The quality of information disclosure has been the subject of an increasing stream of academic research focusing on the economic functions of increased transparency and its value added to market participants. In an imperfect market, it has been emphasised that financial analysts can never perfectly substitute for the deficiency of a firm's disclosure policy. Thus it is important to analyse the determinants and limits of a firm's voluntary disclosure policies. Obviously, the latter is being discussed here with respect to the overall set of information released in the annual reports of financial and non-financial firms, and in particular is not limited to risk management considerations.

The economic functions of increased transparency are considered in the numerous explanations offered in the finance literature for the willingness of firms to voluntarily disclose complete and timely information. In particular such a policy can be aimed at reducing transaction costs and thus a firm's cost of capital, since it lowers moral hazard and adverse selection problems which in turn leads to more active stock trading. Firms may want to use transparency as a signalling device (see Verrechia 1990), especially if they operate in an industry in which products or services are close substitutes. In this case, only the firms whose benefits of disclosure exceed a certain threshold level of disclosure cost will disclose. Thus, the risk management disclosure policy of the leading banks and financial firms may, from this perspective, be considered as a reputation device. Herding behaviour, on the other hand, is another motivation to increase disclosure since many studies have shown that analysts have a strong tendency to conform (see Welch 1996) and firms in turn need to satisfy the criteria adopted by the analysts when they make stock recommendations. A final motivation to voluntarily disclose which is often invoked is that transparent firms benefit from a lower cost of equity when they want to raise additional equity. A recent study of Swiss non-financial exchange-listed firms, by Gibson, Tamburini and Tuchschmid (1998), shows that the analyst rating (a measure of the quality of the disclosure in the annual report) increases with the equity free float (a measure of the degree of openness of the firm) and with the number of financial analysts that follow the firm, suggesting an additional incentive to disclose.

The value added of increased transparency is considered in several recent studies (see Brown and Han (1992) and Lang and Lundolm for the US, and Gibson, Tamburini and Tuchschmid (1998) for Switzerland). These studies provide evidence that transparency promotes greater convergence of beliefs and significantly improves the accuracy of analyst earnings forecasts. In these studies, empirical results on the quality of disclosure support the conjecture of Strong and Walker (1987) and Ohlson (1987) that public information causes convergence of beliefs which leads to more complete markets which in turn lead to improved risk-sharing.

There are however several factors which reduce incentives for transparency (the release of accurate, complete and timely information in the annual report.) Among them are the threat of product-market competition (see Darrough and Stoughton (1990) and Chen (1994)), tax avoidance considerations, conflicts of interest among various classes of shareholders and finally the management's fear of losing the confidence of a diffused ownership by revealing more highly variable marked-to-market profits. Interestingly the incentives for transparency may vary over time, for instance several studies have shown that managers have a tendency to delay the reporting of bad news.

These considerations regarding a firm's disclosure policy are especially relevant to the risk management practices of financial firms. For example, a high level of information asymmetry and moral hazard may encourage a universal bank to improve its disclosure quality in order to avoid higher costs of capital when issuing new securities. On the other hand, the intensity of the competitive threats in the investment banking and trading sectors, or the fear of take-over coupled with inadequate managerial incentives, may discourage increased disclosure. Moreover, since disclosure involves significant explicit and implicit costs (for example, market sanctions and/or higher regulatory capital), the quality of disclosure will vary, even though most internationally active firms have adopted the accepted accounting standards (such as US GAAP) imposed by their supervisory authorities.

Thus, disclosure policies require a delicate balance between conflicting goals and will not result in a complete, timely and accurate view of the risk management practices of a firm. Beyond the problem of generating proper incentives to disclose discussed above, there are the enormous difficulties associated with the measurement of financial and non-financial risks. This daunting and complex task involves sophisticated mathematical and statistical models which evolve quite rapidly and the challenge of testing their relevance which was so far hindered by the lack of valid and timely data.