Open AccessArticle
Cross Hedging Stock Sector Risk with Index Futures by Considering the Global Equity Systematic Risk
Int. J. Financial Stud. 2018, 6(2), 44; doi:10.3390/ijfs6020044 (registering DOI) -
Abstract
This article investigates the effectiveness of TAIEX (Taiwan Stock Exchange) futures, Taiwan 50 futures, and nonfinance nonelectronics subindex (NFNE) futures for cross hedging the price risk of stock sector indices traded on the Taiwan stock exchange. A state-dependent volatility spillover GARCH hedging strategy
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This article investigates the effectiveness of TAIEX (Taiwan Stock Exchange) futures, Taiwan 50 futures, and nonfinance nonelectronics subindex (NFNE) futures for cross hedging the price risk of stock sector indices traded on the Taiwan stock exchange. A state-dependent volatility spillover GARCH hedging strategy is developed to capture the regime switching global equity volatility spillover effect. Empirical results show that the NFNE futures exhibit superior effectiveness as an instrument for hedging stock sector exposures compared with the TAIEX and Taiwan 50 futures. Simultaneous hedge using both NFNE and MSCI (Morgan Stanley Capital International) world index futures further improves the hedging effectiveness compared with the hedging strategy using only the NFNE futures. This shows the importance of hedging the global equity systematic risk of stock sectors by considering the comovement between domestic and global equity markets. Full article
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Open AccessArticle
Earnings Persistence of European Football Clubs under UEFA’s FFP
Int. J. Financial Stud. 2018, 6(2), 43; doi:10.3390/ijfs6020043 -
Abstract
The goal of this study was to examine the predictability and persistence of earnings of the European football clubs and whether the new Union of European Football Associations (UEFA) Financial Fair Play (FFP) licensing regulation has forced clubs to produce a more predictable
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The goal of this study was to examine the predictability and persistence of earnings of the European football clubs and whether the new Union of European Football Associations (UEFA) Financial Fair Play (FFP) licensing regulation has forced clubs to produce a more predictable earnings stream. We utilized a sample of 109 European top-tier clubs over the period 2008–2016, summing up to 844 firm-year observations. Empirical evidence indicated that the cash flow component of earnings is more relevant in predicting one-year ahead earnings than accruals. This positive impact of cash flows for predicting earnings is more significant after the FFP regulation since earnings predictability has increased during that period. Moreover, the abovementioned finding is more significant for the smaller league clubs rather than the Big-5 league clubs. This finding is attributed to the fact that smaller league clubs are more in need of UEFA prize money relative to Big-5 league clubs, thus they are more incentivized to produce a more predictable earnings stream. Full article
Open AccessArticle
A Closer Look at the Halloween Effect: The Case of the Dow Jones Industrial Average
Int. J. Financial Stud. 2018, 6(2), 42; doi:10.3390/ijfs6020042 -
Abstract
The Halloween effect is one of the most famous calendar anomalies. It is based on the observation that stock returns tend to perform much better over the winter half of the year (November–April) than over the summer half of the year (May–October). The
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The Halloween effect is one of the most famous calendar anomalies. It is based on the observation that stock returns tend to perform much better over the winter half of the year (November–April) than over the summer half of the year (May–October). The vast majority of studies that investigated the Halloween effect over the recent decades focused only on stock indices. This means that they evaluated whether a stock index follows the Halloween effect pattern, but they omitted digging a little deeper and analyze the Halloween effect on the individual stocks level. This paper investigates to what extent the blue-chips stocks included in the Dow Jones Industrial Average are affected by the Halloween effect and whether the Halloween effect is widespread or the behavior of the whole index is driven by only a handful of stocks that are strongly affected by the Halloween effect. The results show that, although the strength of the Halloween effect varies quite rapidly from stock to stock, the vast majority of analyzed stocks experienced a notably higher average winter period than summer period returns over the 1980–2017 period. Moreover, in 18 out of 35 cases, the Halloween effect was statistically significant. Full article
Open AccessArticle
The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies
Int. J. Financial Stud. 2018, 6(2), 41; doi:10.3390/ijfs6020041 -
Abstract
This paper analyzes the evolution of the main theories regarding the capital structure and the related impact on risk and corporate performance. The capital structure is a dynamic process that changes over time, depending on the variables that influence the overall evolution of
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This paper analyzes the evolution of the main theories regarding the capital structure and the related impact on risk and corporate performance. The capital structure is a dynamic process that changes over time, depending on the variables that influence the overall evolution of the economy, a particular sector, or a company. It may also change depending on the company’s forecasts of its expected profitability, capital structure being, in fact, a risk–return compromise. This study contributes to the literature by investigating the drivers of capital structure of the firms from the Romanian market. For the econometric analysis, we applied multivariate fixed-effects regressions, as well as dynamic panel-data estimations (two-step system generalized method of moments, GMM) on a panel comprising the companies listed on the Bucharest Stock Exchange. The analyzed period, 2000–2016, covers a cycle with significant changes in the Romanian economy. Our results showed that leverage is positively correlated with the size of the company and the share price volatility. On the other hand, the debt structure has a different impact on corporate performance, whether this calculated on accounting measures or seen as market share price evolution. Full article
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Open AccessArticle
The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries
Int. J. Financial Stud. 2018, 6(2), 40; doi:10.3390/ijfs6020040 -
Abstract
This paper is a contribution to the ongoing debate on the benefits and drawbacks of bank revenue diversification. Revenue diversification may benefit banks if diversified activities are inherently less risky and possess high returns, while it may hurt banks if diversified activities are
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This paper is a contribution to the ongoing debate on the benefits and drawbacks of bank revenue diversification. Revenue diversification may benefit banks if diversified activities are inherently less risky and possess high returns, while it may hurt banks if diversified activities are more risky and have low returns. Analyzing a panel dataset of 200 commercial banks from all South Asian countries, we found that overall revenue diversification into non-interest income has a positive impact on the profitability and stability of South Asian commercial banks. We further observed that different types of non-interest income-generating activities have different impacts on bank performance and stability. While fees and commission incomes have a negative impact on the profitability and stability of South Asian commercial banks, other non-interest income has a positive impact. Our results imply that banks can benefit from revenue diversification if they diversify into specific types of non-interest income-generating activities. Our findings are robust and relevant to the use of alternative measures of revenue diversification, profitability and stability. Full article
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Open AccessFeature PaperArticle
Quantifying Correlation Uncertainty Risk in Credit Derivatives Pricing
Int. J. Financial Stud. 2018, 6(2), 39; doi:10.3390/ijfs6020039 -
Abstract
We propose a simple but practical methodology for the quantification of correlation risk in the context of credit derivatives pricing and credit valuation adjustment (CVA), where the correlation between rates and credit is often uncertain or unmodelled. We take the rates model to
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We propose a simple but practical methodology for the quantification of correlation risk in the context of credit derivatives pricing and credit valuation adjustment (CVA), where the correlation between rates and credit is often uncertain or unmodelled. We take the rates model to be Hull–White (normal) and the credit model to be Black–Karasinski (lognormal). We summarise recent work furnishing highly accurate analytic pricing formulae for credit default swaps (CDS) including with defaultable Libor flows, extending this to the situation where they are capped and/or floored. We also consider the pricing of contingent CDS with an interest rate swap underlying. We derive therefrom explicit expressions showing how the dependence of model prices on the uncertain parameter(s) can be captured in analytic formulae that are readily amenable to computation without recourse to Monte Carlo or lattice-based computation. In so doing, we crucially take into account the impact on model calibration of the uncertain (or unmodelled) parameters. Full article
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Open AccessFeature PaperArticle
How Macro Transactions Describe the Evolution and Fluctuation of Financial Variables
Int. J. Financial Stud. 2018, 6(2), 38; doi:10.3390/ijfs6020038 -
Abstract
The description of the dynamics and fluctuations of macro variables remains one of the most exciting problems of financial economics. This paper models macro variables via the description of transactions between agents. We use risk ratings x of agents as their coordinates in
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The description of the dynamics and fluctuations of macro variables remains one of the most exciting problems of financial economics. This paper models macro variables via the description of transactions between agents. We use risk ratings x of agents as their coordinates in the economic space. Transactions like buy–sell, investment, credits, etc., between agents change their extensive financial and economic variables. Aggregates of transactions between all agents with risk ratings x and y define the macro transactions between points x and y. Macro transactions determine the evolution of macro variables. Interactions between different transactions outline their dynamics and fluctuations. We model macro transactions and the interactions between them by economic hydrodynamic-like equations in the economic space. As an example, for simple model interactions between credit–loans and loans–repayment transactions we derive economic hydrodynamic-like equations and wave equations for near perturbations of macro transactions and study simple wave solutions and their consequences. Waves of macro transactions in the economic space propagate from high to low risk agents or vice versa and define the fluctuations of macro financial variables. The existence and diversity of waves and fluctuations of macro transactions in simple models clarifies the importance of wave processes for macro financial modeling and forecasting. Full article
Open AccessArticle
Measuring the Efficiency in the Lithuanian Banking Sector: The DEA Application
Int. J. Financial Stud. 2018, 6(2), 37; doi:10.3390/ijfs6020037 -
Abstract
The purpose of this study is to examine the efficiency of the banks in Lithuania by employing the DEA method and evaluate bank performance in a low interest rate environment. The efficiency scores were calculated with a non-parametric frontier input-oriented DEA technique with
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The purpose of this study is to examine the efficiency of the banks in Lithuania by employing the DEA method and evaluate bank performance in a low interest rate environment. The efficiency scores were calculated with a non-parametric frontier input-oriented DEA technique with the variable returns to scale (VRS) and the constant returns to scale (CRS) assumptions. Five alternative models with different input-output combinations were developed, based on production, profitability and intermediation dimensions. The main bank profitability measure—the return on assets (ROA) ratio—was employed to validate the results obtained using the DEA method. The Lithuanian bank’s efficiency analysis based on the VRS assumption shows that better results are demonstrated by the local banks. The technical efficiency analysis based on the CRS assumption shows other results: the banks owned by the Nordic parent group and the branches have higher pure efficiency than local banks and have success at working at the right scale. Based on this, it stated that during the 2012–2016 period the larger Lithuanian banks (subsidiaries) applied a more appropriate business model than smaller (local) banks operating in Lithuania. Additionally, this research contributes to the scholarly literature in the field of determinants of bank business performance in concentrated markets dominated by foreign banks and, in particular, from one region. Full article
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Open AccessFeature PaperArticle
Hidden Markov Model for Stock Trading
Int. J. Financial Stud. 2018, 6(2), 36; doi:10.3390/ijfs6020036 -
Abstract
Hidden Markov model (HMM) is a statistical signal prediction model, which has been widely used to predict economic regimes and stock prices. In this paper, we introduce the application of HMM in trading stocks (with S&P 500 index being an example) based on
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Hidden Markov model (HMM) is a statistical signal prediction model, which has been widely used to predict economic regimes and stock prices. In this paper, we introduce the application of HMM in trading stocks (with S&P 500 index being an example) based on the stock price predictions. The procedure starts by using four criteria, including the Akaike information, the Bayesian information, the Hannan Quinn information, and the Bozdogan Consistent Akaike Information, in order to determine an optimal number of states for the HMM. The selected four-state HMM is then used to predict monthly closing prices of the S&P 500 index. For this work, the out-of-sample ROS2, and some other error estimators are used to test the HMM predictions against the historical average model. Finally, both the HMM and the historical average model are used to trade the S&P 500. The obtained results clearly prove that the HMM outperforms this traditional method in predicting and trading stocks. Full article
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Open AccessFeature PaperArticle
An Empirical Investigation of Risk-Return Relations in Chinese Equity Markets: Evidence from Aggregate and Sectoral Data
Int. J. Financial Stud. 2018, 6(2), 35; doi:10.3390/ijfs6020035 -
Abstract
This paper investigates the risk-return relations in Chinese equity markets. Based on a TARCH-M model, evidence shows that stock returns are positively correlated with predictable volatility, supporting the risk-return relation in both aggregate and sectoral markets. Evidence finds a positive relation between stock
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This paper investigates the risk-return relations in Chinese equity markets. Based on a TARCH-M model, evidence shows that stock returns are positively correlated with predictable volatility, supporting the risk-return relation in both aggregate and sectoral markets. Evidence finds a positive relation between stock return and intertemporal downside risk, while controlling for sentiment and liquidity. This study suggests that the U.S. stress risk or the world downside risk should be priced into the Chinese stocks. The paper concludes that the risk-return tradeoff is present in the GARCH-in-mean, local downside risk-return, and global risk-return relations. Full article
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Open AccessArticle
The Empirical Analysis of the Impact of Bank Capital Regulations on Operating Efficiency
Int. J. Financial Stud. 2018, 6(2), 34; doi:10.3390/ijfs6020034 -
Abstract
This paper principally aims at examining the impact of capital requirements regulation on bank operating efficiency in Tanzania. The study employs bank level data for the period between 2009 and 2015. The findings show a positive and significant relationship between capital ratio and
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This paper principally aims at examining the impact of capital requirements regulation on bank operating efficiency in Tanzania. The study employs bank level data for the period between 2009 and 2015. The findings show a positive and significant relationship between capital ratio and bank operating efficiency. This shows that commercial banks in Tanzania with more stringent capital regulations are more operationally efficient. This relationship proposes that capital adequacy does not only strengthen financial stability by providing a larger capital cushion but also improves bank operating efficiency by preventing a moral hazard problem between shareholders and debt-holders. This result may also imply that the increased regulations on capital requirements influence the bank’s decision to revisit their internal operations strategy in terms of strong corporate governance, risk assessment methods, credit evaluation procedures, employment of more qualified staffs, and enhanced internal control procedures. Another key finding is an inverse relationship between non-performing Loans (credit risk) and bank operating efficiency. The implication of this relationship may simply mean that the bank’s total loan and advances in combination with total deposit either due from customers or from other banks are of little importance in determining the operational efficiency of banks. This probably implies that the amount of money banks loan out is too excessive, which would attract a greater chance of default. The paper lays down some recommendations: first, banks in Tanzania are advised to invest in more advanced technological innovations to reduce the staff costs and other operating expenses to increase their operational efficiency; and, second, bank management is also advised to be more careful in the loan screening process to reduce the incidence of non-performing loans. Full article
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Open AccessEditorial
Announcing the 2018 IJFS Travel Awards for Ph.D Students
Int. J. Financial Stud. 2018, 6(1), 33; doi:10.3390/ijfs6010033 -
Open AccessArticle
Testing Efficiency of the London Metal Exchange: New Evidence
Int. J. Financial Stud. 2018, 6(1), 32; doi:10.3390/ijfs6010032 -
Abstract
This paper explores the market efficiency of the six base metals traded on the LME (London Metal Exchange) using daily data from January 2000 to June 2016. The hypothesis that futures prices 3M (3-month) are unbiased predictors of spot prices (cash) in the
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This paper explores the market efficiency of the six base metals traded on the LME (London Metal Exchange) using daily data from January 2000 to June 2016. The hypothesis that futures prices 3M (3-month) are unbiased predictors of spot prices (cash) in the LME is rejected based on the false premise that the financialization of commodities has been growing. For the robustness check, monthly data is analyzed using ordinary least squares (OLS) and GARCH (1,1) models. We reject the null hypothesis for all metals except for zinc. Full article
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Open AccessArticle
Value Investing and Size Effect in the South Korean Stock Market
Int. J. Financial Stud. 2018, 6(1), 31; doi:10.3390/ijfs6010031 -
Abstract
There are indications that value investing strategies have been able to outperform the overall market in several countries across the globe. In this article, the specific case of South Korea is analyzed. It would appear that from a rigorous statistical point of view
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There are indications that value investing strategies have been able to outperform the overall market in several countries across the globe. In this article, the specific case of South Korea is analyzed. It would appear that from a rigorous statistical point of view there are no strong evidence supporting the outperformance of value stocks versus growth stocks in South Korea, particularly when measured on a yearly basis. These results were consistent using both MSCI value and growth indexes as well as constructing portfolios using the P/E, P/B, cash flow per share and average 5-year sales growth. The statistical tests performed failed to reject for the majority of the years that the monthly returns come from distributions with different medians. The test yielding rather consistent results on a yearly basis but for large periods of time (decades) the results were more mixed, pointing in some cases to value investing outperforming over that very long time frame. It should be noted that the final value of the portfolios was rather different when using criteria, such as low P/E, typically associated with value stocks. The tests also failed to reject the hypothesis of different means for the monthly returns of small, medium and large companies. Full article
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Open AccessArticle
Asymptotic Expansion of Risk-Neutral Pricing Density
Int. J. Financial Stud. 2018, 6(1), 30; doi:10.3390/ijfs6010030 -
Abstract
A new method for pricing contingent claims based on an asymptotic expansion of the dynamics of the pricing density is introduced. The expansion is conducted in a preferred coordinate frame, in which the pricing density looks stationary. The resulting asymptotic Kolmogorov-backward-equation is
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A new method for pricing contingent claims based on an asymptotic expansion of the dynamics of the pricing density is introduced. The expansion is conducted in a preferred coordinate frame, in which the pricing density looks stationary. The resulting asymptotic Kolmogorov-backward-equation is approximated by using a complete set of orthogonal Hermite-polynomials. The derived model is calibrated and tested on a collection of 1075 European-style ‘Deutscher Aktienindex’ (DAX) index options and is shown to generate very precise option prices and a more accurate implied volatility surface than conventional methods. Full article
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Open AccessFeature PaperArticle
Impact of Competition on Mutual Fund Marketing Expenses
Int. J. Financial Stud. 2018, 6(1), 29; doi:10.3390/ijfs6010029 -
Abstract
In this paper, I study the impact of market competition on mutual fund marketing expenses. In a sample of US domestic equity mutual funds, I find that marketing expenses decrease with the competition. This effect is stronger for top-performing funds. These results are
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In this paper, I study the impact of market competition on mutual fund marketing expenses. In a sample of US domestic equity mutual funds, I find that marketing expenses decrease with the competition. This effect is stronger for top-performing funds. These results are counterintuitive, as one would ordinarily expect funds to incur more marketing expenses in response to pressure from competing funds. However, these results support the narrative that mutual funds employ marketing to draw attention to their performance in a tournament-like market, where the top-performing funds (the winners) are rewarded with disproportionately high new investments. Higher competition decreases the chances of each fund to outperform the others and adversely affect their ability to attract new investments, and the funds respond by decreasing marketing expenses. Thus, competition appears to have implications for investor search cost. Full article
Open AccessArticle
Dynamic Relationships between Price and Net Asset Value for Asian Real Estate Stocks
Int. J. Financial Stud. 2018, 6(1), 28; doi:10.3390/ijfs6010028 -
Abstract
This paper examines short- and long-term behavior of the price-to net asset value ratio in six Asian public real estate markets. We find mean-reverting behavior of the ratio and spillover effects, where each of the examined public real estate markets correlates with other
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This paper examines short- and long-term behavior of the price-to net asset value ratio in six Asian public real estate markets. We find mean-reverting behavior of the ratio and spillover effects, where each of the examined public real estate markets correlates with other markets. Additionally, the unexpected shock correlating with the price-to-net asset value ratio in one market has a positive or negative correlation with the ratios of other markets. Our results offer fresh insights to portfolio managers, policymakers, and academic researchers into the regional and country market dynamics of public real estate valuation and cross-country interaction from the long-term and short-term perspectives. Full article
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Open AccessFeature PaperArticle
Gas Storage Valuation and Hedging: A Quantification of Model Risk
Int. J. Financial Stud. 2018, 6(1), 27; doi:10.3390/ijfs6010027 -
Abstract
This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we propose a model that unifies the dynamics
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This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we propose a model that unifies the dynamics of the futures curve and spot price, and accounts for the main stylized facts of the US natural gas market such as seasonality and the presence of price spikes in the spot market. Secondly, we evaluate the associated model risk, and show not only that the valuation is strongly dependent upon the dynamics of the spot price, but more importantly that the hedging strategy commonly used in the industry leaves the storage operator with significant residual price risk. Full article
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Open AccessArticle
Finite Difference Methods for the BSDEs in Finance
Int. J. Financial Stud. 2018, 6(1), 26; doi:10.3390/ijfs6010026 -
Abstract
This paper gives a review of numerical methods for solving the BSDEs, especially, finite difference methods. For numerical methods of finite difference, we should divide them into three branches. Distributed method (or parallel method) should now become a hot topic. It is a
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This paper gives a review of numerical methods for solving the BSDEs, especially, finite difference methods. For numerical methods of finite difference, we should divide them into three branches. Distributed method (or parallel method) should now become a hot topic. It is a key reason we present the review. We give a brief survey on the financial problems. The problems include solution and simulation methods for the BSDEs. We first describe the BSDEs, and then outline the main techniques and main results of the BSDEs. In addition, we compare with the errors between these methods and the Euler method on the BSDEs. Full article
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Open AccessArticle
The Inconsistent Effects of Plain English Disclosures on Nonprofessional Investors’ Risk Judgments
Int. J. Financial Stud. 2018, 6(1), 25; doi:10.3390/ijfs6010025 -
Abstract
In this paper, we examine whether the readability of different types of corporate risk disclosures influences the risk judgments of nonprofessional investors. Our study contributes evidence to the Security and Exchange Commission’s ongoing initiative to improve corporate financial statement disclosures. Using 359 responses
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In this paper, we examine whether the readability of different types of corporate risk disclosures influences the risk judgments of nonprofessional investors. Our study contributes evidence to the Security and Exchange Commission’s ongoing initiative to improve corporate financial statement disclosures. Using 359 responses from an experimental survey of nonprofessional investors (NPIs), we find that readability, in conjunction with risk factor type, significantly influences investors’ judgments of probability and size of economic loss, cause for worry, and overall risk. NPIs judged the risk from an industry-related risk factor (competition) to be higher when written in plain English, but judged the risk of a company-specific risk factor (internal control weakness over financial reporting) to be higher when written in a less readable format (i.e., legalese). We found no significant differences in judgments between plain English and less readable language on a combined industry/company risk factor, information security. Results suggest that a move to plain English for all types of risk factors may have consequences that are not fully understood or expected. This area needs further research before regulators enact (or enforce) mandates for risk factors to be presented in plain English. Full article
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