Mandatory Risk Disclosure Under Changing Accounting Standards: Effects on the Cost of Capital

Iranian Journal of Accounting, Auditing and Finance

مقاله 9، دوره 9، شماره 4 - شماره پیاپی 33، اسفند 2025، صفحه 183-204   

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.2025.46773.1526

نویسنده

Mojtaba Golmohammadi^*

Department of Finance and Accounting, Humanities Faculty, Meybod University, Meybod, Iran

چکیده

In alignment with international accounting standards, the Iran Audit Organization (IAO) has required corporations to disclose risk information in their financial statements since 2019. This study is the first to examine the informational value of these newly mandated disclosures under Iran’s accounting standards. While prior international research has examined the effects of risk disclosure, this study fills a significant gap by focusing on an emerging market—specifically, Iran’s distinctive institutional environment—where accounting reforms and disclosure practices remain underexplored. To achieve this objective, we analyzed 1,580 firm-year observations from companies listed on the Tehran Stock Exchange (TSE) between 2014 and 2023 using multivariate panel data regressions with fixed effects. The empirical results show that mandatory risk disclosure is statistically unrelated to firms’ cost of capital. Furthermore, the interaction terms between mandatory risk disclosure and corporate governance variables—such as ownership concentration and board independence—are also insignificant. However, the findings indicate that both board independence and institutional ownership are negatively and significantly associated with the cost of capital. These results suggest that although the adoption of new accounting standards has increased the quantity of mandatory risk disclosures, such disclosures do not necessarily reduce the cost of capital within the Iranian context. This outcome may stem from superficial compliance with disclosure requirements and limited oversight by audit committees and independent auditors. Overall, this study offers new insights into how transitional economies navigate disclosure mandates, with actionable implications for improving transparency, strengthening corporate governance, and realizing the potential benefits of accounting reforms.

کلیدواژه‌ها

Board Independence؛ Cost of Capital؛ Mandatory Risk Disclosure؛ Institutional Ownership؛ Ownership Concentration

مراجع

1. Akerlof, G. A. (1970). The market for "lemons": quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500. https://doi.org/10.2307/1879431
2. Alam, M. (2006). Stakeholder theory. In Methodological Issues in Accounting Research: Theories, Methods, and Issues (pp. 207-222). Spiramus, London, UK
3. Azar, J., Schmalz, M. C. and Tecu, I. (2018). Anticompetitive effects of common ownership. The Journal of Finance, 73(4), pp. 1513-1565. https://doi.org/10.1111/jofi.12698
4. Bertomeu, J., Beyer, A. and Dye, R. A. (2011). Capital structure, cost of capital, and voluntary disclosures. The Accounting Review, 86(3), pp. 857-886. https://doi.org/10.2308/accr.00000037
5. Blue, G., Faraji, O., Khotanlou, M. and Rezaee, Z. (2024). A corporate risk assessment and reporting model in emerging economies. Journal of Applied Accounting Research, 25(4), pp. 783-811. https://doi.org/10.1108/JAAR-02-2023-0047
6. Botosan, C. A. (1997). Disclosure level and the cost of equity capital. The Accounting Review, 72(3), pp. 323-349. https://www.jstor.org/stable/248475
7. Bui, B., Moses, O. and Houqe, M. N. (2020). Carbon disclosure, emission intensity and cost of equity capital: multi‐country evidence. Accounting & Finance, 60(1), pp. 47-71. https://doi.org/10.1111/acfi.12492
8. Bushman, R. M. and Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of accounting and Economics, 32(1-3), pp. 237-333. https://doi.org/10.1016/S0165-4101(01)00027-1
9. Campbell, J. L., Chen, H., Dhaliwal, D. S., Lu, H. M. and Steele, L. B. (2014). The information content of mandatory risk factor disclosures in corporate filings. Review of Accounting Studies, 19(1), pp. 396-455. https://doi.org/10.1007/s11142-013-9258-3
10. Connelly, B. L., Certo, S. T., Reutzel, C. R., DesJardine, M. R. and Zhou, Y. S. (2025). Signaling theory: state of the theory and its future. Journal of Management, 51(1), pp. 24-61. https://doi.org/10.1177/01492063241268459
11. Corazza, L., Truant, E., Scagnelli, S. D. and Mio, C. (2020). Sustainability reporting after the Costa Concordia disaster: a multi-theory study on legitimacy, impression management and image restoration. Accounting, Auditing & Accountability Journal, 33(8), pp. 1909-1941. https://doi.org/10.1108/AAAJ-05-2018-3488
12. Core, J. E., Hail, L. and Verdi, R. S. (2015). Mandatory disclosure quality, inside ownership, and cost of capital. European Accounting Review, 24(1), pp. 1-29. https://doi.org/10.1080/09638180.2014.985691
13. Dam, L. and Scholtens, B. (2012). Does ownership type matter for corporate social responsibility?. Corporate Governance: An International Review, 20(3), pp. 233-252. https://doi.org/10.1111/j.1467-8683.2011.00907.x
14. Deegan, C. (2006). Legitimacy theory. In Z. Hoque (Ed.), Issues in accounting research: theories and methods. Spiramus Press Ltd, London, U.K.
15. Dhaliwal, D., Heitzman, S. and Zhen Li, O. L. I. V. E. R. (2006). Taxes, leverage, and the cost of equity capital. Journal of Accounting Research, 44(4), pp. 691-723. https://doi.org/10.1111/j.1475-679X.2006.00214.x
16. Diamond, D. W. and Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46(4), pp. 1325-1359. https://doi.org/10.1111/j.1540-6261.1991.tb04620.x
17. Dutta, S. and Nezlobin, A. (2017). Information disclosure, firm growth, and the cost of capital. Journal of Financial Economics, 123(2), pp. 415-431. https://doi.org/10.1016/j.jfineco.2016.04.001
18. Fama, E. F. and French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), pp. 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
19. Fama, E. F. and Jensen, M. C. (1983). Separation of ownership and control. The journal of Law and Economics, 26(2), pp. 301-325. https://www.jstor.org/stable/725104
20. Fasihi, S. and Hosseini, S. A. (2020). Do risk disclosure increase firms’ value?. Iranian Journal of Finance, 4(2), pp. 67-76. https://doi.org/10.22034/ijf.2020.232416.1132
21. Fauzi, I. and Firmansyah, A. (2023). Corporate social responsibility disclosure, intellectual capital disclosure, risk disclosure, cost of capital: moderating role of earnings management. Accounting Analysis Journal, 12(1), pp. 50-70. https://journal.unnes.ac.id/sju/index.php/aaj/article/view/66185
22. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman Publishing. Cambridge university press, Cambridge, England.
23. Gebhardt, W. R., Lee, C. M. and Swaminathan, B. (2001). Toward an implied cost of capital. Journal of Accounting Research, 39(1), pp. 135-176. https://doi.org/10.1111/1475-679X.00007
24. Gordon, L. A., Loeb, M. P. and Sohail, T. (2010). Market value of voluntary disclosures concerning information security. MIS Quarterly, 34(3), pp. 567-594. https://doi.org/10.2307/25750692
25. Gull, A. A., Abid, A., Hussainey, K., Ahsan, T. and Haque, A. (2023). Corporate governance reforms and risk disclosure quality: evidence from an emerging economy. Journal of Accounting in Emerging Economies, 13(2), pp. 331-354. https://doi.org/10.1108/JAEE-11-2021-0378  
26. Hail, L. and Leuz, C. (2006). International differences in the cost of equity capital: do legal institutions and securities regulation matter?. Journal of Accounting Research, 44(3), pp. 485-531. https://doi.org/10.1111/j.1475-679X.2006.00209.x
27. Hao, J. (2024). Disclosure regulation, cost of capital, and firm values. Journal of Accounting and Economics, 77(1), A. 101605. https://doi.org/10.1016/j.jacceco.2023.101605
28. Hautz, J., Mayer, M. C. and Stadler, C. (2013). Ownership identity and concentration: A study of their joint impact on corporate diversification. British Journal of Management, 24(1), pp. 102-126. https://doi.org/10.1111/j.1467-8551.2011.00792.x
29. He, J. and Huang, J. (2017). Product market competition in a world of cross-ownership: Evidence from institutional blockholdings. The Review of Financial Studies, 30(8), pp. 2674-2718. https://doi.org/10.1093/rfs/hhx028
30. He, J., Plumlee, M. A. and Wen, H. (2019). Voluntary disclosure, mandatory disclosure and the cost of capital. Journal of Business Finance & Accounting, 46(3-4), pp. 307-335. https://doi.org/10.1111/jbfa.12368
31. Healy, P. M. and Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1-3), 405-440. https://doi.org/10.1016/S0165-4101(01)00018-0
32. Holm, C. and Laursen, P. B. (2007). Risk and control developments in corporate governance: changing the role of the external auditor?. Corporate Governance: An International Review, 15(2), pp. 322-333. https://doi.org/10.1111/j.1467-8683.2007.00563.x
33. Ibrahim, A. E. A. and Aboud, A. (2024). Corporate risk disclosure and firm value: UK evidence. International Journal of Finance & Economics, 29(4), pp. 4225-4246. https://doi.org/10.1002/ijfe.2871
34. Ibrahim, A. E. A., Hussainey, K., Nawaz, T., Ntim, C. and Elamer, A. (2022). A systematic literature review on risk disclosure research: State-of-the-art and future research agenda. International Review of Financial Analysis, 82, A. 102217. https://doi.org/10.1016/j.irfa.2022.102217
35. Iranian Audit Organization. (IAO). (2023). Accounting Standards (Publication 160). Tehran: Audit Organization, Tehran, Iran.
36. Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
37. Johnstone, D. (2016). The effect of information on uncertainty and the cost of capital. Contemporary Accounting Research, 33(2), pp. 752-774. https://doi.org/10.1111/1911-3846.12165
38. Júnior, J. F. A., Oliveira, M. C., Ponte, V. M. R. and de Sousa Ribeiro, M. (2014). Social disclosure of Brazilian and UK firms in light of stakeholder theory, legitimacy theory and voluntary disclosure theory. Advances in Scientific and Applied Accounting, 7(2), pp. 175-200. https://doi.org/10.14392/ASAA.2014070201
39. Kassamany, T., Harb, E., Louhichi, W. and Nasr, M. (2023). Impact of risk disclosure on the volatility, liquidity and performance of the UK and Canadian insurance companies. Competitiveness Review: An International Business Journal, 33(1), pp. 30-61. https://doi.org/10.1108/CR-10-2021-0129
40. Kravet, T. and Muslu, V. (2013). Textual risk disclosures and investors’ risk perceptions. Review of Accounting Studies, 18(4), pp. 1088-1122. https://doi.org/10.1007/s11142-013-9228-9
41. Lambert, R., Leuz, C. and Verrecchia, R. E. (2007). Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, 45(2), pp. 385-420. https://doi.org/10.1111/j.1475-679X.2007.00238.x
42. Lei, L. and Luo, Y. (2023). Political/policy uncertainty, corporate disclosure, and information asymmetry. Accounting Perspectives, 22(1), pp. 87-110. https://doi.org/10.1111/1911-3838.12317
43. Lemma, T. T., Feedman, M., Mlilo, M. and Park, J. D. (2019). Corporate carbon risk, voluntary disclosure, and cost of capital: S outh A frican evidence. Business Strategy and the Environment, 28(1), pp. 111-126. https://doi.org/10.1002/bse.2242
44. Leuz, C. and Verrecchia, R. E. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38, pp. 91-124. https://doi.org/10.2307/2672910
45. Lopes, A. B. and de Alencar, R. C. (2010). Disclosure and cost of equity capital in emerging markets: the Brazilian case. The International Journal of Accounting, 45(4), pp. 443-464. https://doi.org/10.1016/j.intacc.2010.09.003
46. Martens, W. and Bui, C. N. M. (2023). An exploration of legitimacy theory in accounting literature. Open Access Library Journal, 10(1), pp. 1-20. https://doi.org/10.4236/oalib.1109713
47. Mehrani, K. and Safarzadeh, M.H. (2011). 'Explaining the relationship between corporate governance and earnings quality with a native approach ', Journal of Accounting Knowledge, 2(7), pp. 69-98 (In Persion). https://doi.org/10.22103/jak.2011.13
48. Miihkinen, A. (2013). The usefulness of firm risk disclosures under different firm riskiness, investor-interest, and market conditions: New evidence from Finland. Advances in Accounting, 29(2), pp. 312-331. https://doi.org/10.1016/j.adiac.2013.09.006
49. Myers, S. C. and Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
50. Nahar, S., Azim, M. and Anne Jubb, C. (2016). Risk disclosure, cost of capital and bank performance. International Journal of Accounting & Information Management, 24(4), pp. 476-494. https://doi.org/10.1108/IJAIM-02-2016-0016
51. Ntim, C. G., Lindop, S. and Thomas, D. A. (2013). Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre-and post-2007/2008 global financial crisis periods. International Review of Financial Analysis, 30, pp. 363-383. https://doi.org/10.1016/j.irfa.2013.07.001
52. Pakdelan, S., Azarberahman, A., Akbari, S. and Azarberahman, J. (2021). Does risk disclosure affect firm's cost of capital. International Journal of Management, Accounting and Economics, 8(11), pp. 816-837. https://www.ijmae.com/article_144390_a37812153eb23b4b7359d7c387f60738.pdf
53. Rajabalizadeh, J. and Schadewitz, H. (2025). Audit report readability and information efficiency: evidence from the Tehran Stock Exchange. Journal of Accounting in Emerging Economies, 15(2), pp. 491-516. https://doi.org/10.1108/JAEE-08-2024-0344
54. Rhodes, M. J. (2010). Information asymmetry and socially responsible investment. Journal of Business Ethics, 95(1), pp. 145-150. https://doi.org/10.1007/s10551-009-0343-2
55. Saggar, R. and Singh, B. (2017). Corporate governance and risk reporting: Indian evidence. Managerial Auditing Journal, 32(4/5), pp. 378-405. https://doi.org/10.1108/MAJ-03-2016-1341
56. Said Mokhtar, E. and Mellett, H. (2013). Competition, corporate governance, ownership structure and risk reporting. Managerial Auditing Journal, 28(9), pp. 838-865. https://doi.org/10.1108/MAJ-11-2012-0776
57. Salem, I. H., Ayadi, S. D. and Hussainey, K. (2019). Corporate governance and risk disclosure quality: Tunisian evidence. Journal of Accounting in Emerging Economies, 9(4), pp. 567-602. https://doi.org/10.1108/JAEE-01-2019-0005
58. Shivaani, M. V. and Agarwal, N. (2020). Does competitive position of a firm affect the quality of risk disclosure?. Pacific-Basin Finance Journal, 61, A. 101317. https://doi.org/10.1016/j.pacfin.2020.101317
59. Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), pp. 355–374. https://doi.org/10.2307/1882010
60. Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), pp. 571-610. https://doi.org/10.2307/258788
61. Taj, S. A. (2016). Application of signaling theory in management research: addressing major gaps in theory. European Management Journal, 34(4), pp. 338-348. https://doi.org/10.1016/j.emj.2016.02.001
62. Thitinun, P. and Yomchinda, N. (2021). The effect of specific risk disclosure under IFRS7 on cost of capital. Academy of Accounting and Financial Studies Journal, 251, p. 12. https://www.abacademies.org/articles/The-effect-of-specific-risk-disclosure-under-ifrs-7-on-Cost-of-capital-1528-2635-25-1-673.pdf
63. Tirado-Beltrán, J. M., Cabedo, D. and Muñoz Ramírez, D. E. (2020). Risk disclosure and cost of equity: A Bayesian approach. Instituto Tecnológico Metropolitano, 6(11), pp. 25-43. https://doi.org/10.22430/24223182.1497
64. Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, pp. 179-194. https://doi.org/10.1016/0165-4101(83)90011-3
65. Verrecchia, R. E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32(1-3), pp. 97-180. https://doi.org/10.1016/S0165-4101(01)00025-8
66. Yasar, B., Martin, T. and Kiessling, T. (2020). An empirical test of signalling theory. Management Research Review, 43(11), pp. 1309-1335. https://doi.org/10.1108/MRR-08-2019-0338