Information Content of Liquidity Risk Disclosure

This paper examines whether the liquidity risk disclosure in accordance with K-IFRS 1107 provides useful information to investors. Specifically, this paper examines the relationship between the amount of liquidity risk, measured as the difference in contractual cash flows and carrying amounts of financial liabilities in the maturity analysis disclosed in the liquidity risk disclosure, and the cost of capital which is a measure of the firm’s risk. Using samples listed on the KOSPI market from 2011 to 2018, the results show a significant positive relationship between the amount of liquidity risk and the cost of capital. This results indicate that liquidity risk disclosure provides useful information to investor. On the other hand, this positive relationship appears when the level of information asymmetry is high, indicating that the information content depends on the firm’s financial reporting environment. Further analyses show that a significant positive relationship between the amount of liquidity risk and the cost of capital for firms with a small amount of information provided in the capital market or with high cost of debt. The contributions of this paper are as follows: First, to our knowledge, this is the first empirical study to examine the information content of quantitative information about liquidity risk disclosure. Second, through the results that liquidity risk disclosure provides useful information to investors, this paper provides the policy implication for the regulators that more accurate liquidity risk information should be provided to investors through best practices.