**1. Introduction**

Risk disclosure is information that describes firms' major risks and their expected economic impact on their current and future performance (Miihkinen 2010). The 2007–2009 global financial crises have significantly raised concerns about the aggressive risk taking of public companies, research interest in risk management, and disclosure around the world and triggered regulatory reforms from various governmen<sup>t</sup> agencies and accounting standard setters (Dobler 2005; Rezaee 2016). Prior research (e.g., Linsley and Shrives 2006; Abraham and Cox 2007; Linsley and Lawrence 2007; Hasan et al. 2008) states that corporate risk disclosure has become an integral part of business disclosure because it provides greater transparency and increases investors' confidence in the context of developed countries and markets. The Dodd–Frank Act (DOF) of 2010 requires large financial institutions in the United States to have a board-level risk committee that oversees the assessment, management, and disclosure of financial risks (Dodd–Frank Wall Street Reform and Consumer Protection Act 2010). Aliabadi et al. (2013) find that the adoption of enterprise risk managemen<sup>t</sup> (ERM) in assessing and disclosing risk reduces the risk-taking behavior of management. Prior research (e.g., Beasley et al. 2008; Pagach and Warr 2007) finds that firms with financial challenges and stock price volatility are more likely to adopt ERM and disclose their financial risk. However, the empirical evidence on financial risk disclosure in the context of developing countries is rare. As a result, this study attempts to bridge this gap by examining corporate financial risk disclosure in an emerging economy like Bangladesh.

Motivated by risk disclosure research and its inconclusive results in developed countries, we examine the association between financial risk disclosure and financial attributes in Bangladesh, one of the fast-developing markets and economies. We focus on financial risk disclosure in Bangladesh for several reasons. First, the 1996 and 2010–2011 Bangladesh stock market crashes indicate that the traditional reporting culture fails to provide enough information to investors in making sound investment decisions (Das et al. 2015). Second, the Institute of Chartered Accountants of Bangladesh (ICAB) adopted the International Financial Reporting Standard No. 7 (IFRS-7) as Bangladesh Financial Reporting Standard (BFRS)-7 in 2010. BFRS No. 7 requires the disclosure of information relating to both recognized and unrecognized financial instruments, their significance, performance, accounting policies, terms, conditions, net fair value, and risk information, as well as company policies for controlling risk and exposure.

Third, the Bangladesh National Parliament enacted the Financial Reporting Act of 2015 (FRA) on 6 September 2015 (FRA 2015). The FRA requires the establishment of a new oversight body, referred to as the Financial Reporting Council (FRC). The main purpose of the FRC is to regulate the financial reporting procedure followed by the reporting entities. The FRA recognizes the major functions of the FRC and monitoring of financial reporting including risk assessment and management. The FRC is intended to bring a level of discipline into corporate financial reporting, and thus strengthen the safety and soundness of capital markets. From that perspective, this study could provide evidence pertaining to the efficacy of the FRA. Finally, the type and extent of risk disclosure vary and are influenced by the factors related to a given company in Bangladesh (Al-Mulhem 1997).

We posit that the degree of financial risk disclosure is positively associated with financial attributes. Our rationale for such an association is the following: (1) risk disclosure provides greater transparency and enhances investors' confidence that may lead to higher firm value; (2) leveraged firms are obliged to disclose more risk information to satisfy the needs of investors and creditors; (3) large firms are more exposed to public scrutiny than small firms, and hence they are more likely to disclose more information; (4) higher financial performance could persuade managemen<sup>t</sup> to provide more information to demonstrate its ability to create shareholder value; and (5) liquidity risk might encourage reporting entities to enhance the extent of risk disclosure to notify shareholders that managemen<sup>t</sup> is considering such a risk.

The theoretical intuition for our prediction of the relationship between risk disclosure and financial attributes is based on signaling theory and the institutional settings in Bangladesh. Signaling theory explains management's incentives for disclosing financial risk to differentiate its firm's risk tolerance and appetite from other firms with higher financial risk to avoid adverse selection problems (Verrecchia 1983; Ng and Rezaee 2015). The institutional settings are relevant to our study as many provisions of regulatory measures in Bangladesh specifically address managemen<sup>t</sup> risk assessment and disclosure. For example, provisions of Section 184 of the Companies Act of 1994, Rule 12 of the Bangladesh Securities and Exchange Rules of 1987, Bangladesh Securities and Exchange Commission (BSEC), and Accounting Standards as adopted by the ICAB require that listed companies report their true and fair position to shareholders. After the adoption of IFRS-7 as BFRS-7, financial risk disclosure has been reinforced.

We use financial risk disclosure indices (FRDIs) calculated based on a set of 30 disclosure identifiers through content analysis to assess the level of financial risk disclosure in the annual reports of 48 manufacturing companies in Bangladesh over a period of six years (2010–2015). The association between the level of financial risk disclosure and firm specific characteristics has been examined using regression analyses. The content analysis of individual FRDIs shows that there is no common practice among the companies in disclosing financial risk and they treat financial risk disclosure in a heterogeneous way. However, the regression model reveals that firm size, financial performance, and auditor type are positively and significantly associated with the level of financial risk disclosure.

This study contributes to the accounting and business literature in several ways. First, this paper contributes to corporate risk disclosure literature in the Anglo-Saxon countries by using the setting of Bangladesh as a highly speculative and volatile capital market of an emerging economy. Second, this manuscript adds to relatively limited literature relating to risk disclosure in emerging economies and markets. Another contribution is the development of a risk disclosure index based on financial risk disclosure identifiers in the light of reporting standards, professional requirements, prior research, and

the regulatory framework of Bangladesh. The examination of the relationship between firm specific characteristics and the extent of financial risk disclosure not only enhances our understanding of the reasons behind the variation of the disclosure, but also assists policy makers in adopting the appropriate tools to alleviate inconsistencies. Third, this study provides policy and practical implications by finding an association between financial leverage and liquidity and the level of financial risk disclosure, which may stimulate the regulatory bodies of the country to consider it and act accordingly. Undoubtedly, the Institute of Chartered Accountants of Bangladesh (ICAB) has adopted IFRS 7 as Bangladesh Financial Reporting Standard 7 (BFRS 7) to ensure understandable, comparable, reliable, and transparent financial risk reporting for a sound, organized, and stable capital market in Bangladesh. However, empirical results document a compliance gap and sugges<sup>t</sup> for full compliance of BFRS 7 without any deviation to achieve comparability and reliability in disclosing financial risk. An analysis of the link between the level of financial risk disclosure and the firm's attributes has not previously been done in the context of Bangladesh.

Fourth, we measure the level of aggregate disclosure (both mandatory and voluntary) on financial risk in the annual reports of Dhaka Stock Exchange (DSE) listed manufacturing companies in terms of financial risk indices for a period of six years from 2010 to 2015 in response to BFRS-7. Thus, this manuscript enables regulators, policy makers, and corporate managers to understand the financial risk disclosure pattern of publicly traded manufacturing companies in Bangladesh and to set an appropriate risk disclosure policy with guidelines to minimize the heterogeneous problem relating to corporate financial risk disclosure. Finally, prior related research does not directly address financial risk disclosure in emerging markets and economies.

The remainder of the paper is organized as follows: Section 2 presents the legal framework for disclosure in Bangladesh. The literature review is provided in Section 3. The theoretical framework and hypothesis development are presented in Section 4. Methodology, description of our sample, and descriptive analysis are provided in Section 5. The results and their interpretations are presented in Section 6 and the last section concludes the paper.

### **2. Legal Framework for Risk Disclosure in Bangladesh**

Generally, each country has its own regulatory framework that governs corporate disclosure within the country. The corporate reports, in general, include information in accordance with reporting and disclosure requirements of the regulatory body, and as such, the reporting entity needs to provide at least the required amount of information to facilitate the evaluation of securities (Akhtaruddin 2005). In Bangladesh, the Companies Act of 1994, Securities and Exchange Rules 1987, and accounting standards adopted by ICAB provide the framework for corporate disclosure. The disclosure best practices can affect the extent of risk disclosure by listing regulations of stock exchanges (DSE and CSE—Chittagong Stock Exchange) and Income Tax Ordinance 1984. Besides, BSEC issues notifications and guidelines from time to time on different issues, which increases the level of corporate disclosure.

The Companies Act of 1994 provides the basic requirements for corporate disclosure and reporting in Bangladesh. The Act requires that the corporate financial statements must reflect the true and fair view of the reporting entity. Concomitantly, BSEC plays the leading role in monitoring and enforcing mandatory disclosure compliance of publicly traded companies. Moreover, Accounting Standards adopted by the ICAB, in addition to its own disclosure provisions, gain mandatory status through the directives of the BSEC.
