Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

Abstract

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm-year observations over the 2007-2011 period, we find that MRDs are significantly and negatively associated with both under-investment and over-investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under-investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over-investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.