Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities

Maximilian Düsterhöft; Frank Schiemann; Thomas Walther

doi:10.1016/j.eneco.2023.106794

Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities

Maximilian Düsterhöft
, Frank Schiemann
, Thomas Walther^*

^*Corresponding author for this work

University of Bamberg
Technische Universität Dresden

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

We analyze how risk reporting by European energy utilities is related to uncertainty about firms’ future prospects. Using an unsupervised machine learning topic model, we classify the content of the risk reports presented in the notes to the financial statements into different risk topics over the period from 2007 to 2017. We find that more risk reporting is related to lower idiosyncratic volatility and that this relation is especially evident for reporting about credit risk, risk management processes, economic risk, and accounting-related risk. We also find that the uncertainty-decreasing effect of risk disclosure extends to a positive relation between risk disclosure and firm value. Our study contributes to the call for more transparency in risk reporting and disclosure. Interestingly, we are unable to identify a climate-related risk topic, and further tests show only a rudimentary disclosure of climate-related risks. Combining the usefulness of the current risk disclosure regulation with the current lack of climate-related risk disclosures, we see good reasons for increased mandatory climate-related risk disclosures.

Original language	English
Article number	106794
Pages (from-to)	1-18
Number of pages	18
Journal	Energy Economics
Volume	125
DOIs	https://doi.org/10.1016/j.eneco.2023.106794
Publication status	Published - Sept 2023

Bibliographical note

Funding Information:
We are thankful to Lance Bachmeister (handling editor), two anonymous referees, Alexander Blasberg (discussant), Michael Dobler, Robert Gutsche, Ronald Huisman, and Eric Schmiedchen, as well as participants of WROFIN (Wroclaw, 2021), Carbon Finance Workshop (Hagen, 2022), CFIW (Clermont-Ferrand, 2023), and ISEFI (Paris, 2023) for useful comments on an earlier version of this manuscript. A former version of this paper was circulated under the title “Let's Talk About Risk! The Firm Value Effects of Risk Disclosure for European Energy Utilities”. We appreciate the assistance of Leif Hansen and Phillipp Henschke. Part of the work was conducted during Thomas Walther's research time as an Assistant Professor at the University of St. Gallen, the Institute for Operations Research and Computational Finance. This publication is part of SCCER CREST, which is supported by Innosuisse. Thomas Walther is grateful for the funding received for conducting this research.

Publisher Copyright:
© 2023 The Author(s)

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 13 Climate Action

Keywords

Climate change
Energy utilities
Risk disclosure
Risk reporting
Topic modeling

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1-s2.0-S014098832300292X-mainFinal published version, 905 KBLicence: CC BY

Cite this

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title = "Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities",

abstract = "We analyze how risk reporting by European energy utilities is related to uncertainty about firms{\textquoteright} future prospects. Using an unsupervised machine learning topic model, we classify the content of the risk reports presented in the notes to the financial statements into different risk topics over the period from 2007 to 2017. We find that more risk reporting is related to lower idiosyncratic volatility and that this relation is especially evident for reporting about credit risk, risk management processes, economic risk, and accounting-related risk. We also find that the uncertainty-decreasing effect of risk disclosure extends to a positive relation between risk disclosure and firm value. Our study contributes to the call for more transparency in risk reporting and disclosure. Interestingly, we are unable to identify a climate-related risk topic, and further tests show only a rudimentary disclosure of climate-related risks. Combining the usefulness of the current risk disclosure regulation with the current lack of climate-related risk disclosures, we see good reasons for increased mandatory climate-related risk disclosures.",

keywords = "Climate change, Energy utilities, Risk disclosure, Risk reporting, Topic modeling",

author = "Maximilian D{\"u}sterh{\"o}ft and Frank Schiemann and Thomas Walther",

note = "Funding Information: We are thankful to Lance Bachmeister (handling editor), two anonymous referees, Alexander Blasberg (discussant), Michael Dobler, Robert Gutsche, Ronald Huisman, and Eric Schmiedchen, as well as participants of WROFIN (Wroclaw, 2021), Carbon Finance Workshop (Hagen, 2022), CFIW (Clermont-Ferrand, 2023), and ISEFI (Paris, 2023) for useful comments on an earlier version of this manuscript. A former version of this paper was circulated under the title {\textquotedblleft}Let's Talk About Risk! The Firm Value Effects of Risk Disclosure for European Energy Utilities{\textquotedblright}. We appreciate the assistance of Leif Hansen and Phillipp Henschke. Part of the work was conducted during Thomas Walther's research time as an Assistant Professor at the University of St. Gallen, the Institute for Operations Research and Computational Finance. This publication is part of SCCER CREST, which is supported by Innosuisse. Thomas Walther is grateful for the funding received for conducting this research. Publisher Copyright: {\textcopyright} 2023 The Author(s)",

year = "2023",

month = sep,

doi = "10.1016/j.eneco.2023.106794",

language = "English",

volume = "125",

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AU - Schiemann, Frank

AU - Walther, Thomas

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PY - 2023/9

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N2 - We analyze how risk reporting by European energy utilities is related to uncertainty about firms’ future prospects. Using an unsupervised machine learning topic model, we classify the content of the risk reports presented in the notes to the financial statements into different risk topics over the period from 2007 to 2017. We find that more risk reporting is related to lower idiosyncratic volatility and that this relation is especially evident for reporting about credit risk, risk management processes, economic risk, and accounting-related risk. We also find that the uncertainty-decreasing effect of risk disclosure extends to a positive relation between risk disclosure and firm value. Our study contributes to the call for more transparency in risk reporting and disclosure. Interestingly, we are unable to identify a climate-related risk topic, and further tests show only a rudimentary disclosure of climate-related risks. Combining the usefulness of the current risk disclosure regulation with the current lack of climate-related risk disclosures, we see good reasons for increased mandatory climate-related risk disclosures.

AB - We analyze how risk reporting by European energy utilities is related to uncertainty about firms’ future prospects. Using an unsupervised machine learning topic model, we classify the content of the risk reports presented in the notes to the financial statements into different risk topics over the period from 2007 to 2017. We find that more risk reporting is related to lower idiosyncratic volatility and that this relation is especially evident for reporting about credit risk, risk management processes, economic risk, and accounting-related risk. We also find that the uncertainty-decreasing effect of risk disclosure extends to a positive relation between risk disclosure and firm value. Our study contributes to the call for more transparency in risk reporting and disclosure. Interestingly, we are unable to identify a climate-related risk topic, and further tests show only a rudimentary disclosure of climate-related risks. Combining the usefulness of the current risk disclosure regulation with the current lack of climate-related risk disclosures, we see good reasons for increased mandatory climate-related risk disclosures.

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KW - Energy utilities

KW - Risk disclosure

KW - Risk reporting

KW - Topic modeling

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M3 - Article

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VL - 125

SP - 1

EP - 18

JO - Energy Economics

JF - Energy Economics

M1 - 106794

ER -

Let's Talk About Risk! Stock Market Effects of Risk Disclosure for European Energy Utilities

Abstract

Bibliographical note

UN SDGs

Keywords

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Let's Talk About Risk! The Firm Value Effect of Risk Disclosure for European Energy Utilities

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