When Do Qualitative Risk Disclosures Backfire? The Effects of a Mismatch in Hedge Disclosure Formats on Investors’ Judgments

38 Pages Posted: 5 Jan 2019

See all articles by Yanan He

Yanan He

Shanghai Lixin University of Accounting and Finance

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Feng Yeo

University of South Carolina - Darla Moore School of Business

Jixun Zhang

Nankai University-Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 29, 2018

Abstract

Disclosure standards mandate the quantitative disclosure of hedging-instrument related risks but not the disclosure of hedged item related risks. We examine how a match (mismatch) in formats, caused by making quantitative (qualitative) hedged item disclosures alongside quantitative hedging instrument risk disclosures, affects investors’ integration of information from these two related disclosures. Our first experiment varies the hedged item risk disclosure format (quantitative or qualitative) and the portion of risk hedged (small or large). We find that when disclosure formats are mismatched, the less comparable nature of the two disclosures caused investors to neglect their offsetting relationship when assessing net risks. As a result, risk and investment judgments were influenced by the more prominent quantitative hedging instrument disclosures. Our second experiment finds that the use of a qualitative debiaser that clarifies the relationship between the two disclosures led to the integration of information and mitigated this effect.

Keywords: hedge proportion, risk disclosure format, qualitative versus quantitative disclosures, risk disclosure standard

JEL Classification: D81, G18, M41, M48

Suggested Citation

He, Yanan and Tan, Hun-Tong and Yeo, Feng and Zhang, Jixun, When Do Qualitative Risk Disclosures Backfire? The Effects of a Mismatch in Hedge Disclosure Formats on Investors’ Judgments (August 29, 2018). Available at SSRN: https://ssrn.com/abstract=3304372 or http://dx.doi.org/10.2139/ssrn.3304372

Yanan He

Shanghai Lixin University of Accounting and Finance ( email )

Hun-Tong Tan (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

Feng Yeo

University of South Carolina - Darla Moore School of Business

1014 Greene Street
Columbia, SC Columbia 29208
United States

Jixun Zhang

Nankai University-Business School ( email )

94 Weijin Road
Tianjin, 300071
China

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