Determining factors and consequences of risk perception in annual reports: Structural equation modeling approach

The current research aims to investigate the effect of the causes and consequences of determining the risk perception of annual reports with the approach of structural equations. The research sample includes 130 companies admitted to the Tehran Stock Exchange in the period from 2008 to 2020. Using the structural equation modeling method, the depth of influence of each of the causes on the feeling of risk and its consequences have been extracted. The consequences of risk perception are the cost of capital and information asymmetry and the causes of risk perception are macroeconomic characteristics, financial performance, ownership structure, board characteristics, structural characteristics, and auditing. In short, based on the obtained results, risk perception has a positive and significant effect on the cost of capital and a positive and significant effect on information asymmetry. In addition, the results of the model test showed that the variables of ownership structure, macroeconomic characteristics, and characteristics of the board of directors have a positive and significant effect on risk perception. Also, the variable of company structural characteristics and ownership structure do not have a significant effect on information asymmetry; And the variables of the company's structural characteristics, the characteristics of the board of directors, and the ownership structure have a positive and significant effect on financial performance.

The annual report issued by a company is an important source of information for its stakeholders, such as investors, to obtain an accurate picture of the company's business, risks, and operational and financial results. In addition to the quantitative financial data contained in these reports, one of the most important sections on the form is the disclosure of risk factors about the company, as stakeholders are particularly sensitive to risks. This risk disclosure is considered so important that since 2005 the US Securities and Exchange Commission has required all companies to include a separate section on their forms to discuss the most significant factors that expose the company to risk. This section is now one of the most controversial sections of company annual reports (Campbell et al, 2014). The sense of risk is one of the most important pieces of information disclosed in the capital market and is useful for investors in making decisions and estimating risk and return; So, there is a demand for that disclosure. In fact, the importance of risk perception is due to the impact that different risks have on investors' decisions (Ntim et al, 2014). Based on this, the aim of the current research is to answer the question, what are the factors and consequences that determine the sense of risk in annual reports? 

Methods & Material:

The research method in this study is practical in terms of purpose and "causal and post-event" in terms of design. The relationships between the variables are formulated in the form of a causal model like the model of structural equations in a coherent framework. A two-step path has been taken to test the research hypotheses. In this way, first, the validity of the measures of the latent variable and the optimal fit of the measurement model have been ensured, and then the structural model has been investigated. The current research is for the period 1387-1399 in terms of time and in terms of location, the companies admitted to the Tehran Stock Exchange. The statistical sample of the research was selected using the systematic elimination sampling method and the companies that did not have the desired characteristics were excluded from the statistical sample. Finally, by applying restrictions, 130 companies were selected as the research sample. After classifying the information of the sample companies in Excel software, Max Kyuda software was used to count the frequency of risk feeling words in each report, and then PLS software was used for statistical analysis. 

Once the measurement model of the research variables was confirmed using confirmatory factor analysis, path analysis was utilized to test the research hypotheses. The summary of the results of evaluating the structural model in this study is illustrated in the following table: Table 1: A summary of the evaluation results of the structural model of the research  Direct pathPath coefficientT Statistics (|O/STDEV|)P ValuesHypothesis testing resultsRisk Sentiment → Information Asymmetry0/5677/1370/000Not rejectedRisk Sentiment → the cost of capital0.2993.5660/000Not rejectedAudit → Risk Sentiment0/1061/3600.174rejectedAudit → financial performance-0/0590/8460.398rejectedOwnership Structure→ Risk Sentiment0/2372/4130/016Not rejectedOwnership Structure→ Information Asymmetry0/0861/1790/239rejectedOwnership Structure→ financial performance0/5047/1010/000Not rejectedfinancial performance → Risk Sentiment-0/0110/1340/894rejectedfinancial performance → the cost of capital0/2302/5240/012Not rejectedMacroeconomic → Risk Sentiment0/2122/2260/026Not rejectedMacroeconomic → the cost of capital0/1221/2870/199rejectedStructural characteristics of the company→ Risk Sentiment0/0871/0750/283rejectedStructural characteristics of the company→ Information Asymmetry0/0660/9280/354rejectedStructural characteristics of the company→ financial performance0/2053/4510/001Not rejectedBoard Characteristics→ Risk Sentiment0/1762/1440/033Not rejectedBoard Characteristics→ financial performance0/1922/7580/006Not rejected Source: Research findings 

The results showed that the sense of risk has a positive and significant effect on the cost of capital and information asymmetry, so the seventh and eighth hypotheses were confirmed. The results of previous research were different in this case, for example, the results of Al-Shammari (2014) and Netim et al. (2013) were similar to the results of this research, but Campbell et al. (2014) showed the effect of risk perception on information asymmetry to be insignificant. The effect of audit variables, financial performance, and structural characteristics on the sense of risk has shown to be non-significant, that is, factors such as audit opinion or quality, profitability, liquidity, company size, conservatism, financial leverage per unit of change of these variables have no effect on the company's sense of risk. and does not change, so the first, second, and third hypotheses of the research are rejected. This conclusion was similar to the research result of Ghazali (2008), although Al-Shammari (2014) showed that the larger the size of the company, the greater the sense of risk. Also, the results of the research show that the characteristics of the board of directors have a positive and significant effect on the sense of risk and that factors such as the independence of the board of directors, the size of the board of directors, and the stability of the CEO and the number of board meetings increase the sense of risk in companies. The results of Khoshkhal and Vakili Fard (1400) also reported the effect of the size of the board of directors and the stability of the CEO and the number of meetings of the board of directors on risk, which is in accordance with the present research. Based on the results of the data analysis, the ownership structure and macroeconomic factors have a positive and significant effect on the sense of risk, which has confirmed the fourth and fifth hypotheses of the research, and these results are in line with the findings of Zarik and Lohichi (2017) and Khoshkhlokh and Talibnia (1400).