How Do Investors Judge the Risk of Financial Items?

2005 ◽  
Vol 80 (1) ◽  
pp. 221-241 ◽  
Author(s):  
Lisa Koonce ◽  
Mary Lea McAnally ◽  
Molly Mercer
Keyword(s):  
Risk Model ◽  
Unintended Consequence ◽  
Financial Risks ◽  
Psychology Research ◽  
Risk Disclosure ◽  
Behavioral Variables ◽  
Academic Researchers ◽  
Risk Judgments ◽  
Risk Disclosures ◽  
Current Risk

This paper proposes and tests a risk model that explains how investors perceive financial risks. The model combines conventional decision-theory variables—probabilities and outcomes—with behavioral variables from psychology research by Slovic (1987), such as the extent to which a risky item is new, causes worry, and is controllable. To test our model, we conduct two studies in which M.B.A. students judge the risk of a broad range of financial items. Our results indicate that both the decisiontheory variables and Slovic's (1987) behavioral variables are important in explaining investors' risk judgments. Further, we demonstrate that information about the amount of potential loss outcome contained within mandated risk disclosures not only directly influences risk judgments, but also indirectly affects such judgments via its effect on some of Slovic's (1987) behavioral variables. By identifying this unintended consequence of current risk disclosures, these results have the potential to influence the way accounting regulators, firm managers, and academic researchers think about risk disclosure.

Numerical Formats within Risk Disclosures and the Moderating Effect of Investors' Concerns about Management Discretion

2014 ◽  
Vol 90 (3) ◽  
pp. 1149-1168 ◽  
Author(s):  
Mark W. Nelson ◽  
Kathy K. Rupar
Keyword(s):  
Moderating Effect ◽  
Cognitive Capacity ◽  
Persuasion Knowledge ◽  
Knowledge Model ◽  
Accounting Disclosures ◽  
Financial Disclosures ◽  
Risk Judgments ◽  
Risk Disclosures

ABSTRACT We report the results of two experiments that provide evidence that investors' risk judgments are affected by the numerical format used to describe outcomes within accounting disclosures. Consistent with prior research in psychology, investors assess higher risk in response to dollar-formatted disclosures than to equivalent percentage-formatted disclosures. Consistent with the Persuasion Knowledge Model (Friestad and Wright 1994), this effect is moderated when investors have both (1) awareness that management has discretion over format, and (2) sufficient cognitive capacity to consider its implications. Our results provide insight about the effects of current disclosure formats and suggest implications for managers who choose formats, investors who interpret formatted information, and regulators who consider whether to further prescribe the formats that are used in financial disclosures.

scholarly journals Risk Disclosure and Cost of Equity: A Bayesian Approach

Revista CEA ◽  
2020 ◽  
Vol 6 (11) ◽  
pp. 25-43
Author(s):  
Jose Miguel Tirado-Beltrán ◽  
José David Cabedo ◽  
Dennis Esther Muñoz-Ramírez
Keyword(s):  
Information Disclosure ◽  
Stock Exchange ◽  
Risk Information ◽  
Financial Risks ◽  
Risk Disclosure ◽  
Cost Of Equity ◽  
Global View ◽  
Bayesian Linear Regression ◽  
The Cost ◽  
The Relationship

This paper aims to analyze the relationship between risk information disclosure and the cost of equity of companies in the Spanish capital market. This study uses a set of 71 firms listed on Madrid stock exchange between 2010 and 2015; all of them are non-financial listed companies for which profit forecasts existed. The problem was analyzed using a Bayesian linear regression approach. The results show that cost of equity and disclosed risk information are not related if a global view of the latter is adopted. However, a positive relationship between financial risks and the cost of equity occurs when risk information is divided into financial and non-financial risks.

Firm Use of Cybersecurity Risk Disclosure

2021 ◽  
Author(s):  
Wanying Jiang ◽  
Joseph Legoria ◽  
Kenneth Reichelt ◽  
Stephanie Walton
Keyword(s):  
Risk Factors ◽  
Information Asymmetry ◽  
Response Behavior ◽  
Risk Disclosure ◽  
Market Reactions ◽  
External Stakeholders ◽  
Risk Disclosures

Increasingly, firms are subject to rising cybersecurity risks. One way that firms can communicate cybersecurity uncertainty and reduce information asymmetry with external stakeholders is through cybersecurity risk disclosures. SEC (2011, 2018) guidance encourages the disclosure of significant cybersecurity risk factors. However, not all firms provide informative or quality disclosures following a cybersecurity breach event. In this study, we examine the firm use of cybersecurity risk disclosures after a cybersecurity breach. We find that not all breached firms alter their cybersecurity disclosure behavior similarly following a breach. Rather, firm prior breach experience and breach-related market reactions impact the provision of additional cybersecurity disclosures. Our study provides initial evidence on when firms provide additional cybersecurity disclosures post-breach and informs regulators and policymakers on how firms utilize cybersecurity risk disclosures as a response behavior.

Classifying the Contents of Cybersecurity Risk Disclosure through Textual Analysis and Factor Analysis

2020 ◽  
Author(s):  
Arion Cheong ◽  
Kyunghee Yoon ◽  
Soohyun Cho ◽  
Won Gyun No
Keyword(s):  
Factor Analysis ◽  
Internal Control ◽  
Textual Analysis ◽  
Quantitative Methodology ◽  
Risk Disclosure ◽  
Related Factors ◽  
Negative Effect ◽  
Internal Control Weaknesses ◽  
Risk Disclosures

Cybersecurity has garnered much attention due to the increasing frequency and cost of cybersecurity incidents in recent years and become a significant concern for organizations and governments. Regulators such as the Security and Exchange Commission (SEC) have also shown an interest in cybersecurity and the quality of cybersecurity risk disclosures. This paper examines the informativeness of cybersecurity risk disclosures when cybersecurity incidents or related internal control weaknesses are reported. In particular, we propose a quantitative methodology, which is a combination of textual analysis and factor analysis, for classifying cybersecurity risk disclosures into nine factors. Our results show different disclosing patterns among firms depending on whether they had cybersecurity incidents and internal control weaknesses. Further, our analysis indicates that firms disclose control-related factors to mediate the negative effect of disclosing vulnerability-related factors. This study provides various stakeholders, including investors, regulators, and researchers, with insight into the informativeness of cybersecurity risk disclosures.

scholarly journals Investigating risk disclosures in Italian integrated reports

2020 ◽  
Vol 28 (6) ◽  
pp. 1149-1178 ◽  
Author(s):  
James Guthrie ◽  
Francesca Manes Rossi ◽  
Rebecca Levy Orelli ◽  
Giuseppe Nicolò
Keyword(s):  
Content Analysis ◽  
Financial Reporting ◽  
Design Methodology ◽  
Alternative Form ◽  
Risk Disclosure ◽  
Integrated Reporting ◽  
Content Type ◽  
Risk Disclosures ◽  
Do So

Purpose The paper identifies the types of risks disclosed by Italian organisations using integrated reporting (IR). This paper aims to understand the level and features of risk disclosure with the adoption of IR. Design/methodology/approach The authors use risk classifications already provided in the literature to develop a content analysis of Italian organisations’ integrated reports published. Findings The content analysis reveals that most of the Italian organisations incorporate many types of risk disclosure into their integrated reports. Organisations use this alternative form of reporting to communicate risk differently from how they disclose risks in traditional annual financial reporting. That is, the study finds that the organisations use their integrated reports to disclose a broader group of risks, related to the environment and society, and do so using narrative and visual representation. Originality/value The paper contributes to a narrow stream of research investigating risk disclosure provided through IR, contributing to the understanding of the role of IR in representing an organisational risk.

scholarly journals Risk Disclosure Patterns among Jordanian Companies: An Exploratory Study during Covid-19 Pandemic

2020 ◽  
Vol 9 (3) ◽  
pp. 69
Author(s):  
Fawzi Ata Al-Sawalqa
Keyword(s):  
Board Of Directors ◽  
Exploratory Study ◽  
Critical Time ◽  
Extraction Process ◽  
Risk Disclosure ◽  
Entire Study ◽  
Operational Activities ◽  
Risk Disclosures ◽  
Disclosure Patterns

This current exploratory study comes at a critical time to determine the risk disclosure pattern of Jordanian companies during Covid-19 pandemic in response to the request of JSC for Jordanian listed companies to prepare and send disclosure reports include the effect of Covid-19 pandemic on their activities in terms of material events, operational activities and the decisions of board of directors during the period of disclosure suspension extending from March 18, 2020 to May 5, 2020. Based on all the non-financial companies that listed in the first market, the results of the study indicated that the entire study sample (100%) did send the disclosure reports to JSC. In terms of the quality of disclosed risks, extraction process resulted in finding 20 risk items distributed over 5 categories. The results show that the average disclosure level is 65.6%, with the operational category ranked first and followed by investor relation category, financial category, strategic category and finally the market category. Results show that those sectors that were suspended completely during Covid-19 pandemic provided risk disclosures in all categories and vice versa. In addition to the several implications, the study offers many avenues for future study based on the risk disclosure model of the current study.

Do Risk Disclosures Relating to the Use of Financial Instruments Matter? Evidence from the Australian Metals and Mining Sector

2019 ◽  
Vol 54 (04) ◽  
pp. 1950017
Author(s):  
Kevin Huu Phat Thai ◽  
Jacqueline Birt
Keyword(s):  
Value Relevance ◽  
Individual Risk ◽  
Risk Category ◽  
Financial Instruments ◽  
Risk Disclosure ◽  
Mining Sector ◽  
Regulatory Changes ◽  
Related Risk ◽  
Risk Disclosures ◽  
Risk Reporting

This paper investigates the value relevance of risk disclosures relating to the use of financial instruments in the Australian metals and mining sector. The metals and mining sector is the largest sector in Australia by the number of companies and includes several of the world’s largest diversified resource producers. Using a manually constructed disclosure index based on AASB 7 Financial Instruments: Disclosures, we find that financial instrument-related risk disclosures provide useful information to equity investors. In terms of individual risk category, liquidity risk is shown to be the most informative risk disclosure. We contribute to a stream of the literature examining the informativeness of risk disclosures. The results of this study have implications for several stakeholders regarding the quality assessment of risk reporting. In addition, the findings are of interest to standard setters since further regulatory changes are under consideration to improve the presentation and disclosure of financial instruments.

scholarly journals Corporate risk disclosures: Influence of institutional shareholders and audit committee

2013 ◽  
Vol 10 (4) ◽  
pp. 341-354 ◽  
Author(s):  
Xuan Zhang ◽  
Dennis Taylor ◽  
Wen Qu ◽  
Judith Oliver
Keyword(s):  
Audit Committee ◽  
Audit Committees ◽  
Annual Reports ◽  
Risk Disclosure ◽  
Proprietary Information ◽  
High Resource ◽  
Institutional Shareholders ◽  
Risk Disclosures ◽  
Corporate Risk ◽  
Made In

This study investigates the association between corporate risk disclosures and institutional shareholders and audit committees. Using a sample of 66 Australian listed companies, risk disclosures made in 2009 annual reports are analysed. Findings reveal that there is no significant relationship between dedicated-type institutional block shareholders and risk disclosure, which it is argued is consistent with a proprietary information perspective. A positive relationship however is found between transient-type institutional block shareholders and risk disclosures. This result is consistent with a principal that wields limited monitoring resources while achieving high resource dependency over management. Significant positive relationships are found between audit committee independence and risk disclosures.

scholarly journals Impact of risk disclosures on IPO performance: Evidence from India

2021 ◽  
Vol 25 (6) ◽  
pp. 128-144
Author(s):  
Khushboo Gupta ◽  
T. V. Raman ◽  
O. S. Deol ◽  
Kanishka Gupta
Keyword(s):  
Information Disclosure ◽  
Risk Measures ◽  
Positive Association ◽  
Least Square ◽  
Risk Disclosure ◽  
Ipo Performance ◽  
Ordinary Least Square Regression ◽  
External Risk ◽  
Risk Disclosures ◽  
The Impact

The main aim of the paper is to explore the performance of Indian IPOs in the context of risk disclosures in the offer documents. For the purpose of assessing the impact of risk disclosure factors on initial returns, subsequent returns and post issue risk of IPOs, the study has implemented ordinary least square regression. The study has analysed 109 IPOs that were listed in two main Indian stock exchanges (BSE and NSE) from 2015–2019. Outcomes of the present study are contrary to the previous studies which showed that information disclosure reduces the asymmetry, which is touted as the main reason for underpricing, the present study did not find any association between risk disclosures and underpricing. Quantitative risk measures showed positive association with 1-year returns, but qualitative measures failed to show any association. The post issue risk of the firms showed positive association with external risk factors listed in prospectus and negative association with liquidity. The results of this study are useful for the investors as based on the results they can make decisions about investing in Indian IPOs. Besides, the managers of issuing companies and lead managers of issues can use the results of this study to improve the pricing of issues. To the best of the authors’ knowledge no study has been done before in the Indian context which is specific to risk disclosures (quantitative and qualitative measures) and IPO performance. The present study seeks to fill this gap and contribute to the existing literature.

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