Are Risk and Governance Disclosures Informative? Evidence from MENA banks’ credit ratings

Abstract

This study examines whether risk and governance disclosures (RGDs) have predictive effect (informativeness) on banks’ credit ratings (BCRs) and consequently, ascertains whether governance structures can moderate such an association. Using firm-level data from 12 Middle East and North African (MENA) countries for the period 2006-2013, our findings suggest that RGDs have predictive effect (informativeness) on BCRs credit. Specifically, we find that the quality of the BCR is higher in banks that have higher risk disclosures, board size, government ownership, non-executive directors, women directors, and established Sharia supervisory board. On the other hand, our results indicate that the BCR quality is lower in banks that have higher foreign ownership, and CEO role duality. Furthermore, our findings suggest that governance structures moderate the relation between risk disclosures and BCRs. The central tenor of our findings remains unchanged after controlling for a number of firm- and country-level factors, alternative risk and governance proxies, and potential endogeneities. Our findings have important implications for investors, especially bondholders, standard setters, regulators and central governments.