The Impact of Disclosure of Capital Adequacy and Financial Risks on the Liquidity Creation in the Light of Governance and Income Diversity: An Empirical Study on Saudi Banks

This study aims to analyze the importance of the banking sector information environment by exploring its impact on banking mediation functions and analyzing the interaction between it and some basic characteristics of the banking work environment such as the diversity of activities and the quality of the governance system and its reflection on the functions of the bank. The study examines the effect of voluntary disclosure of capital adequacy and mandatory disclosure of financial risks in accordance with international standards IFRS and Basel guidelines on the liquidity creation as one of the main economic functions of the bank, and the effect of both the degree of income diversification and the quality of the governance system to that relationship. Using data from registered Saudi commercial banks for a time series from 2013 to 2019, the results showed a positive impact of both voluntary disclosure of capital adequacy and disclosure of financial risks on the liquidity creation, reflecting the importance of the bank's information environment and its impact on its economic functions. On the other hand, the results showed that the quality of the governance system and income diversity did not affect the relationship between disclosure and the liquidity creation, except for the effect of income diversity on the relationship between capital adequacy disclosure and the liquidity creation. This result indicates the weak interaction between the bank's information environment and the factors constituting the banking sector's work environment, and that voluntary disclosure can be affected by environmental factors more than mandatory disclosure.