The effect of the specificity of the risk disclosure language on investors' risk and credibility judgments

Companies use different formats in their risk disclosures in their annual and quarterly reports, as well as in their prospectuses. Some companies specifically disclose the nature of their risks by identifying the parties or circumstances that comprise the source of risk. Conversely, other companies use more generic language to convey risk. I predict and find that investors perceive risk to be more likely to adversely affect a company when it is disclosed in a more specific way rather than in a less specific way. However, I also predict and find that when investors have some prior knowledge about the risk, this effect is mitigated. Finally, after the risk is realized, I find that investors have lower credibility judgments for managers who use less specific language in their risk disclosures than ones who use more specific language when they are aware of another level of specificity. I also find some evidence that participants infer that managers are signaling the importance or triviality of a risk factor through the choice of disclosure specificity. This study contributes to our understanding of how investors react to different disclosure formats and highlights to the preparers of accounting disclosures the importance of their choice of specificity levels, and also has important implications for regulators.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Accountancy

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2012

Author dc:creator

• Arikan, Ozlem

Contributors dc:contributor

• Jackson, Kevin E.
• Hobson, Jessen L.
• Shavitt, Sharon
• Smith, Steven

• Risk disclosure
• nonprofessional investors
• judgment and decision making
• risk judgments
• credibility judgments
• narrative disclosures

Statement dc:rights

• Copyright 2012 Ozlem Arikan

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/34569

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/34569