Cortese, Alessandro (2025). Essays Examining How Risk Reporting Affects Nonprofessional Investors’ Judgments. (Thesis). Universität Bern, Bern

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Abstract

My dissertation is composed of three papers investigating how risk reporting affects the judgment of nonprofessional investors. Each paper investigates a different and relevant research question related to the field of financial accounting. I employ the experimental method to test my hypotheses and to address my research questions. An important advantage of the experimental method is that researchers can manipulate the constructs of interest while keeping all other factors constant. This ensures that a causal link between the independent and dependent variables can be established. Moreover, experiments also allow me to examine settings that do not yet exist in the real world. For instance, I can investigate how a potential new disclosure requirement that is not currently mandated would affect investors. In my first study, I explore whether quantifying the risk in the qualitative 10-K risk factor disclosure (RFD) can work as a remedy for framed RFDs. More specifically, I investigate if quantifying the risk mitigates investors’ tendency to be more willing to invest in a firm that reports a positively framed RFD compared to a negatively framed RFD. Prior literature established that managers can and do frame financial disclosures to influence investors. Moreover, investigating whether quantifying the risk could counteract the effect of RFD framing is worth pursuing as regulators are considering mandating risk quantification in RFDs. I employ a 2x2 between-subject experiment where I manipulate the framing of the RFD (negative vs. positive) and whether the risk is quantified (no quantification vs. quantification). In line with the framing literature, I find that when risk is not quantified, investors are more (less) willing to invest in a firm that frames its RFD positively (negatively). Furthermore, as predicted, I show that quantifying the risk counteracts the effect of a positively framed RFD, as investors’ willingness to invest does not differ between firms framing the RFD either positively or negatively. My study suggests to regulators that mandating risk quantification may benefit investors. This is so because it avoids that investors are more willing to invest in a firm simply because its RFD was framed positively despite identical underlying economics and risk exposure. Requiring risk quantification would limit managers’ ability to influence investors via the strategic framing of RFDs. These findings advance our understanding of how qualitative and quantitative elements of the RFD jointly affect investors’ judgments. In my second study, I examine whether investors understand the risk formats used in the 10-K market risk disclosure (i.e., Value-at-Risk (VaR-format) and sensitivity analysis (SA-format)) and how the choice of the format affects their willingness to invest. Due to the different estimation methods of the two risk formats, the VaR-format (SA-format) is more informative than the SA-format (VaR-format) when uncertainty is low (high). However, I hypothesize that investors do not understand this. I argue that investors rely on the attribute substitution heuristic, using the perceived sophistication of the risk format to infer its informativeness while disregarding uncertainty. It is important to investigate whether investors understand these risk formats. If not, it would suggest that what regulators arguably see as an advantage, i.e., disclosure flexibility, is actually misleading investors’ judgments. I use a 2x2 between-subject experiment, where I operationalize the risk format as a risk format change (change from VaR- to SA-format vs. change from SA- to VaR-format) and the degree of uncertainty (low vs. high). Consistent with my predictions, investors do not understand the risk formats. They perceive the VaR-format as more sophisticated and informative than the SA-format independent of uncertainty. Consequently, in a context of high uncertainty, I find that investors are erroneously more willing to invest in a firm reporting the less informative VaR-format compared to the more informative SA-format. In contrast, investors seem to consider the reported risk format to be irrelevant when uncertainty is low because the risk is too unlikely to materialize. I additionally show that investors are more willing to invest in a firm reporting the VaR-format because it enhances investors’ perception of the management’s credibility. These findings show that the risk formats may lead investors to erroneous investment assessments. Lay investors fail to assess the risk formats critically and paradoxically perceive managers reporting the risk less transparently as more credible, which ultimately makes them more willing to invest. Notably, in times of high uncertainty managers face the complex dilemma of disclosing the risk less transparently to improve how investors perceive them or disclosing the risk more transparently at the cost of being perceived as less credible. This study contributes new evidence to the risk reporting literature. It improves our understanding of the unintended effects of allowing the communication of risks through different formats with different estimation methods. In the third study, co-authored with my supervisor Alexis H. Kunz, we investigate how the voluntary choices of a focal firm and a perfectly comparable peer firm to quantify (or not quantify) the risk in their respective RFDs affect investors’ perceptions. We are interested in how investors assess the focal firm’s risk, the credibility of its management, and its disclosure usefulness. While regulators are considering introducing risk quantification, it is unclear how investors react to the quantification. Even more so in a context where risk quantification is voluntary, so that some firms may decide to quantify while others may not. We predict that investors interpret the risk quantification as an economic signal and a social signal. Quantifying the risk should increase investors’ risk perceptions, but the fact that managers do it voluntarily also improves investors’ perceptions of the management credibility. We additionally conjecture that investors’ perceptions of management credibility will be strengthened if the focal and the peer firms make a different disclosure choice. We employ a 2x2 between-subject experiment to test our predictions. We manipulate the RFD-type reported by the focal firm (qualitative vs. quantitative RFD) and whether the peer firm’s RFD-type matches or differs (same vs. different RFD-types). As predicted, quantifying the risk provides an economic signal to investors, who perceive higher risk. Quantifying (not quantifying) the risk is also interpreted as a social signal, leading investors to perceive the management as more (less) credible. This positive (negative) effect is stronger when the peer firm makes a different disclosure choice. Notably, this occurs even though investors have no means to assess whether the management is competent at quantifying the risk. As supplementary analysis, we show that quantifying the risk voluntarily affects how investors perceive the usefulness of the disclosure via their perceptions of the risk and the management’s credibility. More precise information on the risk via its quantification results in investors perceiving the investment in the firm as riskier. However, this leads investors to consider the disclosure as more useful as well. Interestingly, we also find that investors associate higher risk with a more credible management, which leads them to assess the disclosure as more useful. Our findings show that investors rely on the risk quantification, as they do not question whether managers are competent at quantifying risks. We do not find support for concerns expressed in the literature that investors might discount quantified risk information. Thus, we caution investors to consider the reliability of the risk quantification before assessing the management and the disclosure. This study also suggests that managers face a trade-off since quantifying the risk makes them appear more credible to investors but also causes an investment in their firm to be perceived as riskier. Finally, our study differs from most in that it investigates a setting in which investors are provided with the financial disclosures of two firms so that they can compare them. While this is arguably a common situation for real-world investors, most of the literature employs experiments featuring only one firm’s financial disclosure. Taken together, my dissertation answers important research questions and contributes to the accounting literature on risk reporting with novel knowledge. It advances our understanding of how risk reporting affects investors, representing valuable evidence for academics, regulators, investors, and managers.

Item Type:	Thesis
Dissertation Type:	Cumulative
Date of Defense:	22 January 2025
Subjects:	300 Social sciences, sociology & anthropology > 330 Economics
Institute / Center:	03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute for Accounting and Controlling
Depositing User:	Hammer Igor
Date Deposited:	08 Aug 2025 14:07
Last Modified:	08 Aug 2025 14:07
URI:	https://boristheses.unibe.ch/id/eprint/6533

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