Corporate Risk Information in Annual Reports and Stock Price Behavior in the United Arab Emirates

INTRODUCTION Corporations often utilize various devices, such as media and newspapers, to communicate information about their activities, but annual report is the official public document that includes information about corporations' current activities and future plans. Although different studies investigate level of voluntary disclosure in the annual reports (e.g. Robb et. al., 2001; Cabedo and Tirado, 2004; and Hassan, 2009), managers are generally skeptical about providing all information to their shareholders without certain regulatory and professional requirements. Regulatory requirements are laid in two forms: accounting standards and listing conditions. For example, Financial Accounting Standard Board (FASB) and Accounting Standards Board (ASB) set rules of disclosure in the US and UK respectively, while International Financial Reporting System (IFRS) sets guidelines that aim at enhancing financial disclosure globally. In this regard, Statement of Financial Accounting Standards (SFAS) 119 & 133, Financial Reporting Standard (FRS) 13, and IFRS 7 require the inclusion of risk related information in annual reports. Likewise, security exchange enforces binding rules for the listed corporations to promptly release risk related information and market sensitive information. One the other hand, professional institutions, such as American Institute of Chartered Public Accountants (AICPA) and Association of Investment Management and Research (AIMR), encourage corporations to disclose information about their strategic plans, business opportunities, risks, as well as process and operations management. Therefore, we expect that if annual report provides adequate risk related information to the shareholders then it should influence the cross sectional behavior of stock prices in market trading. Adequacy of information in annual report could influence the behavior of stock prices because it may help reducing uncertainty of valuation. This enables the shareholders to take informed decisions about their portfolio. Most importantly, the corporate risk information disclosure in annual reports would help reducing the agency problem between the public shareholders and corporate managers. One the one hand, the accounting literature includes plenty of studies related to voluntary and/or mandatory disclosures and factors affecting such disclosures (e.g., Hooks et. al., 2002; Leventis and Weetman (2004); and Ferrell, 2007). On the other hand, the information effect on the stock price behavior is well known in the market efficiency literature in finance (e.g., Fama, 1970). However, there is a research gap in investigating whether the inclusion of risk related information in annual reports can influence the stock price behavior. The finding on relationship between corporate risk disclosure and stock price behavior would therefore enrich the current knowledge on the linkage between accounting information and financial market. This study extends on the prior work that develops a corporate risk disclosure (CRD) index for the United Arab Emirate (UAE) listed corporations (e.g. Hassan, 2009) to examine the CRD cross-sectional relationship with the average volatility of stock price over the different interval of periods after publication of annual reports. The volatility of price movements reflects the behavioral pattern of stock price and the potential risk of investment. This is measured by calculating spread between the highest and lowest prices in each trading week over different intervals until end of the financial year, when the next annual reports become due. There are several reasons to choose the United Arab Emirates (UAE) for this study. First the UAE is an emerging market in oil-rich gulf region, yet most listed corporations apply the IFRS. The UAE corporations' annual reports demonstrate a pattern of risk disclosure (Hassan, 2009). The limitation however is that the UAE stock markets started in 2000; hence it has only eight years of trading history. …