Ownership structure variables

3.5.2.1. Government ownership

The business environment in Saudi Arabia is distinct by ownership concentration by the government where the Saudi government owns 42% of the total market value. Ghazali & Weetman (2006) argue that government ownership has the potential to encourage firms to reveal less information. Capital need theory can be employed to explain the negative association between government ownership and risk disclosure. Firms with a higher level of government ownership may lose the incentive to disclose more risk-related information since they do not have the need for attracting capital. These firms enjoy easy access to various forms of capital (Ghazali & Weetman, 2006). On the other hand, state holding can be considered as a monitoring tool which has the potential to influence the level of disclosure in firms’ annual reports because of accountability to society (Ghazali & Weetman, 2006).

Empirically, Eng & Mak (2003) report a positive relationship between government ownership and voluntary disclosure in Singapore. Ntim et al. (2013) find a positive relationship between government ownership and risk disclosure in South Africa. On the contrary, Samaha, Dahawy, Hussainey, & Stapleton (2012) discover a significant negative association between corporate governance voluntary disclosure and state holdings among Egyptian listed firms. Al-Janadi, Rahman, & Haj Omar (2013) report a significant negative association between voluntary disclosure and state ownership in Saudi Arabia. Alzead (2017) also find a significant negative relationship between risk disclosure and government

ownership in Saudi Arabia. Through an analysis of the existing literature, the study develops the following hypothesis:

H7: There is a significant and negative relationship between government ownership and

risk disclosure.

3.5.2.2. Institutional ownership

Institutional investors have a higher ability for monitoring companies since they are acquiring the required resources such as efficiency, experience, and robust employment of voting rights (Donnelly & Mulcahy, 2008). They are motivated to protect their investment which, in turn, encourages them to monitors management in order to mitigate the agency conflict between owners and executives (Haniffa & Hudaib, 2006). Hence, firms are encouraged to reveal more risk-related information to fulfill the pressure imposed by institutional investors. Empirically, Guan, Sheu, & Chu (2007); Healy, Hutton, & Palepu (1999); Khan (2016); Laidroo (2009); and Ntim, Opong, Danbolt, & Thomas (2012) find a significant positive relationship between institutional ownership and disclosure. On the other hand, Schadewitz & Blevins (1998) discover that interim disclosure is negatively and significantly related to institutional holdings in Finland.

Based on the theoretical foundation and the findings of previous studies (e.g. Guan et al., 2007; Healy et al., 1999; Khan, 2016; Laidroo, 2009; Ntim et al., 2012), the eighth hypothesis to be tested is formulated as follows:

H8: There is a significant and positive relationship between institutional ownership and

risk disclosure.

3.5.2.3. Inside ownership

Inside ownership is the proportion of stocks owned by executive directors. It is argued that inside ownership is an important factor affecting firms` disclosure policy (Khlif, Ahmed, & Souissi, 2016). Agency theory suggests a possible conflict of interest between insiders and externals because of the separation between ownership and control. However, it is believed that inside ownership has the possibility to align the interests of insiders with the interests of external shareholders (Ghazali & Weetman, 2006; Jensen & Meckling, 1976). Hence, insiders might be discouraged to violate the interest of external owners and they may have a long-term interest in the firm (Khlif et al., 2016). This

theoretical assumption suggests that insider ownership is positively related to risk disclosure. On the other hand, McConnell & Servaes (1990) argue that insiders might use inside information to maximize their own wealth which makes the external owners worse off. Similarly, Shleifer & Vishny (1997) argue that if directors` ownership is large, they might have incentives to maximize their own interest by lowering the level of transparency.

Chow (1982, p.274) states that ‘the degree of conflicts between the manager and the firm’s shareholders and thus the amount of potential wealth transfer, increase inversely with the managers’ ownership’. This implies that lower inside ownership requires more monitoring activities (Mokhtar, 2010). Therefore, firms with a low level of inside ownership are expected to reveal more risk disclosure in order to assure outsiders that they are working in the best interest of them (Mokhtar, 2010). This theoretical argument proposes that insider ownership is negatively related to risk disclosure.

Empirically, and consistent with agency theory, Eng & Mak (2003); Ghazali & Weetman (2006); and Hussainey & Al‐Najjar (2012) report that disclosure is significantly and negatively related to inside ownership. However, Al-Maghzom et al. (2016a); and Guan et al. (2007) find that the relationship is insignificant. From the discussion above, the ninth hypothesis to be tested is formulated as follows:

H9: There is a significant and negative relationship between inside ownership and risk

disclosure.

3.5.2.4. Block ownership

It is assumed that governance mechanisms and ownership structure are of importance in determining the level of risk disclosure since directors and shareholders are responsible in preparing the firms` annual reports (Abraham & Cox, 2007). Agency costs theory could be applied to explain the correlation between ownership concentration and risk reporting. Firms with dispersed ownership experience higher degree of agency problem because of the separation between ownership and control which motivates shareholders to put more pressure on managers to reveal a higher level of risk disclosure (Muzahhem, 2011). On the other hand, companies with concentrated ownership do not experience a separation between ownership and control. In fact, owners do not depend on

public disclosure to monitor managers since they have access to internal information. Therefore, agency theory suggests that ownership concentration is negatively associated with risk reporting.

Ntim, Lindop, and Thomas (2013) find a significant negative association between risk reporting and ownership concentration in South Africa. Deumes and Knechel (2008) discover a negative relationship between ownership concentration and internal control disclosure. However, Konishi and Ali (2007) and Mohobbot (2005) find no significant relationship between risk reporting and ownership concentration. From the discussion above, the tenth hypothesis to be tested is formulated as follows:

H10: There is a significant and negative relationship between block ownership and risk

disclosure.