1. Davlat Abduvali, Nazarbayev University GSB
Discussion of Risk Disclosure Quality and National Culture: evidence from the EU banking industry by Basto and Marques
Davlat Abduvali, Nazarbayev University GSB

2. Paper Summary Finds a positive association between
the voluntary operational risk disclosure volume of banks (using the Barakat and Hussainey 2013 framework) and the individualism score (using the Hofstede 2001 cultural score dimensions) of the banks’ home countries
based on this association, concludes that
banks in greater individualistic countries voluntarily report more operating risk items, and
posits managers in more individualistic cultures do so
because they want to “look better” compared “to others”
Economically, I read this as
bank management in individualistic cultures (Western countries) report more than required to please the bank shareholders in order to maximise their compensation

3. Research Question Risk Disclosure Quality or Quantity?
Mouselli et al. (2012, BAR) argue that defining quality in risk disclosures is difficult if possible at all
the quantity is used as a proxy for quality
“… use operational risk disclosure as a proxy for risk disclosure.”
BASEL II distinguishes three groups of risks in banks: credit risk, market risk and operational risk
Barakat and Hussainey (2013) provide solid motivation
“… predict that the individualism vs collectivism dimension is the only cultural value that is significantly associated with the quality of risk disclosure.”
not clear why this prediction

4. Research Question Hooghiemstra et al. (2015, p. 361):
“Since in individualistic societies personal goals and values prevail, individuals in these societies have a strong need to view themselves as competent and talented (Heine & Hamamura, 2007).
Consequently, it can be expected that for managers in individualistic societies managerial reputation building and career concerns may be particularly important.
That is, we expect that in individualistic societies managers’ cost-benefit analysis of voluntarily disclosing information on internal controls will be particularly focused on the effects on her reputation in the managerial labor market (Campbell et al., 2014; Kothari et al., 2009).
To establish a reputation for credible reporting, the manager will need to disclose credible and complete information (Healy & Palepu, 2001; Mercer, 2004).
This means that a manager has incentives to voluntarily disclose information, even if the information disclosed is not favorable from the manager’s point of view (Campbell et al., 2014; Skinner, 1994).”

5. Research Question
“contribute to the national culture and accounting literature … and … banking industry research … by identifying individualism as a significant cultural value.” Then, you argue the paper “to test Gray’s (1988) secrecy hypothesis in the context of the EU banking industry and focusing specifically on risk disclosure.”
not immediately clear why and how the “secrecy hypothesis” comes into the above notion
In developing Hypothesis 1 you “expect banks’ management to be more prone to voluntarily disclose quality risk information to make them look better” in higher individualism societies
not clear why this expectation. It came as a surprise here and I had to read relevant literature to establish the link on my own.

6. Research Question
In developing Hypothesis 1 you comment on Hofstede’s (2011) finding that “individualism scores are higher in developed and Western countries and collectivism – in less developed and Eastern countries.”
how, then, do we distinguish the effect of individualism on risk disclosure from that of other possible factors inherent in countries?
had we used country dummies instead of the individualism, would we find similar results?
In developing Hypothesis 2 you posit that “banks’ management may want to use risk disclosure to convey … an image of stability.”
endogeneity and omitted-variables bias in the regressions?

7. Research Question
In Hypothesis 2 you expect a priori that the other dimensions of cultural values – uncertainty avoidance, power distance and masculinity – are not associated with the quality of operational risk disclosure.
why this expectation?
why this story if no association?
The above is inconsistent with the prior research (e.g. Hooghiemstra et al. 2015, CG)
negative association (and explain it) between uncertainty avoidance and internal control disclosure level
positive association between the internal control disclosure and investor protection (insignificant in your regressions)

8. Additional Findings
“… the association between cultural values [individualism] and the quality of operational risk disclosures … is weaker for global banks.”
the “Global” variable has negative coefficient, could this sound counterintuitive?
two other factors leading to spurious correlation – stability and size?
“Racar” becomes less negative when “Global” is added. Although “Racar” coefficient is insignificant and its correlation with “Global” is only , the change in “Racar” coefficient, when “Global” is added, raises questions.
“Size” effect becomes stronger when “Global” is added. And, the correlation between them is quite high,

9. Regression Issues five banking specializations
do dummies control sufficiently?
the sample period
why 2014?
bank-level control variable – the size of the Audit Committee – has negative coefficient in all the regressions
adequate control for the importance of the audit committee?
Barakat and Hussainey (2013, IRFA), for instance, find a positive association between the risk disclosure quality and the audit committee meetings frequency
two alternative measures of investor protection
identical results
report one and mention the other for robustness purposes?
cross listing control variable – why US only?

10. Regression Issues
Use of the weighted least squares regression seems compelling since the countries are unevenly represented in the sample as per the number of banks.
Given the perfect correlation between the countries and the individualism (and other cultural values) measure, is this approach not creating potential bias towards countries with less, and, likely, larger banks?
For instance, comparing Italy (110 banks) with France (13 banks), where the population seems larger by around 10%, or Italy (110 banks) with Germany (25 banks), where the population is larger by more than one-third, it seems that the bank size might be substantially different
Could WLS introduce some distortion in the coefficients?
what if try OLS with country dummies?

12. Conclusion Interesting behavioral research topic
Potentially has significant impact on the bank financial statement analysis and valuation
Uses comprehensive sample to include multiple countries (cultures) under the same regulation
Adds to the literature on the cultural differences of risk disclosure exploring the banking industry
I wish you success with this research
Thank you for this opportunity to add to my explorations in behavioral finance