Fuzzy Evaluation of Risk Management Profiles Disclosed in Corporate Annual Reports*

Article excerpt


The most common measures of risk have traditionally been based on quantitative financial and accounting information. However, new information on risk management disclosed in companies' annual reports is generally qualitative or linguistic. As such, exploitation by decision makers becomes difficult. In this study, a fuzzy analysis approach is applied to risk information disclosed by 217 firms listed on the Toronto Stock Exchange. The results provide some evidence that these fuzzy measures are reasonable proxies for traditional financial and accounting measures. They also show that fuzzy measures can predict a significant amount of systematic risk.

Copyright © 2008 ASAC. Published by John Wiley & Sons, Ltd.

JEL classifications: G32, G11, C81

Keywords: risk management, fuzzy analysis, multiple criteria decision making, risk evaluation, information disclosure


Traditionnellement, les informations relatives aux risques ont été appréhendées à travers des mesures quantitatives financières et comptables. Cependant, les nouvelles informations sur le risque divulguées dans les rapports annuels des entreprises sont, le plus souvent, qualitatives ou linguistiques, ce qui rend leur exploitation par les décideurs difficile. Dans cette étude, une approche basée sur l'analyse floue est appliquée aux informations sur le risque divulguées par 217 entreprises cotées à la bourse de Toronto. Les résultats montrent que les mesures floues proposées reproduisent des décisions similaires à celles des mesures traditionnelles boursières et comptables. Ils indiquent également que les mesures floues sont capables de prédire une partie importante du risque systématique. Copyright © 2008 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : gestion des risques, analyse floue, aide multicritère à la décision, évaluation des risques, divulgation des informations

Information disclosure represents one of the primary ways to communicate information to external decision makers such as investors. Assessing the risk of their investments is a very important task for investors who are facing an increasingly uncertain environment as demonstrated by the Enron and WorldCom scandals. In this context, voluntary information disclosure by management targets the lack of informational symmetry between managers within a company and decision makers or shareholders outside the company. It is assumed in general that closing this gap contributes to lower agency costs. Risk management disclosure also serves to provide information on exposure to risks and the practice of risk management (Woods, Dowd, & Humphrey, 2004), which in turn enables decision makers to evaluate the effects that such risks might have on the future standing of a company (as well as the relevant probabilities) (Dobler, 2005). However, if the information disclosed, including information on risk management, is not useful to decision makers (namely, to shareholders), the role of such information in closing the gap and reducing agency costs is cast into doubt. It is this hypothesis that we address here through our evaluation of fuzzy risk measures.

The few studies dealing with risk disclosure are recent and mostly focus on (a) descriptive analysis of the information disclosure on corporate risk management; (b) the drivers for such disclosure; and (c) the weaknesses related to a lack of standards for such information. These studies have shown that the obstacles to disclosure and provision of information on risk result mostly from a lack of standards for measures of risk (IFAC & PricewaterhouseCoopers, 1999; Kajuter, 2001). Studies aimed at eliminating such obstacles or reducing their magnitude have dealt primarily with standardizing risk measures and with disclosure formats (Eccles, Herz, Keegan, & Phillips, 2001; Hodder & McAnally, 2001; Linsmeier & Pearson, 1997; Reerink, 1996; Securities and Exchange Commission [SEC], 1997). …