Stock price informativeness of risk disclosure: Does time orientation matter?

Abstract

This paper investigates the extent to which firms’ stock prices may incorporate aggregate risk disclosure levels differently depending on its time orientation, whether forward-looking or non-forward-looking. Using a sample period of ten years for the UK FTSE all-share non-financial firms, this paper used price synchronicity to capture stock informativeness and utilized textual analysis of the narrative sections of annual reports to capture aggregate risk disclosure levels and time orientation. Our empirical results suggest that, whereas the UK market does not incorporate aggregate risk disclosure, it does react significantly to the time orientation of the content of risk disclosure. Specifically, we find that non-forward-looking risk disclosure is significantly and negatively associated with stock price synchronicity, suggesting that this disclosure is firm-specific and it is difficult to replace with market-wide factors. However, we also find that forward-looking risk disclosure, is significantly and positively associated with stock price synchronicity, indicating that such disclosure is generic, and it can be replaced by market-wide factors. These results are likely to have theoretical and practical implications because they testify to the importance of considering the content (time orientation) rather than the level of aggregate risk information when observing the informativeness of the narrative sections of annual reports.