How Risk Disclosures Are Used by Investors to Make Decisions

This paper uses research articles to provide evidence that risk disclosures are used by investors to make decisions, furthermore how the risk disclosures compare to other factors in influencing an investor to make a decision. The language of the disclosures is used to make a connection on how investors can use litigation to get a return on their investment through legal means if the investor feels that the disclosures were improper. In the article â€Å"Textual risk disclosures and investors risk perceptions† by Kravet and Mushu (2011), the authors provided evidence that textual risk disclosures in annual reports corresponds with a similar amount of increase or decrease in the stock price and increased volatility in the volumes traded in the market, these disclosures are a mean for the managers to send signals about future firm performance to the investors who can then use the information to make a rational decision. The authors research 4315 firms between the years 1994 and 2007 leading to a sample of 28,110 observations for their article. The authors test how the investors and analyst’s behavior changes during the two months before and after the filings of the 10 – K reports the authors collect their data from. The test is conducted by linking the various test variables such as changes in stock returns, changes in volume traded by linking them amongst other variables to changes in managem ents forecasts, changes in risk disclosures, changes in sales, changes in institutionalShow MoreRelatedQuestions On Financial Reporting Disclosures1477 Words   |  6 Pagesabout financial reporting disclosures in 2013 to solve current disclosure overload problem. This report will mainly argue against recommendation four. 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