given through a company rating which, as we all know, identifies the probability of the company's default. Theoretically, if the risk profile increases, the probability of default of the company should increase since the creditworthiness assessment involves an analysis of liquidity and corporate credit.

In this paper it seemed more appropriate to adopt the experimental approach that demonstrates the direct effect of information, added to the budget in the strict sense, on the judgment of the subjects subjected to it.

The experiment allows us to effectively understand if the subjects take into consideration the information object of our study and if it actually participates in their decision-making process.

In summary, we want to understand whether analysts see disclosure on financial risk as a simple piece of information or as useful information for their assessments.

Only this type of approach can highlight the cause-effect relationship between the variables; and in this context, only through the explicit request for a risk assessment based on the information provided can we have a reliable result on the actual usefulness for financial analysts of the disclosure envisaged by IFRS 7.

For the conception of the research design the framework of the predictive model of Hunton and McEwen (1997) was taken as a reference

suitably modified for experimental purposes. The final design involves the study of three dependent variables (rating, liquidity risk and credit risk) in an experiment with a single group of subjects, selected in the particular category of recipients defined as information intermediaries in the process

of financial communication, namely financial analysts.

The experiment is carried out by presenting three different tests to the three groups of randomly selected analysts:

 Financial Information Only (FIO);

report (Report on corporate governance), Consolidated financial statement (consolidated financial statements, already described in the previous note) and Auditors 'report (Statutory auditors' report).

 Financial Information with the addition of positive financial risk information (PFRI);

 Financial Information with the addition of negative financial risk information (NFRI);

this confirms the realization of an experimental between-subject design

Chapter 1.

Chapter 1.

THE REFERENCE NORMATIVE BACKGROUND

1.1 Introduction

As has been stated several times in this paper, the additional information by reducing the information asymmetry reduces the uncertainty of users on the company's performance which in an ideal stock market should have a direct effect both on the market value of the company's securities. and on the number of share deals.

Why are we referring to an ideal market? Essentially, an ideal stock market predicts that stock prices are directly linked to the performance of the companies that issued those shares, but the reality is quite different as there are speculators and speculative bubbles that are a direct consequence of the greedy behavior of this last.

The crash of the American stock market in 1929 is the clear demonstration of what can happen when the value of the securities deviates in an almost absurd way from the real value of the company which can be measured as flows of profits or cash and which should not only be the basis of negotiations, but the precise value at which they should take place.

The speculative bubble swells up to burst when market operators notice the speculation and start selling to bring the market price to the actual value of the shares, but at this point a panic phase is triggered that forces investors to sell all the shares before losing everything, which causes a chain reaction on the part of all operators that can lead to a catastrophic crisis like that of '29.