ISLAMIC VALUES, ISLAMIC GOVERNANCE MECHANISMS, AND OPERATIONAL RISK DISCLOSURE: EVIDENCE FROM SAUDI ARABIAN COMPANIES

Abstract

The financial crisis of 2009 and other corporate failures have emphasised the significance of monitoring risk-taking in firms, drawing the attention of practitioners and academics to corporate operational risk disclosure. The objective of this research is to address the current gap in the risk disclosure literature by examining operational risk disclosure in a developing capital market (Saudi Arabia). The present study aims to broaden insight of operational risk disclosure levels and determinants by initially investigating the levels of operational risk disclosure in the annual reports of all listed companies in Saudi Arabia; and secondly, by drawing on stakeholder theory and empirically exploring whether and how Islamic values, corporate Islamic governance, and the joint effect of Islamic values and Islamic governance influence operational risk disclosure practices by the Saudi listed companies. In line with the research aims, this study employs content analysis and regression modelling to analyse operational risk disclosure practices within the annual reports of Saudi listed companies over eight years (2010-2017). The study uses content analysis to develop an operational risk disclosure index and then documents the levels of operational risk disclosure within the annual reports. The data gathered show that the levels of average operational risk disclosure is moderate. The descriptive results reveal that Saudi listed companies disclose 35.30% operational risk items on average. Drawing on stakeholder theory and by using panel corrected standard error (PCSE) and system generalised method of moments (GMM) methods, this study finds that Islamic values, Islamic governance mechanisms, and the joint effect of Islamic values and Islamic governance are positively and significantly related to operational risk disclosure. These findings have some vital implications for policymakers and any other interested users on the importance of Islamic values and Islamic governance mechanisms, which can be used to enhance operational risk disclosure in all listed firms. These findings will also be valuable to educate Saudi stakeholders (e.g., investors) and firms on corporate operational risk disclosure practices.