The Joint Effect of Presentation Format and Disclosure Balance on Investors’ Reactions to Sensitivity Disclosures of Hedging Instruments

52 Pages Posted: 24 May 2021

See all articles by Wenhuan Liu

Wenhuan Liu

Qingdao University

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Tu Xu

Renmin University of China - School of Business; University of Hawaii at Manoa - Shidler College of Business

Jixun Zhang

Nankai University-Business School

Date Written: May 21, 2021

Abstract

Derivative-related risk disclosure has been a key issue in accounting regulation and research, and sensitivity analysis is the most popular form of quantitative derivative-related disclosure. In an experiment, we find that, relative to disclosing potential losses only, disclosing both potential gains and potential losses associated with hedged items and derivatives leads to favorable investor reactions when information about net risk after hedging is omitted from the disclosure, but not when net risk is shown. We further show that disclosing net risk on top of hedged-item and derivative risks is a disclosure remedy that is as effective as disclosing potential gains. Finally, we demonstrate that disclosing net risk and disclosing potential gains operate through different mechanisms. We extend Koonce, Lipe, and McAnally (2005) by showing the generalizability of their findings and proposing an alternative disclosure remedy. Our results have important implications for investors, managers, and regulators.

Keywords: risk disclosure; sensitivity analysis; derivatives; hedge

Suggested Citation

Liu, Wenhuan and Tan, Hun-Tong and Xu, Tu and Zhang, Jixun, The Joint Effect of Presentation Format and Disclosure Balance on Investors’ Reactions to Sensitivity Disclosures of Hedging Instruments (May 21, 2021). Available at SSRN: https://ssrn.com/abstract=3850545 or http://dx.doi.org/10.2139/ssrn.3850545

Wenhuan Liu

Qingdao University ( email )

No. 308 Ning Xia Road
Qingdao, 266071
China

Hun-Tong Tan (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

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

Tu Xu

Renmin University of China - School of Business ( email )

Beijing
China

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States

Jixun Zhang

Nankai University-Business School ( email )

94 Weijin Road
Tianjin, 300071
China

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