Examining the Effects of Detail in Risk Oversight Disclosures on Investors’ Decisions

• In Event: Disclosures

Abstract

This study examines how the level of detail in a firm’s disclosure of its board of director’s role in risk oversight influences investors’ decisions. Using an experiment, investors examine the disclosures of two firms with different levels of risk exposure that disclose the same risk oversight practices with varying levels of detail. I predict and find that when the disclosures contain dissimilar levels of detail, investors assess the firm with the more detailed disclosure to have stronger risk oversight and risk management relative to the firm with the less detailed disclosure and invest more in the firm with the more detailed disclosure, irrespective of the firm’s level of risk exposure. However, when the disclosures both contain more detail, the additional detail appears to obfuscate the underlying risk characteristics of both firms. Overall, results provide evidence that the level of detail within risk oversight disclosures can influence investors’ risk perceptions beyond the underlying risk characteristics of firms and adversely influence investors’ investment decisions, under certain conditions. This study furthers our understanding of how and why firm risk oversight disclosures influence investors’ decisions.

Author

• Kristina Colleen Demek, University of Central Florida