Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities

43 Pages Posted: 25 Sep 2020 Last revised: 31 May 2023

See all articles by Maximilian Düsterhöft

Maximilian Düsterhöft

Dresden University of Technology - Faculty of Economics and Business Management

Frank Schiemann

University of Bamberg

Thomas Walther

Utrecht University - School of Economics; Dresden University of Technology - Faculty of Economics and Business Management

Date Written: September 14, 2020

Abstract

We analyze how risk reporting by European energy utilities is related to uncertainty about firms' future prospects. Using an unsupervised machine learning topic model, we classify the content of the risk reports presented in the notes to the financial statements into different risk topics over the period from 2007 to 2017. We find that more risk reporting is related to lower idiosyncratic volatility and that this relation is especially evident for reporting about credit risk, risk management processes, economic risk, and accounting-related risk. We also find that the uncertainty-decreasing effect of risk disclosure extends to a positive relation between risk disclosure and firm value. Our study contributes to the call for more transparency in risk reporting and disclosure. Interestingly, we are unable to identify a climate-related risk topic, and further tests show only a rudimentary disclosure of climate-related risks. Combining the usefulness of the current risk disclosure regulation with the current lack of climate-related risk disclosures, we see good reasons for increased mandatory climate-related risk disclosures.

Keywords: Climate Change, Risk Reporting, Risk Disclosure, Energy Utilities, LDA

JEL Classification: G32, M41, M48

Suggested Citation

Düsterhöft, Maximilian and Schiemann, Frank and Walther, Thomas, Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities (September 14, 2020). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3692372 or http://dx.doi.org/10.2139/ssrn.3692372

Maximilian Düsterhöft

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Tillich-Bau 6-8
Dresden, D-01062
Germany

Frank Schiemann

University of Bamberg ( email )

Feldkirchenstr. 21
Bamberg, 96052
Germany

HOME PAGE: http://https://www.uni-bamberg.de/bwl-controlling/

Thomas Walther (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

HOME PAGE: http://www.tu-dresden.de/wiwi/finance

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