Does SEC FRR No. 48 disclosure communicate risk management effectiveness? |
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Authors: | Gerald J Lobo Wei Z Siqueira Kinsun Tam Jian Zhou |
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Institution: | 1. C. T. Bauer College of Business, University of Houston, 4750 Calhoun Road, Houston, TX 77204, United States;2. School of Business, State University of New York at Albany, 1400 Washington Avenue, Albany, NY 12222, United States;3. Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822, United States |
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Abstract: | We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 5.34 percent decrease in cash flow volatility. Given the significant impact of cash flow volatility on firm value and capital investment, our results highlight the importance of market risk disclosures and should be of interest to investors and analysts. |
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Keywords: | Corresponding author G18 G31 M41 Market risk disclosure Managerial decision Risk management Real effects |
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