Relevance of risk information for depositors’ judgment and decision-making

Abstract

For several years risk reporting of banks has been high on the agenda. Banks must disclose information on their risk exposure to enhance market discipline. As a precondition for this positive effect of risk reporting, the risk information provided by the banks must be relevant for the depositors' and other investors’ judgments and decisions. In this paper, we analyze whether this is really true. Using an experimental design we show that risk information may influence the individuals’ judgments and decisions. We find that positive (negative) risk information lead to more positive (more negative) evaluations. In the case of conspiring risk and financial statement information the judgments and decisions are most pronounced. However, this enhancing effect of risk information is not significant. Considering opposing risk and financial statement information we find that positive (negative) risk information lead to more positive/less negative (more negative/less positive) judgments and decisions. Risk information can even reverse the effect of opposing financial statement information on the individuals’ judgment of the banks’ risk exposure.