Impact of risk disclosure on stock volatility, market liquidity, and financial performance for UK and Canadian insurance companies : pre versus post IFRS

Abstract

Purpose: This study investigates the impact of risk disclosure practices on stock return volatility, market liquidity, and financial performance for insurance companies in UK and Canada before and after IFRS adoption. Design/methodology/approach: The sample is divided into two groups; 14 insurance companies in UK and 12 ones in Canada. Univariate and Multivariate analysis were conducted to examine the impact of risk disclosure practices on stock return volatility, market liquidity, and financial performance for insurance companies before and after the implementation of IFRS with and without control variable. Risk disclosure Index is also developed as a robustness check. Risk disclosure data are collected manually from the annual reports over a six-year period and analyzed through QSR Nvivo software for each country, while all dependent and control variables are collected from Thomson Reiuters Eikon and Deatstream. Findings: Results reveal that mandatory risk disclosure practices positively influence stock return volatility for UK insurers but not Canadian ones. Moreover, both mandatory and voluntary risk disclosures increase market liquidity for UK insurers. Additionally, the outcomes show a negative influence of risk disclosure practices on financial performance for both UK and Canadian insurers. The adoption of IFRS enhances the impact of risk disclosure practices in both countries on market liquidity and financial performance. Research limitations: The main limitation is that few companies were dropped out from the sample because of unavailable annual reports and missing data for some variables. Practical implications: The findings highlight the diverse effects of voluntary and mandatory risk disclosure practices. The study also confirms that valuable information provided to investors, mitigate information asymmetry problem. Originality/value: There is no research that investigates the effect of risk disclosure on stock return volatility, market liquidity, and financial performance in the insurance industry in these two countries and accounts for IFRS implementation. Therefore, this research contributes to the literature by filling the gap through distinguishing between voluntary and mandatory risk disclosures and adds to literature information about the effect of risk disclosure particularly on insurance industry.