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

Listed author(s):
  • Hoang, Daniel
  • Ruckes, Martin
Registered author(s):

    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.

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    File URL: https://www.econstor.eu/bitstream/10419/104707/1/810608804.pdf
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    Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 65.

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    Date of creation: 2014
    Handle: RePEc:zbw:kitwps:65
    Contact details of provider: Web page: http://www.wiwi.kit.edu/

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