Let's Talk About Risk! The Firm Value Effect of Risk Disclosure for European Energy Utilities

42 Pages Posted: 25 Sep 2020 Last revised: 7 Jan 2022

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

Date Written: September 14, 2020

Abstract

We analyse whether increased risk reporting by European energy utilities is positively or negatively related to firm value. Using an unsupervised machine learning topic model `Latent Dirichlet Allocation', we classify the content of the risk reports presented in the notes to the financial statements in different risk topics over the period from 2007 to 2017. We find that reporting market and credit risk as well as details of risk management and country-related risks is significantly related to higher firm values. The positive relation between risk disclosure and firm value is also robust for different levels of financial performance and the number of risk topics. Our study contributes to the call for more transparency in risk reporting and disclosure. Our findings imply that current risk disclosure regulation is useful in the sense that it provides information, which is reflected in the firm value. Interestingly, we are not able to identify a climate-related risk topic, and further tests show only 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, Topic Modelling

JEL Classification: G32, M41, M48

Suggested Citation

Düsterhöft, Maximilian and Schiemann, Frank and Walther, Thomas, Let's Talk About Risk! The Firm Value Effect of Risk Disclosure for European Energy Utilities (September 14, 2020). 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

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