**4. Theoretical Framework**

Several theories are suggested in the accounting and finance literature in providing an explanation of the voluntary disclosure practices of business entities. The most common theories that are relevant to our research issues are the following: agency theory, signaling theory, political cost theory, capital need theory, and legitimacy theory. We briefly discussed these theories and their implications for our research because there is no specific theory perceived to explain the motivation for voluntary disclosure (Khlifi and Bouri 2010).

Agency theory can explain voluntary disclosure phenomena in many countries with a different social, political, and economic context (Ferguson et al. 2002; Akhtaruddin and Hossain 2008; Hossain and Taylor 2007). Disclosure is seen as a monitoring mechanism in agency theory. Healy and Palepu (2001) argue that demand for financial reporting and disclosure arises from information asymmetry along with agency conflicts between managers and outside investors. Prior research (Oliveira et al. 2011a, 2011b; Konishi and Ali 2007) uses firm size as a proxy for agency costs and assumes a positive association between disclosure and firm size and argues that leverage represents the agency cost between debt-holders and managers, and is thus reflected in disclosure practices.

Signaling theory also explains why companies voluntarily disclose information in their annual reports (Haniffa and Cooke 2002; Akhtaruddin and Hossain 2008). In accordance with this theory, a firm's information disclosure can be considered a signal to capital markets, directed to reduce information asymmetry that often exists between managemen<sup>t</sup> and stakeholders, as well as to increase the firm's value (Connelly et al. 2011; Rezaee 2016).

Under political cost theory, firms with high political visibility in the market place tend to increase disclosure as a means of mitigating potential political costs. The political cost theory is usually discussed in relation to the corporate size hypothesis, in which the manager of a big corporation is more likely to select accounting procedures that defer reported earnings from current to future periods. (Milne 2002). The capital needs theory also helps explain the reasons behind companies' disclosure of voluntary information by suggesting that companies disclose more information to raise capital at the lowest cost (Core 2001). The capital needs theory predicts that increased voluntary disclosure is likely to lower the cost of capital because of the reduced uncertainty from an investor's perspective (Schuster and O'Connell 2006).

The legitimacy theory assumes that a company has no right to exist unless its values are perceived as being matched with those of the society at large in which it operates (Magness 2006). Companies may disclose information voluntarily for improving communication with society that helps societal people to believe that the entities are operating within the social value system. In summary, the above theories have implications for financial risk disclosure in the sense that firms should assess, manage, and disclose risk to shareholders in compliance with agency theory, disclosing managemen<sup>t</sup> risk appetite, and risk-taking under the signaling theory, focusing on financial risk disclosure as a means of mitigating political costs and governmen<sup>t</sup> intervention in accordance with political cost theory, and communicating risk tolerance under legitimacy theory. Although all these theories are relevant to our study, the two prevailing theories that provide the foundations for our research hypotheses, as described in the next section, are the signaling and political cost theories. The signaling theory suggests that firms have incentives to disclose their good information to the capital markets and the political cost theory explains the institutional setting in Bangladesh.
