Incentives for Risk Reporting - A Discretionary Disclosure and Cheap Talk Approach

By M. Dobler. 2008

240 citations recorded by the source corpus.

This paper adopts and reviews discretionary disclosure and cheap talk models to analyze risk reporting incentives and their relation to regulation. Given its inherent discretion, risk reporting depends on disclosure incentives. To assess these incentives the analytical models consider risk reporting as an endogenous feature, thereby providing a benchmark to discuss regulatory attempts. Particularly, discretionary disclosure models refer to verified disclosure, e.g., on risk factors or risk management, whereas cheap talk models refer to unverified disclosure, like managerial forecasts on the impact of risk factors. This provides an analytically-based framework for discussion. Unlike prior literature, which focuses on disclosure cost, I argue that uncertainty of information endowment and issues of credible communication can explain restricted risk reporting observed empirically. Linking regulatory attempts to these restrictions implies that regulation may mitigate the incentives-driven restrictions to some extent, but can have adverse effects on risk reporting. I particularly discuss the link between effective risk monitoring and the precision of risk reporting; the ex post assessment and usefulness of managerial forecasts on impacts of risk factors; the claimed decreasing cost of capital by mandatory risk reporting; and the threat of self-fulfilling prophecies. While the discussion has implications for both specific risk reporting requirements and empirical research, overall results suggest that we should not overestimate the informativeness of risk reporting even in a regulated environment.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/c6a7e5ac2c8564a619d66738eeb0b3bec5118116

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Citations in the corpus

The Effects of IFRS 7 Adoption on Bank Disclosure in Europe (2009, background): “Such a management approach is by definition incompatible with a formalized disclosure format (Dobler, 2008).”
Introduction of International Accounting Standards, Disclosure Quality and Accuracy of Analysts' Earnings Forecasts (2013, unknown): “…b1INT + b2MANREP + x. and GAS 15 ‘Management Report’, the pertinent standards of the GASB, which are more specific than § 315 HGB. Companies appear to be especially reticent regarding information about their risks and their expected development, that is, future-oriented information (Dobler, 2008).”
Carbon Disclosure, Contextual Factors, and Information Asymmetry: The Case of Physical Risk Reporting (2018, background): “However, the settings of repeated disclosures and the heterogeneous group of users of CDP reports decrease the likelihood of deliberately false and misleading statements (Dobler, 2008; Ott, Schiemann, & Günther, 2017).”
Determinants of narrative risk disclosures in UK interim reports (2012, background): “The changes in business environment make ﬁrms more relying on ﬁnancial instruments and international transactions, which raise the importance of corporate risk disclosure (CRD), especially in non-ﬁnancial ﬁrms (Dobler, 2008).”
What drives mandatory and voluntary risk reporting variations across Germany, UK and US? (2015, unknown): “More recently, Dobler et al. (2011) find that high-leverage US firms are likely to provide more risk disclosure in their narratives than highleverage German firms.”
The tone of business model disclosure: an impression management analysis of the integrated reports (2015, background): “Another important characteristic affecting the verifiability of the disclosure is the type of information: quantitative information is considered to be more verifiable than non-quantitative (Dobler 2008; Dobler et al. 2011).”
The impact of multi-layer governance on bank risk disclosure in emerging markets: the case of Middle East and North Africa (2019, background): “Fourth, our paper contributes to the strand of literature that had called for the exploration of risk disclosure motives and drivers across countries (e.g. Dobler, 2008).”
What Drives Quality of Firm Risk Disclosure? The Impact of a National Disclosure Standard and Reporting Incentives under IFRS (2012, background): “Managers’ disclosure incentives and firms’ corporate governance structures Risk reporting incentives also influence risk disclosure in regulated environments (Dye, 1990; Marshall & Weetman, 2007; Dobler, 2008; Dobler et al., 2011).”
Aggregated, Voluntary and Mandatory Risk Disclosure Incentives: Evidence from UK FTSE All Share Companies (2013, background): “The threat of economic disadvantage may give rise to disincentives to disclose risk information voluntarily (Dobler, 2008).”