Disclosure of market risk or accounting measures of risk: an empirical study

Purpose - In 1997, the Securities and Exchange Commission (SEC) issued Financial Reporting Release No. 48. FFR No. 48 requires that companies disclose both qualitative and quantitative market risk information for risks of loss arising from adverse changes in interest rates, foreign currency rates, commodity prices, and equity prices. This research focuses on the required disclosure of market risk related to equity prices which is commonly known as Beta in the capital asset pricing model (CAPM). Design/methodology/approach - A sample of 323 companies listed in NYSE was selected to investigate the relationship between the market risk and the accounting measures of risk in order to determine the accounting variables that should be disclosed as a substitute of market risk, if there is no data, for the companies to fulfill the SEC requirements. Findings - By identifying the accounting measures most closely associated with market Beta, the financial manager may be able to influence the Beta value by changing the company's structure as summarized in the successful accounting - determined risk measures. Such finding may also be used to estimate a company's Beta value in situations where historical stock market price data is limited or not available. An example of this later circumstance occurs in the case of initial public offer (IPO). Market price data may also be limited in acquisition cases, where the acquisition target is a subsidiary of a larger company. Originality/value - The results of this study address these finance and accounting practice situations.