Capital Market Expectations of Risk Materiality and the Credibility of Managers’ Risk Disclosure Decisions

67 Pages Posted: 15 Jun 2017 Last revised: 14 Oct 2018

See all articles by Ella Mae Matsumura

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Rachna Prakash

University of Mississippi - Patterson School of Accountancy

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2018

Abstract

Research shows the capital market can refine firm risk inferences using Form 10-K risk disclosures, raising the question: do managers’ disclosure decisions credibly reflect their private risk materiality assessments? We use experts’ judgments about industry-level risk materiality to impute market expectations of climate-change risk (CCR) materiality to test whether the association between disclosing CCR in 10-K’s and firm risk (proxied by cost of equity (COE)) varies with market expectations. Using S&P 500 firms’ CCR disclosures over nine years, we find that disclosing firms’ COE is 26 bps lower than nondisclosers overall. In industries where the market expects CCR to be material, disclosing firms’ COE is 51 bps lower than nondisclosers, while in industries where the market expects CCR not to be material, disclosing firms’ COE is 20 bps lower than nondisclosers. Our results indicate that market CCR materiality expectations allow inferences about the credibility of managers’ risk disclosure decisions.

Keywords: Regulation S-K; climate change risk; risk assessment; voluntary disclosure; mandatory disclosure; enforcement; Sustainability Accounting Standards Board’s (SASB) Materiality Map™; cost of equity capital; self-selection

JEL Classification: G18, G32, M14, M41

Suggested Citation

Matsumura, Ella Mae and Prakash, Rachna and Vera-Munoz, Sandra C., Capital Market Expectations of Risk Materiality and the Credibility of Managers’ Risk Disclosure Decisions (September 18, 2018). Available at SSRN: https://ssrn.com/abstract=2983977 or http://dx.doi.org/10.2139/ssrn.2983977

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Rachna Prakash (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

200 Conner Hall
University, MS 38677
United States

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy ( email )

248 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-9041 (Phone)
574-631-5255 (Fax)

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