SEC Market Risk Disclosures: Implications for Judgment and Decision Making

By Hodder, Leslie; Koonce, Lisa et al. | Accounting Horizons, March 2001 | Go to article overview

SEC Market Risk Disclosures: Implications for Judgment and Decision Making


Hodder, Leslie, Koonce, Lisa, McAnally, Mary Lea, Accounting Horizons


SYNOPSIS: In this paper, we draw on Judgment and decision-making research to examine the behavioral implications of the SEC's Financial Reporting Release No. 48 on market risk disclosures. While these disclosures have been examined using archival data, no research has investigated how these disclosures might-affect individual users of financial statements. The purpose of our paper is to draw on research in the judgment and decision-making arena to identify and analyze the behavioral implications of the new risk disclosures. We offer three conclusions. First, FRR No. 48 users may have more complex evaluations of risk than perhaps anticipated by the SEC. Second, the flexibility accorded firms in FRR No. 48 will adversely affect users' risk judgments. Third, because the Release does not require disclosure of certain quantitative information that is important to risk assessments, inappropriate risk assessments may result. We believe our insights can help others conduct research in this important area and can help the SEC when they revisit the disclosure requirements in FRR No. 48.

INTRODUCTION

In 1997, the Securities and Exchange Commission (SEC) issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative In formation about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments (FRR No. 48). FRR No. 48 requires that companies disclose both qualitative and quantitative market risk information for risks of loss arising from adverse changes in interest rates, foreign currency rates, commodity prices, and equity prices. This reporting requirement is one of the few that requires companies to disclose forward-looking information about risk.

Understanding how these risk disclosures are likely to be interpreted by financial statement users is important because risk disclosures are not always interpreted as intended (Slovic 1987). Research in many domains documents the difficulties in communicating risk information (Fischhoff et al. 1998). Because prior research shows that risk perceptions influence behavior (Slovic et al. 1980; Viscusi et al. 1986), unintended interpretations of the FRR No. 48 risk disclosures could adversely affect investor and analyst judgment and decision-making (e.g., valuation judgments; buy/sell/hold decisions).

In this paper, we draw on judgment and decision-making research to examine two related issues. First, we summarize research from other domains that addresses how people perceive risk and conjecture as to how FRR No. 48 users might think about risk. Second, we examine how FRR No. 48's reporting requirements could adversely affect users' perceptions of the riskiness of companies' financial and derivative instruments. While existing research documents incidents of noncompliance with FRR No. 48 (Elmy et al. 1998; Roulstone 1999), we focus primarily on how the design of the FRR No. 48 disclosures (rather than noncompliance with them) causes judgment difficulties. [1] Throughout the paper, we draw on actual disclosures to illustrate our points about FRR No. 48. The purpose is to provide a descriptive understanding of behavioral implications of the new risk disclosures so that other researchers may draw on our insights when conducting research in this area. Our scholarly insights also could be used as input when th e SEC revisits the disclosure requirements. Finally, companies can use our insights to better understand the possible behavioral implications of their risk disclosures.

We draw three conclusions in the paper. First, we conclude FRR No. 48 users may have more complex evaluations of risk than perhaps the SEC anticipated. Psychology research indicates that when judging risk, individuals often consider additional risk factors beyond those in the SEC's risk disclosures. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

SEC Market Risk Disclosures: Implications for Judgment and Decision Making
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.