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, which often happens through mass media, the difference between investors’ probability perceptions of the risk adversely affecting the company will decrease across the different specificity levels. 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, as predicted. 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 highlight to the preparers of accounting disclosures the importance of their choice of specificity levels, and also has important implications for regulators.

Özlem Arikan began the PhD program in 2007 at University of Illinois at Urbana-Champaign.  She earned her Bachelor of Science in Business Administration from the Middle East Technical University, Turkey in 1992 and completed the Master in Professional Accounting Program at the University of Texas at Austin in 2001. After graduation, he worked as an expert at the Turkish Financial Regulatory Agency. She also worked as a Lecturer at the Middle East Technical University. She enjoys music and reading.