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Unintended Consequences of Lowering Disclosure Thresholds

Posted: 27 Mar 2011 Last revised: 1 Jul 2014

Kirsten Fanning

University of Illinois at Urbana-Champaign

Christopher P. Agoglia

University of Massachusetts at Amherst

M. David Piercey

University of Massachusetts Amherst

Date Written: April 24, 2014

Abstract

In recent years, regulators have considered several initiatives to lower the threshold for disclosing risks to investors. We examine two ways in which disclosing more risks can actually lower investors’ perceptions of risk. Utilizing an experiment, we find evidence of two unintended consequences on different types of investors. First, we demonstrate that the addition of low-probability risks to a disclosure can dilute (rather than add to) more probable losses, leading certain investors to lower their perceptions of overall risk. Second, since lowering the threshold changes the overall composition of the disclosure by adding low-probability losses, firms could adopt a tactic of minimization that characterizes the entire disclosure as unimportant, presenting the lowest risks most saliently, using compliance with the low threshold as a plausible reason for giving a lengthy disclosure of generally unimportant risks. Our findings suggest that such a tactic can be persuasive.

Keywords: disclosure thresholds; dilution effect; persuasion tactics; investor judgment

JEL Classification: C91, M40, M41, M49

Suggested Citation

Fanning, Kirsten and Agoglia, Christopher P. and Piercey, M. David, Unintended Consequences of Lowering Disclosure Thresholds (April 24, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1792796 or http://dx.doi.org/10.2139/ssrn.1792796

Kirsten Fanning

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
Champaign, IL 61820
United States
217-300-1981 (Phone)

Christopher P. Agoglia (Contact Author)

University of Massachusetts at Amherst ( email )

Department of Accounting & Information Systems
121 Presidents Drive
Amherst, MA 01003-4910
United States
413 545-5582 (Phone)
413 545-3858 (Fax)

M. David Piercey

University of Massachusetts Amherst ( email )

Isenberg School of Management
121 Presidents Drive
Amherst, MA 01003
United States

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