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Title: Financial disclosure and market reaction in a crisis situation
Author: Voelker, A.
Awarding Body: University of Surrey
Current Institution: University of Surrey
Date of Award: 2011
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The research question of this study is whether or not companies can improve the relationship with their investors by voluntarily extending the scope of their risk disclosure. The novel aspect of this research is that it analyses the relationship between companies and investors in a unique crisis situation. This thesis explains and tests the relationship between listed European insurance groups that disclose risk information in their annual financial statements and the reaction of the capital market during the recent sub-prime loan crisis. It covers the disclosure periods 2007 and 2008 of thirteen insurance groups that file their financial reports according to International Financial Reporting Standards (IFRS). Based on literature it is assumed that during a crisis situation investors estimate the value of the company they have invested in and decide whether or not they sell their shares or hold on to them. Research studies indicate that investors demand company-specific information about the investment risk, measurement of financial instruments and forecasts that are up to date and specific to the crisis situation. To analyse the relationship between listed companies and investors the thesis measures their disclosure performance and the capital market response towards it. A self administered risk disclosure performance index is used that is based on accounting disclosure requirements and specified to the crisis. It measures the discretionary disclosure of companies about mortgage portfolio-based financial instruments. These instruments caused financial distress of banks that spread to a global economic crisis. The thesis measures the reaction of the capital market towards the disclosed risk information by applying the event study methodology at the peak of the crisis situation. The statistical analysis of the relationship indicated that voluntary risk disclosure is not well recognized by investors as reported in the literature. It found out that investors had recognized those listed European insurance groups that have been most severely affected by the financial crisis. Investors came to that conclusion even before the researched companies disclosed risk information about their financial instruments in annual group financial statementsThe statistical research has been extended using structured-interviews with experts that represent significant users of financial information. This qualitative approach seeks to verify and explain the statistical results. The results of the interviews with professional users of financial information such as financial analysts, managers of rating agencies and bankers have shown that they do not depend on risk information from annual financial statements of respective companies. They seek to get risk information in the event of a crisis by directly addressing the management of insurance groups. This enables them to gain comments on the impact of upcoming problems in the financial market from these managers. These results imply that theories about the relationship between disclosing companies and the capital market are different in crisis situations when psychological factors influence the behaviour of both companies and the capital market. These factors are difficult to separate and need further research. Practical implications of this research study arise for regulators and standard setters. Regulators should be aware that communication between management and professional users of financial information exists that exclude private investors during a crisis situation and deprives them from company-specific and recent information. This information disadvantage of private investors is amplified by the difficulty to understand the business model of the insurance industry. Therefore detailed and understandable information that explains the aftermath of the financial crisis on the insurance company should be made freely and promptly available. Regulators should require the insurance industry to do so because their discretionary risk disclosure is not sufficient to enable private investors to make snap-shot financial decisions. Based on the evidence that insurance groups have hesitated to disclose their risk positions during a crisis, it is questionable whether they will comply with upcoming financial standards that require the disclosure of sensitive data about the fair market values of assets and liabilities. These data can be considered equally sensitive to listed insurance groups as information about their risk position on financial instruments. Such hesitation may be critical in other crisis situations when discretionary disclosure is necessary from an investor point. Accounting requirements cannot add the necessaryinformation because they cannot be modified quickly enough to force companies to disclose risk information that is critical in each individual crisis. Regulators and accounting standard-setters should not rely on listed European insurance groups disclosing sufficient risk information during a crisis voluntarily. They should enhance incentives for insurance groups to disclose information about their risk position to create a level playing field between institutional investors with easier access to crisis relevant information and private investors that lack such information in crisis situations. Investors should reward discretionary risk disclosure of companies by investing in them.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available