Does Risk Disclosure Signal Risk Management Outcome? An Examination of the SEC FRR No. 48 Disclosure’s Relation with Cash Flow Volatility
Does Risk Disclosure Signal Risk Management Outcome? An Examination of the SEC FRR No. 48 Disclosure’s Relation with Cash Flow Volatility
Date
2017-08-31
Authors
Lobo, Gerald
Siqueira, Wei
Tam, Kinsun
Zhou, Jian
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Abstract
We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful signals for predicting risk management outcome. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 4.4 percent decrease in cash flow volatility. We further document that this association is moderated by managers’ intention to manage risk. The market generally understands the implications of disclosure modification with respect to cash flow volatility, but its understanding has limitations. Our results should be of interest to those who seek to assess how a firm’s cash flows will fluctuate in the future.
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Keywords
disclosure,
managerial decision,
risk management,
real effects,
signaling
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