The effects of disclosure policy on risk management incentives and market entry

Daniel Hoang and Martin Ruckes

No 65, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a simple model of market entry and shows that incumbent firms engage in risk management when these activities remain unobserved by outsiders. The resulting equilibrium is desirable from a social standpoint. Financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides firms with incentives to distort risk management activities thereby influencing entrant beliefs. In equililibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries. Our findings thus suggest that more disclosure on risk management may change risk management in socially undesirable ways.

Keywords: Risk Management; Hedge Disclosures; Market Entry; Signal Jamming (search for similar items in EconPapers)
JEL-codes: D82 G3 L1 M4 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:65

DOI: 10.5445/IR/1000044664

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