Bank Risk Appetite Communication and Risk Taking: The Key Role of Integrated Reports

This paper investigates whether qualitative information provided by banks about risk appetite sheds substantive insight on their effective risk taking and whether this latter in turn affects risk appetite disclosure, as well as the role played by specific types of banks’ reports (i.e., Integrated Report, Annual Report, Pillar 3 report) on such relations. Using a sample of 134 reports representing 52 banks, a Generalized Structural Equation Model is applied. The paper hypothesizes and empirically finds a reciprocal relation between risk appetite disclosure and banks’ risk taking. More specifically, in line with agency theory, the analysis displays a predominance of the inverse relation according to which banks showing higher risk taking provide greater disclosure. In addition, risk taking is found to play a mediator role between the adoption of a specific type of report – the Integrated Report – and risk appetite disclosure, independently of the context in which the banks operate. Results also highlight that risk taking in banks adopting an Integrated Report is lower than the one of matched banks. Overall, this study extends risk science by complementing the literature stream on banks’ accounting discretion and risk disclosure, supporting the impact of market discipline in promoting new forms of corporate reporting. Results indeed emphasize the key role of Integrated Reporting on risk taking, suggesting that integrated logic should be strengthened by policy makers to curb banks’ excessive risk taking and leading them to provide substantive disclosure.