国際会計研究学会年報 2005年度

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies
Ali M d. M ohobbot
Graduate School of Humanities & Social Sciences
Okayama University, Japan

Abstract
This paper attempts to ﬁnd out the corporate risk disclosure practices ofJapanese companies. 90 non-ﬁnancial companies have been selected randomly from companies enlisted with Tokyo Stock Exchange as the study
sample. Their published annual reports have been used for content
analysis. The ﬁndings show that in absence of any regulatory guidanceJapanese companies are voluntarily reporting risk information in theannual reports. Study ﬁndings evidence that the company size and thenumber of risk disclosure are signiﬁcantly positively correlated i.e.,larger
companies are disclosing more risk information than smaller companies
which is consistent with the ﬁndings of previous studies. On the other
hand, no signiﬁcant relation exists between number of risk disclosure andlevel of risk, relative proﬁtability, and ownership distribution pattern.
The study also reveals that companies are used to disclose more past
information and reluctant to disclose future risk information which istreated as more useful for the stakeholders for their economic decisions.
In addition to that, most of the companies are disclosing descriptive risk
information and are reluctant to quantify the risk either because ofunavailability of reliable measurement tools or to avoid potential legal
complicacies. Although companies are reporting risk information they do
not disclose risk identiﬁcation and measurement system they used. Furthermore, most of the companies do not disclose any information regarding risk prioritization.

113

1. Introduction

the Institute of Chartered Accountants ofEngland and Wales (ICAEW, 1997, 1999,

Corporate risk reporting is relatively a2002), Canadian Institute of Chartered

new issue and gaining popularitygradual-

Accountants (CICA, 2002), Americanly.It is being talked during last few years.

Accounting Association

For better corporate governance, risk

counting Standard Board (AAA FASB,

disclosure is very important both for the1997), and German Accounting Standard

management and stakeholders of theBoard (GASB, 2001) are concerned incompany. Accordingly, to comply withthis regard. On the other hand, there are

the better corporate governance disclo-

few academicians (for example, Linsleysure, companies are reporting about risk

& Shrives, Hookana, Woods, Dowd, andinformation voluntarily in annual re-

Humphrey, Woods and Reber, Homolle,

ports. But, to some extent,these voluntar-

Dobler, Verrecchia) have also conducted

y risk disclosures can not fulﬁll the de-research on this particular issue.

Financial Ac-

mands of the users and therefore, stakeholders are not fully satisﬁed with theGordon (1999) says that the world does

disclosed risk information. More often

not trust ﬁnancial reporting by Japanesethan not, companies do not provide clear

companies. How far this comment isand complete risk proﬁle as there is noth-

trustworthy and evident that is diﬀerent

ing mandatory to do so. Even the manda-

issue. But, a huge ﬁnancial scandals andtory risk reporting regulations always canbankruptcies in the 1990s have undoubt-

not ensure full disclosure and enhanced

edly inﬂuenced to come to this comment.

quality (Woods and Reber, 2003). How-

Bad loan recovery is a much talked andever, to minimize the level of information

badly needed issue in the Japanese econo-

asymmetry proper risk disclosure is very

my. In response to various ﬁnancial sys-important. Therefore risk reporting issue

tem weaknesses and pressures from out-

attracts attention to the concerned par-side community, the government eventu-

ties. It is a matter of general interest to

ally recognized the need for greater trans-

know how companies are reporting theparency in corporate ﬁnancial reporting

risk, how these risks are being identiﬁed

and for accounting practices closer toand measured. To what extent risk infor-

international standards. Consequently,

mation should be disclosed is also an

the government announced details of anissue of debate. As a result, diﬀerent“Accounting Big Bang”between 1997 andprofessional and regulatory bodies in1999 that require massive reformation of

diﬀerent countries are concerned about

ﬁnancial reporting and accounting regu-

this issue and issued various pronounce-

lations. But traditionally Japanese com-ments to give clear guidelines. Such as,

panies have strong resistance towards

114

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

disclosure and inherently secretive andlevel of risk of the company and so on.

are unwilling to supply accounts to non-The study will also reveal the relation

shareholders (Cooke, 1991, 1992). Jiang

between monetary risk disclosure andand Kim (2004) ﬁnd that there is somenon-monetary risk disclosure, past andsort of information asymmetry between

future risk disclosure and the relationshipﬁrm (manager) and market (outside

between among good, bad and neutral

investors) and show that foreign (insti-

risk disclosures. Other objectives include

tutional) investors are attracted to Japa-(i) how the Japanese companies identify

nese ﬁrms with low information asym-

risk, (ii) how they classify them, (iii)metry. However, we do not have much

how they prioritize them, (iv) whether

study ﬁndings particularly about Japa-

they measure risk or not and so on.

nese corporate risk disclosures.Although,This study proceeds as follows. Section 2

The Financial Service Agency (FSA) ispresents existing literature, section 3 pres-set to force listed ﬁrms to signiﬁcantly

ents hypotheses of the study followed byexpand the scope of information theymethodology in section 4. Section 5 and 6

disclose including potential risk factor inpresent the results and discussions andtheir securities reports starting from 2003

conclusions respectively.

(Zaman, 2003). Till to date, no massive
initiative has been taken in Japan for risk
reporting in annual reports. On the other
hand, some countries such as, the UK,

2. Literature review
2.1 Institutional Literature

Canada, and Germany are well advanced

In fact, a very few empirical studies

in this regard and have issued various

have been done by academic researchers

pronouncements aiming at better report-on this particular issue. M ost of the litera-1)

ing of risk. But, it is assumed that Japa-

tures come from various regulatory

nese companies are disclosing risk infor-professional bodies e.g. ICAEW (1997,

mation in annual reports as they are to19999, 2002), CICA (2002), AAA FASB

operate their business both in home and(1997), GASB (2001) and so on. Other

abroad. The study aims at ﬁnding out

than GASB all the above bodies suggest

their risk reporting status. To be more

to disclose risk information voluntarily.

speciﬁc, this study will try to ﬁnd out the

GASB issued a standard making risk

extent of company risk disclosure. It also

disclosure mandatory. In fact, risk disclo-attempts to ﬁnd the pattern of risk disclo-sure debate has been brought into spot-

sure e.g. what is the relationship (if any)

light by ICAEW through a discussion

between number of risk disclosure andpaper “Financial Reporting of Risk ?Pro-

corporate characteristics. Corporate char-posals for a Statement of Business Risk”

acteristics include size, proﬁtability, andin 1997. Although, ICAEW has published115

several subsequent papers on this issue

certainty, the disclosures should be madethe ﬁrst proposal has the exceptional im-

before taking account of such techniques.

portance as it brings risk reporting idea in

It also requires that an appropriate de-the light for the ﬁrst time. According toscription of the risk management system

this proposal, companies with publicly

is provided, including a description of the

traded shares should lead the introduc-policies, procedures and organization oftion of enhanced risk reporting in annual

the risk management system. CICA also

reports. Enhanced information about

mentions that a company should disclose

what companies do to assess and manage

its principal risks and describe related

key business risks of all types will provide

risk management systems to enable read-practical forward-looking information ;ers to understand and evaluate thereduce the cost of capital; encouragecompanyʼs risks and its decisions regard-

better risk management ; help to ensure

ing the management of such risks. Suchthe equal treatment of all investors; anddisclosure should include: the principal

improve accountability for stewardship,

risks and uncertaintieSFACing the com-

investor protection and the usefulness ofpany and its core businesses and seg-ﬁnancial reporting.Accordance with GAS

ments, as appropriate; the strategies and5, a risk which threatens the existence ofprocesses employed for managing these

the group should be clearly described andrisks; and the potential speciﬁc impact

individual risks should be classiﬁed in aof these risks on results and capabilities,

suitable manner into risk categories. The

including capital resources and liability

information provided on risk should be(CICA, 2002). Therefore, literature fromself-contained which means that the risk

diﬀerent regulatory bodies implies that inand the consequences should be dis-principle, there is no basic diﬀerence

closed. It also includes that risk should beamong the guidelines. All of them advise

quantiﬁed where this can be done withto disclose principal

reliable and recognized methods, where it

mation along with consequences of theis economically justiﬁable and whererisk and the methods of risk measurement

quantiﬁcation could aﬀect the decisions

and identiﬁcation.

material risk infor-of the users of the group management
report. In this case, the models and assumptions used should be described. As a

2.2 Literature from Academic Researchers

general rule, disclosures about risk

Academic researchers also have con-should be made after taking account ofducted research studies in this arena e.g.,risk reduction techniques to mitigate theLinsley et al. (2000, 2002-04), Hookana

eﬀects of risks. If these techniques cannot(2003), Homolle (2003) and so on. Lins-

compensate for the eﬀects of risk withley et al. ﬁnd that big ﬁrms disclose more

116Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

risk information than small ﬁrms andditions.

there is no relation between the level of

It is noteworthy to mention that most ofrisk and the number of disclosure. They

the studies were conducted on the UK,also ﬁnd that there is no relationship

Germany and Canadian companies possi-

between the average proﬁtability and the

bly as because they are well advanced in

number of risk disclosure. They show

this regard. There are some researchersthat directors are reluctant to quantify

notably, Cooke (1991, 1992) and Choi etthe risk ; rather they are more willing toal (1999), Singleton and Globerman

disclose non-monetary risk information.

(2005) who have carried out some re-

Hookana (2003) sees the nature andsearches focusing on ﬁnancial disclosureinﬂuence of institutional environment onof Japan. But no research study has been

the formation of the current practices andundertaken speciﬁcally on risk disclosure

problems relating to risk identiﬁcation

issue about Japanese companies. Thisand measurement. Woods et al. (2004)

dearth in this area motivates the author

criticize the risk measurement system

to reveal the situation in Japanese compa-

particularly VaR. They mention that in-nies.

stitutions will typically be reluctant toreveal more than their peers,as risk information is commercially sensitive by its
deﬁnition and which lead to make the risk

3. Hypotheses of theStudy :
2)

reporting as ʻ
boiler plateʼ. Ali and Koni-

Risk disclosure and size of the com-shi (2005) mention that the existing dis-pany

closure requirements are not suﬃcient for

Various general disclosures related

proper risk disclosure and it has been felt

studies reveal that there is a positive rela-that there should have some other guide-tion with company size and number oflines for reporting company risk informa-disclosure (e.g. Adams et al., 1998, M ar-tion. Dobler (2005) advises caution notston & Shrives, 1991). These studies do

to overestimate the information content

not focus on the risk disclosure issue;of risk reports. He mentions uncertainty

rather these are on general disclosure.

of managerial information availability

Linsley and Shrives (2003) show particu-

and veriﬁability is a problem of risk re-larly that there is a positive association

porting. Even with regulatory action thisbetween company size and the total num-problem can not be removed fully.

ber of risk disclosure. They also ﬁnd the

Homolle (2003) also says that risk report

existence of positive association between

does not generally lead to a decrease incompany size and number of ﬁnancialbankʼ
s risk exposure. In stead it induces

risk and non-ﬁnancial risk disclosure.

higher insolvency risk under certain con-

Their study is particularly on the UK117

companies after issuance of risk reporting

greater amounts of risk information as

guidelines by the ICAEW. On the otherthe directors need to explain the cause ofhand, Japanese companies may havethis risk. On the other hand, companies

diﬀerent patterns of disclosure as they

could have strong incentive to disclose inhave to operate in a separate environment

details to the stakeholders how they areso called secretive environment (Cooke

actively managing the risk and this would

1991, 1992) and do not have any

also result in higher levels of disclosure.

regulatory guidelines in this regard. In

Therefore there should be a positive asso-

addition to that, most of the sample com-ciation between risk disclosure and level

panies having international businessof risk. In contrast, there could be anoth-should have more or less same risk disclo-

er argument that companies with higher

sure pattern irrespective of their origin.

levels of risk may also feel that they do

Therefore this study also will test the

not want to draw attention to their ʻriski-

same set of hypothesis whether resultsnessʼand therefore they may show a re-

conﬁrm the earlier results.

luctance to disclose signiﬁcant amounts

Hypothesis 1(a): There will be a posi-of risk information voluntarily. On thetive association be-other hand, companies with lower level oftween company size

risk may wish to publicly declare that thisand the total number

is so, possibly directors wanting to signalof risk disclosures.

that this has arisen from their better risk

Hypothesis 1(b): There will be a posi-management abilities.

tive association be-

A circular relationship between risk levels

tween company size

and risk disclosure may also exist. The

and the total number

ICAEW, amongst others, argue that com-of ﬁnancial risk disclo-

panies that disclose more risk informa-sures.

tion will ﬁnd an image in the market

Hypothesis 1(c): There will be a positive

place that they are less risky than before.

association

between

Therefore, increased risk disclosure could

company size and theimpact upon the company risk level, al-total number of non-though to what extent is unknown.

ﬁnancial risk disclo-

Because the nature of the relationshipsures.

between the volume of risk disclosuresand risk levels is indeterminate the author

Risk disclosure and the level oftherefore presents the hypotheses in a nullcompany risk

form :

It could be postulated that companies

Hypothesis 2(a): There is no association

with higher levels of risk will disclose

between the level of118

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

risk within a company

Hypothesis 3 : There will be a positive

and the total number

relationship between theof risk disclosures.

relative proﬁtability of the

Hypothesis 2(b): There is no associationcompany and the total

between the level ofquantity of risk disclo-risk within a company

sure.

and the total numberof ﬁnancial risk disclo-

Risk disclosure and ownership dis-sures.

tribution pattern

Hypothesis 2(c): There is no association

It is thought that if majority or a large

between the level ofnumber of shares of a company is owned

risk within a company

and controlled by a few persons, risk

and the total number

disclosure pattern would be diﬀerent thanof non-ﬁnancial risk

a ﬁrm having evenly distributed owner-disclosures.

ship. If a very few people control the
majority shares then most of the risk in-

Risk disclosure and proﬁtability

formation will be disclosed at the board

It is being argued that those companies

room meeting or with analysts as thethat are better at risk management will

most interest lies with them. General sta-

have higher levels of relative proﬁtability

keholders, who are not holding a substan-and they will then want to signal theirtial amount of share, somehow will notsuperior risk management abilities to theget material risk information throughmarket place via disclosures in the annual

annual reports. From the arguments, wereport (Linsley et al., 2003). Disclosing

can postulate that there is a negative

more risk information, management not

relationship exists between the level of

only to show their risk management

shareholdings of top few shareholders

eﬃciency but also to show their transpar-

and the level of risk disclosure. On theent attitude to the stakeholders using thiscontrary, if the number of individual

opportunity. Although it is very diﬃcult

shareholders and foreign shareholders is

to know the actual attitude ofthe manage-high the pressure mounts to the directors

ment at a comfortable proﬁt position of

to disclose more risk information. Institu-

the company. Whatever may be the actu-

tional isomorphism particularly, coercive

al intention of disclosing risk informa-isomorphism theory may work in thistion, it seems that there is a relation

regard. And therefore the relationshipbetween the proﬁtability and number ofbetween level of individual and foreignrisk disclosures. Therefore the hypothesis

shareholdings and risk disclosure will beis:positive.
119

Therefore the hypotheses will be:using value at risk methodologies, but

Hypothesis 4(a): There will be a nega-these techniques can only be used in cer-tive relationship be-tain circumstances. That a large number

tween the level of shar-ofrisks are diﬃcult to measure leads on toeholdings of top few

the second problem. A company may doshareholders and levelits best to estimate the size of a future riskof risk disclosure.

but the eventual outcome may be quite

Hypothesis 4(b): There will be a posi-

diﬀerent to this original estimate. There-

tive relationship be-fore directors will be very reluctant totween the level of shar-attempt to quantify the size of risks aseholdings by individu-

this can leave them open to severe criti-

als and level of risk

cism, and potential legal actions fromdisclosure through an-

investors who can claim that they havenual reports.

suﬀered ﬁnancially, in the future once theHypothesis 4(c): There will be a positive

actual impact becomes known.

Conse-

relationship between

quently one would expect risk disclosuresthe level of sharehold-to be described and discussed, but withings by foreign share-

infrequent disclosure of risk information

holders and level ofthat has a monetary value attached.

risk disclosure through

Therefore the hypothesis is:3)

annual reports.

Hypothesis 5 : The number of nonmonetary risk disclosures

Monetary and non-monetary risk

willdisclosure

greater than the number

The ICAEW (1999) advises to quantify
the size of a risk whenever possible tobe signiﬁcantlyof monetary risk disclosures.

improve the quality of risk reporting.
Placing of a monetary value upon a risk

Past and future risk disclosure

enables reader to better assess the poten-

The fundamental problem associatedtial consequences of risk to the company

with the disclosure of future risk informa-and therefore the consequences to thetion being that it is inherently uncertain

reader are easier to assess. There are,information. Thus, whilst future infor-

however, two diﬃculties associated withmation is more useful than past informa-

the quantiﬁcation of risk. First, not all

tion, it is likely that directors will be as

risks are susceptible to measurement.

reluctant to disclose future risk informa-

There are well-tried techniques fortion as they would monetarily-quantiﬁed

measuring for example, market risks

risk information. The directors will not120Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

want to be held responsible for the deci-

ed to release bad news into the public

sions stakeholders take based upon thedomain via annual report if they want todisclosures.

pre-warn of possible diﬃculties in the

Therefore the hypothesisis:future. Therefore there are a number ofHypothesis 6 : The number of past risk

reasons why bad news will be disclosed.

disclosu resbe

An annual report that focused predomi-

signiﬁcantly greater thannantly upon bad news would be poor

the number of future risk

publicity for the directors and therefore

disclosures.

they would, presumably, seek to intro-

willduce good news also. The type of good
Good, bad and neutral risk disclo-risk news that may be disclosed could be

sure

discussions of opportunities that the com-

This hypothesis tests whether there arepany can exploit or explanations of how adiﬀerences in the numbers of risk disclo-risk has been actively and successfullysures in terms of the nature of the ʻ
newsʼmanaged. The amounts of good, bad or

they disclose. That is, is good news orneutral news that will be disclosed will

bad news being disclosed or is the infor-

presumably be variable however, as it

mation ʻ
neutralʼ? Although, prima facie,

will be dependent upon how much ofeach

it could be argued that companies may

category of news exists at the time ofprefer not to disclose bad news, this will

preparing the annual report and how

not always translate into their withhold-much is withheld from the annual report,

ing that bad news. The bad news may

for example for commercial reasons. As

need to be disclosed ifthe ﬁnancial results

because it is not possible to pre-determine

are such that had the directors omitted an

the disclosure patterns of good, bad andexplanation for the results this would

neutral news the last hypothesis is:merely arouse suspicions and potentiallyHypothesis 7: The number of good, baddamage their reputations to a greaterand neutral risk disclo-extent than if the information had been

su resdisclosed. The directors may also wish tosigniﬁcantly diﬀerent

disclose the bad news if they can attributefrom one another.

will

n ot

be

this to external factors and therefore
deﬂect blame away from their own management actions and abilities. Attribution theory would support this suggestionthat managers wish to attribute bad news

4. M ethodology of the
study
Sample selection

to factors that are outside their control or

The sample has been selected randomly

inﬂuence. Directors could also be prepar-

from the listed companies enlisted with121

Tokyo Stock Exchange. About400 compa-

Total turnover and total asset havenies have been contacted and requested

been selected as the proxy variables forfor their annual reports. After receiving

size ofthe ﬁrm.For measuring the level ofthe response, 90 non-ﬁnancial companies

risk, it can be done in various ways like,were found suitable for the study. Finan-

gearing ratio, beta factor, book to market

cial companies were not being consideredvalue and so on. But, it is very tough toas they are to report some information

justify favoring one method than anotheraccording to their special nature. The

to use (Linsley and Shrives, 2002). How-annual reports were selected to form theever,for this studywe have decided to use

basis for content analysis with a year-end

market to book ratio (M BR) and gearing

date nearest to 31 March 2003. Table 1

ratio as the risk proxy variables. Fama

shows the list of the sample companies.

and French (1992) study advocates theuse of book to market value ratio as theContent analysis

appropriate proxy of risk. The year end

Content analyses of the annual reports

ﬁgure has been considered for calculation

have been performed to ﬁnd out the con-of gearing ratio and book to market value

cerned issues. Linsley and Shrives haveratio. On the other hand, Return on asset

also used the same technique for various(ROA) and Return on equity (ROE)

studies. The author himself did the cod-have been selected as the proxy variables

ing job and analyzed based on the deci-for relative proﬁtability of the sample

sion rule applied by the Linsley andcompanies. For analyzing the relation-

Shrives (appendix A). The researcher

ship between ownership distribution andhas also used the sentences as unit of therisk disclosure, shares held by top 10

analysis as it was supported by the M ilne

shareholders and holdings of individuals

and Adler (1999) saying that they are

and foreign shareholders have been taken“far more reliable than any other unit ofas proxies which have been collected fromanalysis.”The sentence coding was per-the annual reports on the year end date.

formed according to the grid used by
Linsley and Shrive (appendix B) with aPearsonʼs correlation co-eﬃcient havelittle modiﬁcation about the categories ofalso been calculated using SPSS for test-

risk. There are ﬁve categories of risk

ing ﬁrst four sets of hypotheses. To test

disclosure (appendix C) were used forrest of the hypotheses Wilcoxon Rank-

this study. This risk category has been

Sum Test (same as Mann-Whitney test)

taken from the Turnbullʼs report suggest-

has been performed. By drawing histo-

ed by ICAEW with a minor modiﬁcation.

gram of the data it is found that sample
data is not normally distributed andMeasurement of variables
122

therefore Wilcoxon Sign Rank test couldCorporate Risk Reporting Practices in Annual Reports of Japanese Companies

not be performed.

5. Results and discussion
5.1 Descriptive statistics
The results of the descriptive statistics
Table 2: Descriptive Statistics
Minimum

M aximumM ean

Std. Deviation

Nat log of assets

23.742629.951426.8703

1.4215Nat log turnover

23.812829.9787

26.7701

1.4515

ROA

-8.6

13.19

1.469

3.4608ROE-152.91

72.8

2.162

20.2453

Market to book value ratio

0.001918.9992.0404

2.205

Gearing ratio

2.07951916.469

133.9689

253.8043

Top 10 shareholderʼs holdings

19.8

74.49

42.9361

11.3972

Holdings of Individuals and Foreigners

15.2

63.45

39.171

9.7639Total number of risk disclosure

5

143

51.6

27.311

Total number of ﬁnancial risk disclosure

0

41

8.03

6.602

Total number of non-ﬁnancial risk disclosure

4

121

43.57

22.791

Total number of monetary risk disclosure

4

81

19.97

13.012

Total number of non-monetary risk disclosure

0

102

31.63

18.565

Total number of past disclosure

5

125

38.53

21.784

Total number of future disclosure

0

82

13.07

11.742

Total number of good news disclosure

0

95

22.29

15.865

Total number of bad news disclosure

0

61

14.28

9.831

Total number of neutral news disclosure

0

70

15.03

10.485

Table 3: Pearson Correlation Coeﬃcient for variables
VARIABLESTOTAL NUMBER OFRISKDISCLOSURESTOTAL NUM BER OFFINANCIAL RISKDISCLOSURESTOTAL NUM BER OFNON-FINANCIALRISKDISCLOSURES

Pearsoncorrelation

Sig. (2 tailed)for Pearson

Pearsoncorrelation

Sig. (2 tailed)for Pearson

Nat log ofassets

0.261

0.013

0.275

0.009

0.233

0.027

Nat log ofturnover

0.290

0.006

0.308

0.003

0.258

0.014

Pearsoncorrelation

Sig. (2 tailed)for Pearson

Correlation is signiﬁcant at the 0.05 level (2‑tailed)．
Correlation is signiﬁcant at the 0.01 level (2‑tailed)．

123are shown in the table 2. For the purpose

number of non-ﬁnancial risk disclosures.

of smooth statistical calculation two vari-

The results conﬁrm that there is a posi-

ables named total turnover and total

tive relation between company size andassets have been converted into theirlevel of risk disclosure. More speciﬁcally,natural logarithm. Table shows that total

it shows a positive relation between com-

number of risk disclosures varies ranging

pany size and total number of risk disclo-from 5 to 138 with an average 51.60. The

sures (at the 5% level of signiﬁcance foraverage number of ﬁnancial and non-total assets and at the 1% level ofﬁnancial risk disclosures is 8.03 and 43.57

signiﬁcance for turnover); a positive as-

respectively. From the table, we also cansociation between company size and total

see that some companies do not disclose

number ﬁnancial risk disclosures (at thesome risk categories at all such as ﬁnan-

5% level of signiﬁcance for total assets

cial risk, future risk information, good

and at the 1% level of signiﬁcance forrisk information and so on having zero as

turnover); and a positive correlation

their minimum number.

between company size and total numberof non-ﬁnancial risk disclosure (at the 5%

5.2 Testing the hypotheses

level of signiﬁcance for both total assets

Table 3 shows that both proxy varia-

and turnover).

bles for the size of the company, natural

Table 4 shows that there is nolog of the assets and natural log of thesigniﬁcant relation exists between the lev-

turnover, are signiﬁcantly correlated withel of risk and number of total risk disclo-

the number of total risk disclosures, num-sures. For both the risk proxies, there is

ber of ﬁnancial risk disclosures, and theno signiﬁcant relation between level ofTable 4: Pearson Correlation Coeﬃcient for variables
VARIABLESTOTAL NUMBER OFRISKDISCLOSURES
Pearsoncorrelation

TOTAL NUM BER OFFINANCIAL RISKDISCLOSURES

Sig. (2 tailed)for Pearson

Pearsoncorrelation

Sig. (2 tailed)for Pearson

TOTAL NUM BER OFNON-FINANCIALRISKDISCLOSURES
Pearsoncorrelation

Sig. (2 tailed)for Pearson

M BR‑0.1090.305‑0.1140.283‑0.0980.359

Gearing ratio

0.046

0.665

0.027

0.802

0.048

0.656

Table 5: Pearson Correlation Coeﬃcient for variables
VARIABLE

ROA
ROE

124

TOTAL NUM BER OF RISK DISCLOSURES
Pearson

Sig. (2 tailed)correlation

for Pearson

0.062

0.563

0.101

0.345

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

Table 6: Pearson Correlation Coeﬃcient for variables
VARIABLETOTAL NUM BER OF RISK DISCLOSURES
Pearsoncorrelation

Sig. (2 tailed)for Pearson

Top 10 shareholderʼsholding‑0.122

0.563

Shareholding by
Individuals‑0.122

0.761

Shareholding by Foreign
shareholders

0.073

0.495

risk and the level of risk disclosures irre-

Table-7 also supports the hypothesis 6

spective of ﬁnancial and non-ﬁnancial orthat the number of past risk information

total risk.

is signiﬁcantly higher than future risk

The above table 5 shows that the corre-

disclosure. The signiﬁcance value of 0.000

lation between relative proﬁtability andhaving Z score of -9.586 clearly evidences

total number of risk disclosures is notthat past risk disclosures are higher thansigniﬁcant for both the variables of ROA

future risk disclosures. In addition to thatand ROE.

researcher has excluded the risk category

According to the table 6, the Pearsonʼ
s

F which is being regarded as less usefulcorrelation coeﬃcient for top 10 share-

disclosure for testing the relationshipholders and risk disclosure is -0.122 andbetween past and future risk disclosures.

correlation coeﬃcient for individual shar-

The result shows that most of the compa-

eholdings and foreign shareholdings arenies are disclosing past risk information-0.032 and 0.073 respectively. These corre-

than future risk information.

lations indicate that distribution pattern

Test results regarding the relationshipof shareholdings and number of risk dis-of good, bad, and neutral disclosures

closure is not signiﬁcantly correlated.

shows that the number of good disclo-

The Wilcoxon sum rank test results aresures is signiﬁcantly higher than that ofstated in table 7. According to the result,bad and neutral disclosures at a 0.000

it is evident that number of non-monetarylevel of signiﬁcance. The result alsorisk disclosures is signiﬁcantly higher

shows that there is no signiﬁcantthan monetary risk disclosures. Testdiﬀerence between the number of bad

statistics also supports the signiﬁcantand neutral disclosures as P value shows

diﬀerence between monetary and non-

0.670 having Z score -0.425.

monetary as the Z score-5.511 and P (Sig
2 tailed) value is 0.000.

5.3 Discussion of the results
The results of the study reveal that125

Table‑7 : Wilcoxon Rank Sum test (MannWhitney Test)
Ranks
N
Monetary-Non-monetary

90

69.11

6219.50290
180118.8910070.50

90
90
180

127.6953.31

11492.00
4798.00

90
90
180

133.9947.01

12059.00
4231.00

107.5873.42

9682.506607.50

Total

90
90
180

6
8

90
90

106.5874.42

9592.506697.50

Total

180

7
8

90
90
180

88.85
92.15

7996.50
8293.50

3
4
Total

Past-Future excluding F

3
5
Total
6
7

Good-Bad

Good-Neutral

Bad-Neutral

Sum of Ranks

1
Total

Past -Future

Mean Rank

Total
Test Statistics

MonetaryPast-Future Past-Future
Non-monetary
excluding F
Mann-Whitney U
Wilcoxon W
Z
Asymp. Sig.
(2‑tailed)

Good-Bad

Good-Neutral

Bad-Neutral

2124.500
6219.500‑5.511703.000
4798.000‑9.586136.000
4231.000‑11.2432512.500
6607.500‑4.4022602.500
6697.500‑4.1453901.500
7996.500
‑.425

.000

.000

.000

.000

.000

.670

Japanese companies are voluntarily dis-and Shrives (2002) in the UK. Their

closing risk information. The statistical

study was conducted after issuance of themean numbers of various kinds of risks

ICAEWʼ
s risk reporting proposals to dis-

disclosures may relatively be lower if theyclose more risk information. This result

are compared with other countries having

also helps to come to a conclusion that thesome kind of risk disclosure guidelines.

relationship between number of risk dis-

The results in the table-3 show that size

closures and company size is not muchof the companyand number ofrisk disclo-inﬂuenced by the introduction of risk

sure is signiﬁcantly correlated which isreporting guidelines. Non-risk disclosure

consistent with the ﬁndings of Linsley

study also shows the existence ofthis kind126

Corporate Risk Reporting Practices in Annual Reports of Japanese Companiesof relation between size of the company

board or the management. If the board

and volume of disclosures (Adam et al.,members hold the majority shares

1998 in Linsley and Shrives, 2002). So,

signiﬁcant portion of total shares, theyirrespective of the ﬁnancial and non-may have some inﬂuence on the disclo-ﬁnancial risk information, large compa-

sures of risk information.

nies are reporting more risk information

Table-7 shows that number of monetarythan that of smaller one.

risk disclosure is signiﬁcantly lower thanor aTable-4 shows that the correlation be-that of non-monetary risk disclosure

tween level of risk and number of risk

which shows that most of the sample

disclosures is insigniﬁcant.These ﬁndings

companies are not interested to quantify

also support the previous ﬁndings of Lins-

the risk. These results also conﬁrm theley and Shrives (2002).

ﬁndings of Linsley and Shrives (2003).

The results also show that there is no

Always all kinds of risk can not be meas-

signiﬁcant relation exists between num-ured accurately with the existing tech-

ber of risk disclosure and level of relativeniques and the possible risk of legal ac-

proﬁtability of the sample companies

tions from investors may possibly be the(Table-5). The results are also consistentreasons behind of it. Another result in thewith the ﬁndings of Linsley and Shrives

table-7 shows that good

(2003). It does not support the argument

signiﬁcantly higher than bad and neutralthat a ﬁrm having better risk manage-

news. It implies that management is pret-

ment capability earns relatively higher

ty interested to signal about their capabil-

proﬁt and wants to signal to the con-ities and eﬃciency of managing the com-cerned party about their superiority. In

pany. On the other hand, it is very posi-

addition to that management would pre-tive aspect of reporting that they are not

fer to show their sincerity regarding stew-

merely for boiler plate reporting as theardship function to the stakeholders. But,

number of neutral disclosure is lower

it might be the reason that because ofthan that of good disclosure. This ﬁnding

proprietary cost and other sensitive inter-has partial disagreement with thenal reasons company is not disclosing fullﬁndings of Linsley and Shrives (2002).

risk picture.

news isTable-7 sows that future risk informa-

There is no signiﬁcant relation between

tion is signiﬁcantly lower than past risk

the ownership distribution pattern andinformation. This ﬁnding conﬂicts thethe number of risk disclosures is found by

result of Linsley and Shrives (2003). The

the study (table-6). Although, this issue

ﬁndings help to support the argument

may have some credence as because,that managements are very reluctant torelease of any risk information can not be

disclose future risk information as thisdone without the involvement of the

can not be done objectively. The descrip127

Table 8: Medium of reporting risk information
Number

Percentage

OFR

43

48％

MD&A

35

39％

Presidentʼ
s Message

9

10％

Informal and others

3

3％

Total

90

100％

tive statistics also supports the test result

M D&A. Some companies are disclosing

as the mean number of past disclosuresrisk information through the presidentʼs38.53 is signiﬁcantly higher than that ofmessage and other informal ways. Only

future risk disclosures 13.07.

3% of the companies are using separate

In addition to the test results, authorrisk related section for disclosing risk in-has some observations regarding risk re-formation.

lated practice of the sample companies.

But the frustrating observation is that all

Companies are lacking of standard risk

most all the companies do not disclose

identiﬁcation and measuring system, risk

any information about the nature of the

management policy and so on. Authorrisk whether it is material or immaterial.

ﬁnd that there are some companies which

They do not disclose any information

are disclosing very negligible risk infor-

regarding the identiﬁcation and measure-mation not even keeping in mind to doment system if any they use. They do not

so ; rather they are disclosing those risk

mention about speciﬁc eﬀects of any risk

information as part of their regular ﬁnan-

to the company other than some ﬁnancial

cial disclosure. Since they do not haverisk information. As per the observation,

any policy to report about risk state, they

only 3 companies out of 90 sample compa-

are not doing so in a sophisticated way.

nies are using separate section for risk

But one of the interesting ﬁndings of therelated issue. It indicates that companies

study is most of the companies are report-

which are using MD&A as the medium

ing through either Operating and Finan-

are not well aware of proper use of MD&

cial Review (OFR) or M anagement Dis-A.

cussion and Analysis (MD&A) whichhave been recommended as the mediumof reporting risk information in UK and
Canada respectively.

6. Conclusions
Undoubtedly risk reporting is an emerg-

Table 8 evidences that 48% sample com-

ing issue.It is assumed that risk reporting

panies are reporting through OFR andwill provide users with more fair and true

39% disclose their information throughview of the business. Scandal like Enron

128

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

put more emphasis on the disclosure ofmore details about the risk reportingrisk information. So, it is getting growing

pattern it needs more intensive research.

interest all over the world. Results help toParticularly it will be interesting to study

conclude that the company size and thewhether there is any cultural inﬂuence on

number of risk disclosure are correlated.

risk reporting in Japanese companies. It

On the other hand results show that no

also needs attention to study the relation

association was found between level ofif any between Japanese management

risk and the number of risk disclosure,style and risk reporting.

proﬁtability and level of disclosure, andownership distribution pattern and number of risk disclosure. It also shows thatcompanies are reluctant to quantify therisk as the non-monetary information issigniﬁcantly higher than monetary information. The study reveals about themedium used by Japanese companies forrisk disclosure in the annual reports. 48%
companies are using OFR and 39% using

Notes
1) For risk reporting about America, please
see Kazuyuki Suda et al. (2004) “Disclosure Strategy and its Eﬀect”. pp.151‑168.
Moriyama.
2) Author gratefully acknowledges the adoption of hypotheses from Linsley and Shrives
tested on UK and Canada.
3) I acknowledge the advice of Prof Kazuyuki
Suda for separating Individual shareholdings from shareholdings of Foreigners.

M D&A as reporting place in the annual
reports. Only 3 companies disclosed risk
information in a separate section for riskin the annual reports. But one thing isimportant to mention that without any
regulatory framework companies are reporting risk information voluntarily. Although the future risk information whichis also treated as more useful information
is signiﬁcantly lower than the past information, but authors believe that
regulatory framework could do help inthis regard. Although regulatory framework can not guarantee the quality of thereporting it can help the reporting to beconsistent and comparable. Since thehuman beings are involved within the risk
reporting process, motivation is also important with the regulation. To have

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2003.

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies
Appendix A
Decision rules for risk disclosures
・All disclosures must be speciﬁcally stated,

provide risk information should be interpreted as one line equals one sentence andclassiﬁed accordingly.

they cannot be implied.
・If a sentence has more than one possibleclassiﬁcation, the information will beclassiﬁed into the category that is most em-

・Any disclosure that is repeated shall berecorded as a risk disclosure sentence eachtime it is discussed.
・If a disclosure is too vague in its reference tophasized within the sentence.
・Tables (quantitative and qualitative) thatrisk then it shall not be recorded as a risk
disclosure.

Appendix B
Disclosure coding grid
Category

Text Disclosures
Sentence Characteristics
M onetary good news futureA

M onetary bad news future

B

M onetary neutral futureC

Non-monetary good news futureD

Non-monetary bad news futureE

Non-monetary neutral futureF

M onetary good news pastG

M onetary bad news pastH

M onetary neutral pastI

Non-monetary good news pastJ

Non-monetary bad news pastK

Non-monetary neutral pastL

Financial
Risk

Buisiness
Risk

Operational
andother risk

1

2

3

Compliance Information
ProcessingriskandTechnology
Risk
4

6

Appendix C
Risk Disclosure Categories
Financial risk

Interest rate
Exchange rate
Liquidity brisk
Credit risk
Market risk
Treasury risk
Going concern problems
Breakdown of accounting system and unreliable records
High cost of capital131

Business Risk

Wrong business strategy
Competitive Pressure on price market share
General economic problem
Regional economic problem
Political risk
Obsolescence of technology
Adverse government policy
Industry sector in decline
Substitute products
Take ?over target
Inability to obtain further capital
Bad acquisition
Too slow to innovate

Operational and other risk

Customer satiSFACtion
Product project development
Sourcing
Eﬃciency and performance
Business processes not aligned to strategic goals
Failure of major change initiatives
Loss of entrepreneurial spirit
Stock-out of raw materials
Skills shortage
Physical disasters (ﬁre and explosion)
Loss of physical assets
Failure to create and exploit intangible assets
Loss of intangible assets
Lack of orders
Loss of key people
Breach of conﬁdentiality
Health and safety
Brand name erosion
Ineﬀective and ineﬃcient management process
Other business honesty issues
Missed business opportunities
Lack of employee motivation

Compliance

Breach of Listing Rules
Breach of ﬁnancial regulations
Breach of Companies Act requirements
Litigation risk
Breach of other regulations and laws
VAT and Tax problems
Health and safety
Environmental problems

Information processing
and technology risk

Integrity
AccessAvailability
Infrastructure
Y 2Kothers132

Corporate Risk Reporting Practices in Annual Reports of Japanese Companies

Table 1: List of the sample companies
Aichi Steel

Daiwa House Ind. Co. Ltd.

Aisin Seiki Co. Ltd
Ajinomoto Co.

Daiwabo Information System Co.
ESPEC Corporation

Nissan M otor Company
Nisshinbo Industries, Inc.
Nissin Electric Co. Ltd.
Oki Electric Industry Co. Ltd.
Akebono break industries
Fuji Electric Co Ltd.
Oriental Construction Co. Ltd.
All Nippon Airways Co. Ltd.
Fuji Oil Co. Ltd.
Osaka Gas Co. Ltd
Alpine Electronics Inc.
Hitachi Cable Ltd.
Pioneer Corporation
Alps Electric Co Ltd.
Hitachi Ltd.
Sanyo Denki Co. Ltd.
Amano corporation
Hitachi Metals Ltd.
Sharp Corporation
Anest Iwata Corp
Horiba Ltd.
Shikoku Electric Power Co. Inc.
Anritsu Corporation
Inabata & Co. Ltd.
Shin-Etsu Chemical Co. Ltd.
ARGO 21 Corp
Itochu Corporation
Shiseido Company Ltd.
Asahi Breweries Co. Ltd.
Juki Corporation
Sumitomo Chemical Co. Ltd.
Asahi Kasei Corp
Kanamoto Co. Ltd
Sumitomo M etal Industries Ltd.
Bridgestone Corporation
Kansai Electric Power Co. Inc.
Sysmex Corporation
Casio Computers Ltd.
Kao Corporation
Taisei Corporation
Chiyoda Corporation
Kawasaki Heavy Industries Ltd.
Takeda Chemical Industries Ltd.
Chugai Pharmaceuticals co. ltd. Kirin Brewery Company Ltd.
Tanabe Seiyaku Co. Ltd.
Chugai Ro. Co. Ltd.
Kubota Corporation
Tohoku Electric Power Co. Inc.
chugoku electric power co. ltd. Kuraray Co. Ltd.
Tokyo Electron Limited
Citizen Watch Co. Ltd.
Kurita Water Industries Ltd.
Tokyo Seimitsu Co. Ltd.
Cosmo Oil Co.Ltd.
Mabuchi Motor Co. Ltd.
Tomen Corporation
Dai Nippon Printing Co. Ltd.
Marubeni Corporation
Toray Industries Inc.
Daido Steel Co. Ltd.
Meitec Corporation
Toshiba Corporation
Daihatsu M otors co. ltd.
Mitsubishi Chemical Corporation Toyota Industries Corporation
Daiichi Jitsugyo Co. Ltd.
NGK Insulators, Ltd.
World Co. Ltd.
Daiichi Pharmaceutical co. ltd
NichIASCorporation
Yamaha Corporation
Daimei Telecom Eng Corp
Nippon Light Metal Co. Ltd
Yamaha Motor Co. Ltd.
Dainippon Ink and Chemicals Inc. Nippon Shokubai Co. Ltd.
Yokogawa Electric Corporation
Dainippon Screen Mfg. Co. Ltd. Nippon Yusen Kabushiki Kaisha Zeon Corporation

133