Impact of Market Risk Disclosures on Stock Price Sensitivity to Oil and Gas Prices

Abstract

This study explores associations between U.S. firms' 10-K disclosures of market risk exposure, which were newly mandated by a 1997 SEC Release, and stock price sensitivity to underlying risk factors. Firms whose stock prices were more sensitive to oil and gas prices tended to have open year-end positions in commodity derivatives and disclose the value-at-risk or the sensitivity of their derivative contracts to commodity price changes. Firms whose stock prices were less sensitive to oil and gas prices tended not to have open year-end positions in commodity derivatives or, if they did, to give simple tabular disclosures of derivative contracts. On their SEC filing dates, firms that disclosed value-at-risk or sensitivity experienced more significant shifts than other firms did in stock-price sensitivity to oil and gas price changes. Firms disclosing that their material derivative contracts had zero net sensitivity to commodity price changes, given an assumed shift in commodity prices, experienced the most significant shifts in stock-price sensitivity to those same price changes. Preliminary tests on an oil-intensive sub-sample suggest a tentative economic interpretation of these results that is both intuitively appealing and consistent with the SEC's perceptions. Producers with naturally long oil exposure that disclosed the value-at-risk or sensitivity of their derivative contracts experienced a reduction in the sensitivity of their stock prices to oil price changes because such disclosures signaled to the market that they had implemented effective risk management strategies.