Market-Risk Disclosures: The Initiation and Implementation of a Financial Reporting Innovation

Abstract

Using market-risk disclosures as an empirical context, and drawing on the diffusion of innovations (DOIs) model, this paper contributes new sociological perspectives to a theorization of compliance. We propose that stakeholder behaviors during accounting standard-setting discussion and adoption phases are motivated by social, political, and economic factors. These phases interrelate, and consequently, any analysis of managerial disclosure decisions benefit from considering them together, rather than in isolation, as is typical.

The authors use a mixed-methods design, including detailed analysis of semi-structured interviews (n = 26), constituents’ comment letters (n = 106), annual report disclosures (FTSE 350: firm-year observations n = 1,131), technical meetings, and standard-setting documents.

Results suggest that constituents initially supported introduction of a set of mandatory market-risk disclosures, but implied costs of the proposed and subsequently approved requirements outweighed perceived benefits and efficiencies. This study elaborates on these issues, exploring how and why a financial reporting innovation that stakeholders deemed technically inefficient was diffused. Although the authors were told that compulsion (i.e., forced-selection) dominates disclosure decisions, some freedom of choice remains, as evidenced by greater than 40% non-compliance during the first year of adoption. Respondents indicate that theoretically, market-risk disclosure adoption decisions rest on assessment of the costs of disclosure (e.g., preparation and competition) versus non-disclosure (e.g., litigation and reputation). Second-phase adoption is more straightforward because the costs of disclosure decrease over time.

Although mixed-methods research offers several advantages, self-selection bias, issues with coding reliability, and interviewer/interviewee bias are possible. It is impossible to achieve a truly holistic understanding of standard-setting, and therefore the authors acknowledge that findings are not generalizable, though the risks were minimized.

Recognizing that disclosure choices are not made in political and social vacuums, this study suggests that sociological perspectives such as innovation-diffusion inform a theory of compliance.

Citation

Bamber, M. (2017), "Market-Risk Disclosures: The Initiation and Implementation of a Financial Reporting Innovation", Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 20), Emerald Publishing Limited, Leeds, pp. 159-188. https://doi.org/10.1108/S1475-148820170000020006