ARE BANKS’ RISK DISCLOSURES VALUE RELEVANT? EVIDENCE FROM AN EMERGING MARKET

Abstract

This study examines the value relevance of risk disclosures in Nepalese banks and financial institutions (BFIs), using Information Asymmetry Theory to assess how readability influences stock price. To our knowledge, it is the first to examine this relationship in an emerging market context. We performed a textual analysis of risk disclosures in annual reports and evaluated their readability using the BOG Index for Class A, B, and C Nepalese banks over a fourteen-year period (2010/11 to 2023/24). Using fixed-effects and instrumental variable estimations on a sample of 49 BFIs with 354 firm-year observations, we find that lower readability of risk disclosures significantly reduces share prices, thereby supporting their value relevance. These results are consistent across several model specifications, multiple readability indexes, and principal component analysis. The research enhances agency theory and information asymmetry literature by illustrating the crucial importance of disclosure readability in emerging markets. Policy implications highlight the necessity for regulators to promote for plain-language reporting standards and for banks to improve the readability of risk disclosures to improve market efficiency.