You Have Been Forewarned! The Effects of Risk Management Disclosures and Disclosure Tone on Investors’ Judgments

34 Pages Posted: 15 Mar 2021 Last revised: 28 Jun 2021

See all articles by Hun-Tong Tan

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Feng Yeo

University of South Carolina - Darla Moore School of Business

Date Written: February 10, 2021

Abstract

SEC risk disclosure standards require the standalone disclosure of risk factors and do not permit the concurrent disclosure of risk management information. This differs from requirements in regimes such as Germany. The SEC is considering mandating risk management disclosures. We experimentally examine how the disclosure of risk management information alongside risks and the risk disclosure tone used influence investors’ stock valuation judgments, with and without materialization of the disclosed risk. We find that without risk materialization, investors provide lower (higher) stock valuations when a positive versus negative disclosure tone is used in the absence (presence) of risk management disclosures. With risk materialization, a positive tone leads to lower stock valuations only in the presence of risk management disclosures. Our findings have implications for managers and regulators, as investors may penalize firms that make good faith risk disclosures, even if these risks have been properly managed.

Keywords: risk disclosures, disclosure tone, disclosure regime, risk management plans

Suggested Citation

Tan, Hun-Tong and Yeo, Feng, You Have Been Forewarned! The Effects of Risk Management Disclosures and Disclosure Tone on Investors’ Judgments (February 10, 2021). Nanyang Business School Research Paper No. 21-10, Available at SSRN: https://ssrn.com/abstract=3804021 or http://dx.doi.org/10.2139/ssrn.3804021

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University ( email )

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

Feng Yeo (Contact Author)

University of South Carolina - Darla Moore School of Business

1014 Greene Street
Columbia, SC Columbia 29208
United States

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