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

Liu, Wenhuan; Tan, Hun-Tong; Xu, Tu; Zhang, Jixun

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

Date

2017

Authors

Liu, Wenhuan

Tan, Hun-Tong

Xu, Tu

Zhang, Jixun

Abstract

Derivative-related risk disclosure has been a key issue in accounting regulations and research. In this paper, we examine how investors react to two features of the most popular form of mandatory quantitative risk disclosure-sensitivity analysis. Specifically, we experimentally test how the presentation format of market risk impact and disclosure balance (i.e., showing either potential losses only or both potential losses and potential gains) interact to change investors’ reactions to sensitivity disclosures of hedging instruments. We find that investors judge a firm that provides an SEC FRR No. 48-minimum disclosure to be as unfavorable as an otherwise equivalent firm that leaves its risk exposure unhedged. We further find that a presentation format that shows the market risk impact after hedging improves investors’ judgments when the disclosure is onesided loss-only but not when it is two-sided. A mediation analysis shows that the enhanced presentation format alters investors’ judgments by reducing their worry about unfavorable changes in market conditions. We contribute to the literature by showing that the presentation format of sensitivity disclosures matters and by identifying a moderator to the effect of disclosure balance. Our results have important implications for investors, managers, and regulators.

Description

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Keywords

Risk disclosure, Sensitivity analysis, Derivatives, Risk judgments, Investors

URI

http://hdl.handle.net/10125/51986

Collections

17 Other Research Topics (OTHERS)

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