obliges entities to disclose risk factors, trendinformation, and market riskexposure (Form 10-K; Form 20-F). Since 1998, the German legislation expresslyrequires firms and groups to report on the risks of their future development in theirannual management reports (HGB 289(1), 315(1)); moreover there is a GermanAccounting Standards Board standard on risk reporting (GAS 5). In the EC, reportingduties concurrent to those in Germany have been imposed by recent changes in the ECdirectives. By 2005, firms and groups have to disclose the principle risks anduncertainties they face (Dir. 2003/51/EC, Art. 1(14)(a), Art. 2(2)(a)). This European riskreporting approach clearly differs from the current requirements of the IASB and the USstandard-setters in that it (i) demands direct forecasts; (ii) lacks rather detailed rules; but
(iii) is more comprehensive in scope. Disclosures shall not concentrate on risk factorsand market risks, but comprehend forward-looking information on corporate riskexposure covering risks of all categories. An assessment of the properties of the newreporting challenge and theinformativeness of comprehensive risk reporting recently is
of particular importance in Europe. But may become of even more general interest whenthe IASB will progress its project Management’s Discussion and Analysis, which interalia will be concerned with risk reporting.
2
Literature associates risk reporting with desirable effects for both its preparers and itsusers: It is claimed that risk reporting encourages more effective corporate riskmanagement and helps investors to manage the risk of their own portfolio. By reducinginformation asymmetry and estimation risk, risk reporting may decrease the firm’s riskpremium demanded by the investors and decrease the firm’s cost of capital (e.g.,Courtnage, 1998; Linsley and Shrives, 2000; Solomon et al., 2000). If managers benefitfrom risk reporting as claimed above, we would expect them to release risk reportsvoluntarily. However, descriptive empirical findings indicate rather poor forwardlookingrisk disclosures under a voluntary reporting regime (e.g., recently for CanadaLajili and Zégal, 2003). There is empirical evidence that certain pieces of mandatedmarket risk disclosures have information content (e.g., for market risk disclosuresLinsmeier et al., 2002; Jorion, 2002; for auditor going concern disclosures Carlson,Glezen and Tanewski, 1998). But descriptive evidence from Germany, which was aforerunner in mandating risk reports in Europe, exhibits that even under a mandatoryreporting regime, the comprehensive risk reporting is rather vague providingdissatisfying information content (e.g., Bungartz, 2004; Kajüter, 2004; Fischer and
Vielmeyer, 2004). The disappointing empirical results imply restrictions of riskreporting that cannot not be (fully) overcome by imposing a mandatory disclosureregime. Such restrictions may result from the fact (i) that there are no risks to bereported; or (ii) that a manager is not informed about existing risks; or (iii) that aninformed manager has incentives not to disclose private information about risks. While
the first suggestion seems unrealistic the two remaining suggestions might explain thepoor risk reports in practice. Due to incomplete foresight a manager may not be
informed about particular risks of future development and has nothing to disclose. Lajili
and Zégal (2003: 14) argue that even if information is available, it might be withheld or
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