The Effects of Risk Disclosure on Evaluation of Management Forecast Revisions
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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.
KeywordsManagement forecast Narrative disclosure Non-financial information Risk disclosure Textual analysis Voluntary disclosure
I greatly appreciate the financial support of Tokyo Keizai University, Research Grant D12-02.
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