Competitor Risk Disclosures and Earnings Response Coefficients

Research output: Contribution to conferencePaperScientificpeer-review

Abstract

Risk disclosures is a corporate governance mechanism which aids external stakeholders to monitor the firm. It provides information on future risks and opportunities, and reflects the level of risk management in the organization. Firms can choose the level of risk disclosures relatively freely, and usually, a firm avoids legal consequences although it would have incomplete risk disclosures. This variation in risk disclosures and the high investor interest on risks are the reasons why risk disclosures are a form of self-governance. A firm which disclose transparently on risks shows socially responsible behavior towards the existing and potential investors by opening its “black box” around risks. All this voluntary disclosure is not justified by economic reasons but the firm’s willingness to be a responsible actor in the society. This should be appreciated by investors as well.

This paper examines the impact of 10-K disclosures on competitor risk on the earnings response coefficients of the US listed firms. I use Li et al. (2013) metrix to gauge the threat and extend of firm-specific competition. Competition risk disclosures can potentially impact value through the information on competition risk or through the reduction of information asymmetry. The sample covers US listed firms that report earnings in 1994-2014. The results provide evidence that competition risk disclosures reveal important information for investors and help them to interpret earnings. Current earnings are positively associated with current returns and this relation is amplified by the level of competitor risk disclosures in the preceding annual report. The findings demonstrate that firms operating under high competition are considered to be riskier (as suggested by their significantly higher returns in this study), and under these circumstances, investors show a stronger response on the earnings of those firms that discuss transparently on competitor risk. This paper contributes to literature on risk disclosures, self-governance, and earnings response coefficients.
Original languageEnglish
Publication statusPublished - 2017
EventAnnual ICGS Conference - Luiss University, Rome, Italy
Duration: 2 Sep 20173 Sep 2017
Conference number: 3

Conference

ConferenceAnnual ICGS Conference
CountryItaly
City Rome
Period02/09/201703/09/2017

Keywords

  • Risk reporting
  • Self-governance
  • Returns
  • Earnings response coefficient
  • Competitor risk

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