The Impact of Company Performance on Risk Disclosure: From the Perspective of Audit Quality

HRMARS - With the ongoing development of capital markets, information disclosure has become an essential tool for improving market transparency and protecting investor interests. As a core element of non-financial reporting, the disclosure of risk-related information significantly influences investor decision-making and the efficient functioning of financial markets. This research investigates annual report data from A-share listed companies on the Shanghai and Shenzhen stock exchanges spanning from 2013 to 2022. It centres on the connection between corporate performance and the degree of risk disclosure. The findings indicate a notable inverse relationship: companies with stronger performance are more likely to limit the disclosure of risk information in order to maintain an optimistic corporate image. In contrast, firms experiencing weaker or declining performance tend to provide more extensive risk disclosures, potentially to meet regulatory expectations and minimize the risk of sanctions. Further investigation reveals that audit quality plays a moderating role in this dynamic. High-quality audits help alleviate the negative link between firm performance and risk disclosure, highlighting their importance in fostering more accurate and transparent reporting practices. These insights not only enrich the existing body of research on risk disclosure but also provide practical evidence to support regulatory initiatives aimed at strengthening disclosure standards and enhancing market transparency. Purpose: This paper aims to examine how the performance of companies listed on China’s A-share market correlates with the extent of their risk information disclosure, and to further evaluate how external audit quality moderates this relationship, thereby uncovering key influencing factors and governance mechanisms behind corporate risk disclosure practices. Design/methodology/approach: This paper integrates both literature review and empirical analysis approaches. The literature review method is employed to organize relevant theories and prior research, providing a theoretical explanation for how corporate performance affects risk disclosure and examining the role of audit quality in influencing this relationship. Meanwhile, the empirical analysis method utilizes textual data from annual reports to develop a model that tests the correlation between company performance and the extent of risk information disclosure. Additionally, audit quality is introduced as a moderating variable to conduct a more in-depth investigation. Findings: This paper find a significant negative correlation between a company's performance and the extent of risk information disclosure. The better the performance, the less risk information the management discloses to maintain a positive market image. Conversely, the poorer the performance, the more likely it is to increase risk disclosure to meet compliance requirements and avoid regulatory penalties. Further research indicates that high-quality external auditing can effectively mitigate this negative correlation, suggesting that as an important corporate governance mechanism, external auditing can restrain the management's disclosure motives and enhance the transparency of risk information. Research limitations/implications: This paper is based solely on the risk information disclosed in the annual reports and does not cover the risk information disclosed through other communication channels. There are still certain limitations in the research on risk disclosure. In terms of external supervision, it is not limited to audit quality only. In the future, more external supervision factors can be considered, such as media attention. Practical implications: This paper uncovers the motives behind company risk disclosure, cautioning investors to interpret the disclosure behaviour of companies under different performance backgrounds with caution and make decisions by integrating multiple sources of information. It also provides empirical evidence for improving the information disclosure supervision system, suggesting that the completeness of risk disclosure by companies with excellent performance should be given priority attention, and that high-quality auditing can enhance the overall transparency of the market. Originality/value: This paper contributes to the field of risk information disclosure both theoretically and empirically. It provides empirical evidence on the negative correlation between corporate performance and risk disclosure within China’s capital market, along with an analysis of its underlying governance mechanisms. Furthermore, by incorporating the moderating role of audit quality, the study highlights how external oversight serves as a key governance mechanism in curbing opportunistic disclosure practices by management. These findings extend the scholarly discourse on the interplay between corporate governance and information disclosure.