Accounting Information and Corporate Risk-Taking

Abstract

We examine how accounting information influences corporate risk-taking. We predict that transparent accounting disclosure can influence corporate risk-taking by enabling managers to better evaluate risks and by enabling investors to better monitor managers' risk appetite. We test this prediction by orchestrating the mandatory adoption of IFRS around the world, enforcement reforms around the world, and the introduction of quarterly reporting in the European Union as exogenous shocks to firms’ accounting information environment, which made disclosure more relevant and comparable, reliable as well as more timely. Our findings provide evidence that these changes in the accounting information environment are associated with a decline in corporate risk-taking. For firms subject to enforcement reforms this effect is unconditional. For firms’ adoption of IFRS or quarterly reporting, this effect is conditional upon whether these reforms are strongly enforced. We also document that the decline in risk-taking after the changes in the accounting information environment is associated with an increase in total shareholder return.