*2.3. Governance Disclosure and Firm Risk*

Governance disclosure denotes a company's systems and processes that intend to ensure that the board of directors and executives act in the best interests of a company's longterm shareholders [50]. This type of disclosure bears on the best governance practices [43]. Thus, governance disclosure promotes transparency about firms' engagements with all their stakeholders. Achieving firm objectives is reflected in the value creation process since stakeholder theory specifies that efficient stakeholder accountability leads to creating value for all stakeholders. Consequently, governance disclosure would enhance firms' financial performance by mitigating risk and establishing strategic responses to pressure groups to unfortunate events and consequently decreasing risk.

According to signaling theory [63], information asymmetry could exasperate conflicts between managers and shareholders. Governance disclosure then brings visibility to stakeholders on firms' wide-range commitments and effectiveness towards following best-practice corporate governance principles, leading to a reduced firm risk. From a signaling theory perspective, entrenched managers would convey positive signals to the market through the governance disclosure of the effectiveness of board activities and functions as well as the political involvement of the company, leading to higher investor confidence and greater liquidity for securities and consequently covering suspicions of managers' opportunistic behavior, which reduces the perception of firm risk [64]. Therefore, governance disclosure is an essential contributor to firm risk since managers can mitigate information asymmetry between the company and its stakeholders by disclosing information on board structure and functions, executive compensation, and the political involvement of the company. Firms would then engage in governance disclosure if the benefits would outweigh the associated costs. Therefore, it would be hard for firms with poor governance disclosure to possibly mimic the operation.

From the point of view of legitimacy theory, governance disclosure is viewed as a legitimacy technique in response to possible threats to a corporation's reputation and mainly a defensive tool against pressure groups. Then, corporations use such disclosure to mitigate their specific problems, attenuate their risk, or protect their current reputation from possible unethical allegations [65]. Therefore, governance disclosure leads firms to slowly regain their legitimacy. Accordingly, the issue of legitimacy is crucial to explaining the relationship between firm risk and governance disclosure. The strengths of firms with good governance disclosure include their legitimacy, dense networks, and knowledge of issues. These strengths can lead these firms to be more transparent, resulting in a low cost of capital.

However, from an opposite point of view, the ethical and moral vision would be used as a defensive shield against conflicts that could arise between the principal and the agent. According to agency theory, other opponents of the governance disclosure– risk relationship argue that governance disclosure may lead managers to reinforce their opportunistic behavior and enhance their objectives. Therefore, managers use governance disclosure practices unethically as a self-defense strategy. This supports the assumption that agents would protect themselves from powerful stakeholders by committing to governance disclosure, and paying attention to the latter requires decreasing stakeholders' pressure.

It is worth noting that as corporate needs change over time, corporate and stakeholder expectations for governance disclosure change as well, leading to a dynamic governance disclosure strategy over time.

**Hypothesis 3a (H3a).** *Over time, corporate governance disclosure increases the cost of capital*.

**Hypothesis 3b (H3b).** *Over time, corporate governance disclosure decreases the cost of capital*.
