Impact of audit committee characteristics on risk disclosure: evidence from the banking sector of Pakistan

Abstract

Risk disclosures are crucial for a robust corporate governance framework. It permits shareholders to assess the financial health of banks by understanding various risks (credit, market, operational, etc.). This study investigated the impact of audit committee characteristics such as the size, meetings, and expertise of audit committee members on risk disclosures. For this purpose, we collected data from 20 commercial banks over 17 years, from 2006 to 2022, listed on the Pakistan Stock Exchange. We employed panel data analysis by incorporating both period- and firm-fixed effects, providing a clearer picture of risk disclosure across periods and cross sections. We find a positive and significant impact of the expertise of the audit committee members on the levels of transparency and adequacy of risk disclosure. However, the study also reveals that risk disclosure tends to decrease with increased audit committee size. The study also finds that the Bank of Punjab has the highest risk disclosure, while Habib Bank has the lowest disclosure. Additionally, the period effects show that banks disclosed the highest level of risk in 2020, whereas in 2007, banks provided the least risk disclosure. This study enhances the level of risk disclosure in the banking sector of Pakistan. It also reduces information asymmetry between management and shareholders by strengthening the audit committee and explaining changes across risk disclosure. The findings of this study are helpful for bank BODs in formulating and appointing effective audit committee boards in line with the factors that have been shown to impact risk disclosure significantly. Other sectors can also improve risk disclosure practices by enhancing audit committee expertise and managing committee size, leading to better transparency and stakeholder trust.