Choices and Best Practice in Corporate Risk Management Disclosure

For over a decade, the SEC has required corporations to disclose in their 10‐K filings the nature and extent of their risk exposures using one or more of the following three methods: (1) sensitivity analysis; (2) the so‐called “tabular” format; and (3) value‐at‐risk (VaR). After discussing the significant differences in the type and level of information revealed by each method, this article presents the findings of a study that examines how corporate choices of disclosure method vary with firm‐specific and industry characteristics. While sensitivity analysis has been the “middle of the road” chosen by the majority of companies, there have also been significant minorities adopting the tabular and VaR methods. Those companies that have chosen the tabular method—in the authors' view, the most revealing of the three methods—have also had the largest interest rate and commodity exposures as well as the greatest demand for external financing. The propensity of companies to use VaR, the least revealing method, has been associated with larger size, perhaps reflecting scale economies in risk management, greater use of derivatives, and competitiveness concerns about revealing proprietary information.