The Impact of Business Strategy and Firm Alertness on Risk Disclosure: An Analysis of Environmental Uncertainty

Risk and ambiguity, distinctive facets of environmental uncertainty, significantly influence a firm's disclosure decisions. In theoretical and empirical literature, risk disclosure emerges as a pivotal facet of interpretive disclosures within corporate financial reports, representing a rational response to uncertainty. Nonetheless, the mechanism guiding risk disclosure determinations amidst conditions of risk and uncertainty, while considering the equilibrium between agency advantages and costs, remains a gap within risk disclosure literature. This study investigates the nexus between risk disclosure and uncertainty at the corporate level, hinging upon business strategy and alertness criteria. Employing a multiple regression model, the research examines these hypotheses within firms listed on the Tehran Stock Exchange during the 2016-2021 period. The risk disclosure was assessed through content analysis of annual financial reports. The results demonstrate that firms pursuing the prospector-oriented strategy provide more risk disclosure than defender-oriented firms, aiming to mitigate information asymmetry and its agency benefits. Moreover, the findings illustrate that alert firms, through continual environmental scanning, diminish ambiguity cyclically, enhancing their comprehension of exposed risks and consequentially augmenting risk disclosure. In essence, this research underscores that a firm's strategic stance encompasses implications beyond operational and competitive domains, permeating financial reporting and risk disclosure determinations. Consequently, this study underscores the criticality of incorporating risk dimensions and environmental ambiguity into the interpretation and scrutiny of disclosure of risk related information.