Risk management committee and hedging activities information: Malaysia

What is it about?

This paper examines the relationship between Risk Management Committee (RMC) characteristics and the extent of hedging activities disclosure within the annual reports of the Malaysian listed companies. In particular, relationships are tested on RMC size, independence, RMC meeting, RMC gender diversity and RMC training. Our regression analysis shows that RMC independence significantly and negatively influences the extent of hedging activities information disclosure, while RMC meeting positively influences the disclosure. The implications of these findings are discussed.

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Why is it important?

While MFRS 7 has just been applied by business entities in Malaysia, several studies in other countries have raised concerns regarding the extent and quality of the derivatives disclosure provided by companies in meeting this accounting standard, particularly on the hedging activities information. It was claimed that the derivatives disclosure was less useful and subject to management discretion. Moreover, since hedge accounting is optional, companies may use their discretion not to report the use of derivatives for hedging activities. Several studies provide evidence that companies avoid full compliance in disclosing their hedging activities information in annual reports. In this respect, some studies propose that one of the important elements that should exist in a company for a better transparency of derivatives and hedging activities disclosure is the establishment of Risk Management Committees (RMCs). Nevertheless, there are mixed empirical evidences justifying the existence of RMCs and the degree of transparency and quality of financial instruments disclosure, particularly on the derivatives and hedging activities information. Thus, it is the objective of this study to examine the effectiveness of RMCs. Different from earlier studies, this study focuses on the characteristics of RMCs as a proxy for its effectiveness (i.e. size, independence, meeting, diversity and training).

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