The association between-market risk disclosure reporting and firm risk: The impact of SEC FRR No. 48

Abstract

SEC FRR No. 48 requires that all firms report their market risk exposures using one or more of three alternative formats for disclosure: tabular format, sensitivity analysis, or Value at Risk (VaR). In this paper we examine how the method chosen affects a firm's risk as measured by total risk, the cost of equity, and firm specific risk. We find that firms using VaR have higher total risk and firm specific risk than firms using sensitivity analysis. Conversely, firms employing tabular disclosure generally have lower but not statistically significant lower total risk, cost of equity, and firm specific risk than firms using sensitivity.