Discretionary Risk Disclosures

Posted: 19 Feb 2003

See all articles by Bjorn Jorgensen

Bjorn Jorgensen

Michael Kirschenheiter

College of Business Administration University of Illinois at Chicago

Abstract

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multi-firm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex-post than a non-disclosing firm. Finally, we show that ex-ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

JEL Classification: G14, G21, G28, M41, M45

Suggested Citation

Jorgensen, Bjorn N and Kirschenheiter, Michael, Discretionary Risk Disclosures. The Accounting Review, Vol. 78, April 2003, Available at SSRN: https://ssrn.com/abstract=348881

Michael Kirschenheiter (Contact Author)

College of Business Administration University of Illinois at Chicago ( email )

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