IFRS 7 Disclosures and Risk Perception of Financial Instruments

Abstract

There are many choices when reporting and disclosing financial instruments under IFRS 7. Behavioral theory suggests that the label used to present a financial instrument affects investors’ risk perception. We use an experimental setting to analyze how and why the European practice of reporting financial instruments by measurement categories affects the risk perception of nonprofessional investors. We find that risk perception is associated with management’s choice of a measurement category. Our results imply that there should be a wider debate about possible presentation formats for financial instruments, as the current format does not necessarily ensure a neutral presentation.