Achieving Operational Efficiency through Risk Disclosure

Abstract

Manuscript type: Research paper Research aims: This study aims to investigate the effect of risk disclosure and CEO age on the operational efficiency. Design/Methodology/Approach: A quantitative study was undertaken on 130 manufacturing firms listed on the Indonesian Stock Exchange in 2019. Risk disclosure was evaluated through the content analysis, while operational efficiency was measured using the Data Envelopment Analysis (DEA) technique. The data was analysed by utilising weighted least square regression. Research findings: Results show that risk disclosure positively affects operational efficiency. The effect on CEO’s age however, is not substantial. These findings imply that a company becomes more efficient when it discloses more risk, while the CEO’s age has no bearing on the efficiency attained. Risk disclosure operates as a form of risk awareness that demonstrates management’s commitment to resolving the problems. Theoretical contribution/Originality: This study addresses the gap in the literature by empirically assessing how risk disclosure affect firms’ efficiency in developing countries. It also expands on previous literature by considering CEO age as determinant of the efficiency. The findings of the study support the stakeholder theory in which a company must consider its key stakeholders, especially those who encourage it to improve its efficiency, and hence, risk disclosure is required. Practitioner/Policy implications: This research suggests companies to disclose more to improve operational efficiency. It also recommends investors to invest in firms committed to risk disclosure. Research limitation/Implications: In this study, risk disclosure was measured by the number of risks disclosed in the annual report and did not consider other sources. Therefore, future studies should further explore risk disclosure in different media, such as the newspaper, corporate websites, and social medias. Additionally, this study was conducted based on one industry sector, and hence, future studies may incorporate broader range of industries to capture the impact of CEO characteristics. Keywords: CEO Age, Data Envelopment Analysis (DEA), Operational Efficiency, Risk Disclosure JEL Classification: M41