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

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  • Martins, Henrique Castro

Abstract

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.

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  • Martins, Henrique Castro, 2023. "Financial materiality and corporate risk: Evidence from an Instrumental Variables (IV) design," Finance Research Letters, Elsevier, vol. 58(PB).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pb:s154461232300805x
    DOI: 10.1016/j.frl.2023.104433
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    References listed on IDEAS

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    1. Christopher Marquis & Michael W. Toffel & Yanhua Zhou, 2016. "Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing," Organization Science, INFORMS, vol. 27(2), pages 483-504, April.
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    3. Christopher Marquis & Michael W. Toffel & Yanhua Zhou, 2016. "Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing," Organization Science, INFORMS, vol. 27(2), pages 483-504, April.
    4. Eduardo Schiehll & Sam Kolahgar, 2021. "Financial materiality in the informativeness of sustainability reporting," Business Strategy and the Environment, Wiley Blackwell, vol. 30(2), pages 840-855, February.
    5. Abdoh, Hussein & Varela, Oscar, 2017. "Product market competition, idiosyncratic and systematic volatility," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 500-513.
    6. Caixe, Daniel Ferreira & Kalatzis, Aquiles Elie Guimarães & Castro, Luiz Ricardo Kabbach de, 2019. "Controlling shareholders and investment-risk sensitivity in an emerging economy," Emerging Markets Review, Elsevier, vol. 39(C), pages 133-153.
    7. Cristiano Busco & Costanza Consolandi & Robert G. Eccles & Elena Sofra, 2020. "A Preliminary Analysis of SASB Reporting: Disclosure Topics, Financial Relevance, and the Financial Intensity of ESG Materiality," Journal of Applied Corporate Finance, Morgan Stanley, vol. 32(2), pages 117-125, June.
    8. Glover, Brent & Levine, Oliver, 2015. "Uncertainty, investment, and managerial incentives," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 121-137.
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    Cited by:

    1. Xiong, Wei & Jiang, Mengzhen & Liu, Yingying, 2024. "Digital economy, risk attitudes, and entrepreneurial decision-making in urban and rural households in China," International Review of Financial Analysis, Elsevier, vol. 96(PA).

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