Financial Risk Disclosure and Market Reaction in Pakistan Stock Exchange Firms

Abstract

Financial risk disclosure has become an important process by which companies have been reporting to the stakeholders about the financial risks they may face. Traditionally, in the environment of the listed companies in Pakistan Stock Exchange (PSX), an open and extensive reporting of financial risks, such as market, credit, liquidity, and operational risks, is central to the perception of the investor and the response of the market. The current paper relates the degree of financial risk disclosure and stock market performance in terms of abnormal returns, volatility and volume of trade in the PSX-listed companies. Based on content analysis of annual reports 2018-2022, a disclosure index is built to determine the degree of risk reporting. Empirical evidence indicates that companies that have a better risk disclosure get better market responses, such as less volatility and increased confidence of investors. The research has made contributions to the accounting literature as a whole in highlighting the significance of risk transparency in emerging markets to the regulators, investors, and corporate managers about the best risk communication practices.