Abstract

Most companies disclose risk factors using vague, boilerplate language. Regulators are concerned that this vagueness reduces the decision-usefulness of the information; hence, they are encouraging companies to be more specific rather than generic. However, little is known about the impact of specificity on investment judgments. The results of this experimental study suggest that regulators’ concern may be justified. Non-professional investors who read a generic disclosure react less strongly immediately after reading it than those who read a more specific disclosure when prior information about the disclosed risk factor is available in their memory immediately before reading the risk disclosure. In addition, on realisation of the risk, they are more surprised than their counterparts who read a more specific disclosure, and lower their credibility judgments accordingly. These investors correct their judgments after the risk realisation to a greater extent than those who have read a more specific disclosure. The study has implications for regulators, managers, non-professional investors and researchers.

Highlights

  • The style of information conveyed by companies’ risk disclosures varies

  • More specific disclosures are those that explicitly state the nature of risks by identifying the parties or circumstances comprising the source of risk, whereas less specific risk disclosures do not explicitly identify the source of risk

  • This paper has examined the possible implications for companies of choosing to make more or less specific risk disclosures in the context of non-professional investors’ decision making

Read more

Summary

Introduction

The style of information conveyed by companies’ risk disclosures varies. In their 2009 annual reports, Yahoo (2009) named Google, Microsoft, AOL and Facebook as its main competitors, whereas Google (2009) broadly stated its competitors to be generalpurpose search engines, social networking sites, and providers of online products and services. Regulators seem to be concerned about the use of generic information in risk disclosures. This study attempts to understand the effect of specificity on non-professional investors’ judgments, and validate regulators’ concerns about the decision-usefulness of boilerplate risk disclosures. Interest in risk disclosures intensified following the corporate scandals of the early 2000s (Linsley and Shrives 2005), and The Companies Act 2006 mandated companies’ disclosure of principal risks and uncertainties in their annual reports (UK Government 2006)

Objectives
Methods
Results
Conclusion
Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call