Firm Risk Reporting Profiles

Firms face a great deal of risks in their pursuit of organizational goals. The trade-off between risk and reward and the way this trade-off is managed is one of the most important determinants of firm success. Investors and regulators are well aware of this fact, and firms are required to disclose material risks in their annual accounts (Regulation S–K, Item 305(c), SEC 2005) and investors pay attention to this information (Campbell, Chen, Dhaliwal, Lu, & Steele 2014; Solomon, Solomon, Norton, & Joseph 2000). However, managers and boards have a great deal of freedom to decide which risks they regard as material and choose to disclose. Risk disclosures by firms tend to focus mostly on the market and financial risks, rather than operational or organizational risk (Beretta & Bozzolan 2004; Young & Guenther 2003), and academic research so far has followed this focus. Risk disclosures are also not straightforward to interpret: higher disclosure may signal both increased risk as well as increased risk preparedness. For investors, regulators and scholars alike, more clarity is needed on why certain risks are disclosed, while others are not, and which signals risk disclosures send. The aim of this project is to identify the determinants and consequences of specific risk disclosures.