The Effect of Business Strategy on Risk Disclosure

Abstract

ABSTRACT For a sample of nonfinancial and non-utility firms from the European Economic Area in 2005–2017, we find that a firm’s business strategy is a determinant of the amount of risk factor information in the annual report. Firms with an innovation-oriented prospector strategy report more about their risk factors than firms with an efficiency-oriented defender strategy. This is because, first, these innovation-oriented prospectors face greater risks and uncertainties and the regulator and enforcement institution expect them to report these accordingly in the annual report. Second, given the discretion the firms have in disclosing risks, prospectors are more likely to engage in voluntary disclosure. It seems that the benefits outweigh the costs of revealing proprietary information. Further, our findings reveal that business strategy influences the coverage of the main risk topics and risk disclosure complexity. Additionally, the influence of business strategy on risk disclosure is stronger for small, young, and low-technology firms.