Financial materiality and corporate risk: Evidence from an Instrumental Variables (IV) design

This article investigates how the disclosure of financially material information relates to corporate risk. Studying a sample of 18,207 firm-year observations from 27 countries and using the SASB materiality framework, I find evidence that firms with higher disclosure scores of financially material items show lower standard deviation of stock returns and lower idiosyncratic risk. Moreover, I explore an instrumental variables (IV) design and find that the disclosure of financially material items reduces total risk but not idiosyncratic risk. This research contributes to the current debate on whether the disclosure of material items affects corporate prospects.

Automated summary

This study investigates the relationship between the disclosure of financially material information and corporate risk. The findings suggest that firms with higher disclosure scores of financially material items have lower stock return standard deviation and lower idiosyncratic risk. Additionally, the research shows that the disclosure of financially material items reduces total risk but not idiosyncratic risk.