Advertisement

The Effects of Risk Disclosure on Evaluation of Management Forecast Revisions

  • Hyonok KimEmail author
Chapter
First Online:
  • 1.1k Downloads
Part of the Advances in Japanese Business and Economics book series (AJBE, volume 6)

Abstract

In this paper, I empirically examine the effects of narrative risk disclosure on the evaluation of management forecast revisions. A unique feature of this study is direct investigation of the role of narrative disclosure in valuation using textual risk disclosure. I find that the management forecast revision of firms with a high business risk disclosure level is discounted by the market because of their higher risk. However, a market reaction is not found when a firm issues a downward revision because the higher level of business risk disclosure has the effect of mitigating a market shock. Finally, the market only discounts a management forecast revision when the common risk is disclosed. The results indicate that narrative disclosure provides useful information to aid understanding of financial information. In addition, the results also imply that business risk disclosure has ex-post information value.

Keywords

Management forecast Narrative disclosure Non-financial information Risk disclosure Textual analysis Voluntary disclosure 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgment

I greatly appreciate the financial support of Tokyo Keizai University, Research Grant D12-02.

References

  1. Abraham, S., & Cox, P. (2007). Analysing the determinants of narrative risk information in UK FTSE 100 annual reports. The British Accounting Review, 39, 227–248.CrossRefGoogle Scholar
  2. Brown, S. V., & Tucker, J. W. (2011). Large-sample evidence on firms’ year-over-year MD&A modifications. Journal of Accounting Research, 49(2), 309–346.CrossRefGoogle Scholar
  3. Campbell, J. L., Chen, H., Dhaliwal, D. S., Lu, H., & Steele, L. B. (2012). The information content of mandatory risk factor disclosure in corporate filings. Working Paper, University in Arizona.Google Scholar
  4. Deumes, R. (2008). Corporate risk reporting: A content analysis of narrative risk disclosures in prospectuses. Journal of Business Communication, 45(2), 120–157.CrossRefGoogle Scholar
  5. Feldman, R., Govindaraj, S., Livnat, J., & Segal, B. (2010). Management’s tone change, post earnings announcement drift and accruals. Review of Accounting Studies, 15(4), 915–953.CrossRefGoogle Scholar
  6. Financial Service Agency (FSA). (2003). Cabinet Office Ordinance on Disclosure of Corporate Affairs, etc. (Kigyo Naiyou Tou no Kaiji ni Kansuru Naikakufurei). FSA (in Japanese).Google Scholar
  7. Johnson, S. (2010). SEC pushes companies for more risk information. CFO Magazine, August 2, 2010.Google Scholar
  8. Kato, K., Skinner, D., & Kunimura, M. (2009). Management forecasts in Japan: An empirical study of forecasts that are effectively mandated. The Accounting Review, 84(5), 1575–1606.CrossRefGoogle Scholar
  9. Kim, H. (2007). The effects of the advance disclosure of risk factors on stock returns when there are information security incidents. Hitotusbashi Review of Commerce and Management, 2(2), 102–113 (in Japanese).Google Scholar
  10. Kim, H., & Fukukawa, H. (2013). Japan’s Big 3 firms’ response to clients’ business risk: Greater audit effort or higher audit fees? International Journal of Auditing, 17(2), 190–212.CrossRefGoogle Scholar
  11. Kothari, S. P., Li, X., & Short, J. E. (2009). The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: A study using content analysis. The Accounting Review, 84(5), 1639–1670.CrossRefGoogle Scholar
  12. Kravet, T., & Muslu, V. (2013). Textual risk disclosures and investors’ risk perceptions. Review of Accounting Studies. doi: 10.1007/s11142-013-9228-9.Google Scholar
  13. Li, F. (2006). Do stock market investors understand the risk sentiment of corporate annual reports. Working Paper, University of Michigan.Google Scholar
  14. Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2–3), 221–247.CrossRefGoogle Scholar
  15. Li, F. (2010a). The information content of forward-looking statements in corporate filings: A Naïve Bayesian machine leaning approach. Journal of Accounting Research, 48(5), 1049–1102.CrossRefGoogle Scholar
  16. Li, F. (2010b). Textual analysis of corporate disclosures: a survey of the literature. Journal of Accounting Literature, 29, 143–165.Google Scholar
  17. Li, F., Lundholm, R., & Minnis, M. (2013). A measure of competition based on 10-K filings. Journal of Accounting Research, 51(2), 399–436.Google Scholar
  18. Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. The Journal of Finance, LXVI(1), 35–65.Google Scholar
  19. Miller, B. P. (2010). The effects of reporting complexity on small and large investor trading. The Accounting Review, 85(6), 2107–2143.CrossRefGoogle Scholar
  20. Nelson, K. K., & Pritchard, A. C. (2007). Litigation risk and voluntary disclosure: The use of meaningful cautionary language. Working Paper, Rice University.Google Scholar
  21. Ota, K. (2012). Information content of analysts’ stock ratings and earnings forecasts in the presence of management earnings forecasts. The Japanese Accounting Review, 2, 87–116.CrossRefGoogle Scholar
  22. Tetlock, P. C., Saar-Tsechansky, M., & Macskassy, S. (2008). More than words: Quantifying language to measure firms’ fundamentals. The Journal of Finance, LXIII(3), 1437–1467.CrossRefGoogle Scholar
  23. You, H., & Zhang, X. (2008). Financial reporting complexity and investor underreaction to 10-K information. Review of Accounting Studies, 14(4), 559–586.CrossRefGoogle Scholar

Copyright information

© Springer Japan 2014

Authors and Affiliations

  1. 1.Business AdministrationTokyo Keizai UniversityKokubunjiJapan

Personalised recommendations

Cite chapter

Buy options