The Effect of Financial Leverage on Risk Information Disclosure

This paper takes A-share listed companies in China from 2013 to 2022 as the research sample and positivism analyzes the impact of financial leverage on the level of risk information disclosure of listed companies. Through text analysis, the risk information disclosure indicators in the annual reports of listed companies are constructed, and a multiple linear regression model is established. The research finds that the higher the financial leverage ratio of a company, the higher the level of risk information disclosure, indicating that highly indebted companies have the motivation to increase risk information disclosure to alleviate information asymmetry with creditors. Further analysis shows that this positive relationship is more significant in non-state-owned companies. This study provides new positivist evidence for understanding the interaction between corporate debt financing and information disclosure, and is of great significance for regulatory authorities to improve the information disclosure system and for investors to identify corporate risks. Purpose: The research objective of this paper is to analyse the relationship between financial leverage and risk disclosure of listed companies. It explores whether management chooses to disclose more risks or conceal risks when financial leverage rises. Thus, it aims to analyse the motives of risk disclosure of listed companies and the influence mechanism of financial leverage on risk disclosure, and then put forward suggestions for regulatory authorities to improve the risk disclosure system. Design/methodology/approach: This paper adopts a quantitative research design, selecting A-share listed companies in China from 2013 to 2022 as samples. The dependent variable is the level of risk information disclosure, measured by the proportion of risk-related keywords in the annual report to the total number of words. The core independent variable is financial leverage, measured by the debt-to-asset ratio. Control variables include profitability, revenue growth rate, company size, and the shareholding ratio of the largest shareholder. The positivist part mainly uses a fixed effects regression model to reduce the impact of individual differences. Robustness tests are conducted through alternative variables, introducing lagged terms, and other methods. This research design can systematically examine the impact of financial leverage on corporate risk information disclosure. Findings: Research has found that among listed companies in China, Companies with higher risk asset holdings have higher disclosure levels, suggesting that highly indebted companies increase risk disclosure to mitigate information asymmetry with creditors. Further research has found that this positive relationship is even more significant among non-state-owned companies. It means that non-state-owned companies are more willing to proactively disclose risk information when their financial leverage is high. Research limitations/implications: This paper only considered the quantity aspect of risk disclosure, but has not taken into account the quality aspect of risk disclosure. Future research could explore risk disclosure and its economic consequences from aspects such as the tone of the text. Practical implications: The research results of this paper can provide a reference for creditors to assess corporate credit risk and investors to make investment decisions. And it can provide a reference for regulatory authorities to formulate differentiated and refined information disclosure regulatory policies. Originality/value: This paper enriches and expands the research on information disclosure based on agency theory and signalling theory, and links financial leverage with risk information disclosure. This study effectively integrates property rights theory, corporate governance theory and information disclosure.