An inverted U-shaped relationship between reporting risk information and corporate value: evidence from the UK

This study hypothesizes and tests a positive, a negative, and a nonlinear nexus between corporate value and the reporting of voluntary risk information. Employing an automated textual analysis to quantify risk information reported in the annual reports of the UK FTSE 350 firms, the findings show a positive influence on the corporate value at a lower voluntary risk disclosure level and a negative influence at a higher level of voluntary risk disclosure. These findings together imply a nonlinear nexus between reporting risk information and firms’ values in an inverted U-shaped pattern. Collectively, the results support the existence of an optimal voluntary risk disclosure level up to which investors receive useful risk information that reduces information asymmetry (lower uncertainty risk premium), hence positively associated with firm value. However, extra information may act as clutter and information overloading that obfuscates firms’ underlying performance and negatively affects investors’ valuation. This relationship holds for firms audited by Big 4 auditors. However, non-Big 4 clients are found to disclose beyond the optimal level, leading to a reduction in their values. Further analysis provides evidence that the sensitivity of firm value to voluntary risk disclosure varies over different quantiles of the distribution of firm value proxy. The study provides implications regarding the possibility of managing firm value through either increasing voluntary risk information to the optimal level or reducing this disclosure when it becomes above the optimal level. Besides, it elucidates the growing issue of information overloading in the annual reports.