From risk reporting to uncertainty communication in...
Transcript of From risk reporting to uncertainty communication in...
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Presentation at the M2D conferenceIsaak Newton Institute for Mathematics, Cambridge
June 13, 2018
Dr Ekaterina SvetlovaSchool of Business
University of Leicester
From risk reporting to uncertaintycommunication in financial markets
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My projectM2D: The EPSRC/ESRC“Models to Decisions(M2D): Decision makingunder uncertainty”research network
Three central themes of the network:
Uncertainty QuantificationFrom Model to Decision
Communicating Uncertainty
Start date: 01/01/2018End date: 31/06/2018
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Agenda
• The problem description• Empirical materials and methodology• Core findings so far• Suggestions how to improve uncertainty communication
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Problem description
RISK DISCLOSURE
CEOs, CFOs, IR,risk management
Fund managers
Securities analysts
Capital markets(decision makers)Companies
ANNUAL REPORT/the principal risks
section
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The problem descriptionCURRENT ASSESSMENT OF PRINCIPAL RISKS in Risk Management and Governance section
Source: Capita plc annual report 2016
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Problem description
Source:AstraZeneca annual report 2016
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Problem description
Drawbacks of the current practices of risk disclosure:
• Risk disclosure lacks uniformity and clarity• It is too broad and too generic and thus does not provide
a detailed enough description of risk and uncertainties(information inadequacy)
• The quantity of risk information available to investorsincreased but not the quality (information overload)
• No time scale; back-looking• Risks are seldom quantified• Risk reporting as the formal box-ticking exercise
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Problem description
Drawbacks of the existing research on risk disclosure:
• Focus on the usefulness of the risk information• … for separate groups of market participants
• Risk disclosure is limited to written narratives in annualreports
• Methodology: content analysis (counting words)
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The problem description
RISKDISCLOSURE
Uncertaintycommunication≠
RISK UNCERTAINTY≠
Asymmetricinformation
Symmetricalignorance≠
Financial Models and Society(2018), Edward Elgar, by E. Svetlova.
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Problem description
CEOs, CFOs, IR
Fund managers
Securities analysts
Company reports
Capital marketsCompanies
UNCERTAINTY(fictionalexpectations/convincingnarratives)
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Problem description
CEOs, CFOs, IR
Fund managers
Securities analysts
Company reports
Capital marketsCompanies
Holistic communicationBest practice
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Explorative empirical materials
Semi-structured interviews (n=5) with investor relationsand company representatives and (n=27) with portfoliomanagers/analysts Participation in the IR best practice workshop in London Informal conversations with Financial Reporting Council
and Invicomm on uncertainty communication Written documents: annual reports; transcripts and webcasts
of the quarterly and annual earnings conferences with investors(available online)
Two case studies:1. A start-up within a global engineering
company2. A global pharmaceutical company
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Some findings• Companies don’t differentiate between risk and
uncertainty; the terms are used interchangeably(e.g., Brexit or climate change)
• Risk is very negatively connotated (risk vs.opportunity)
• Risk replicates only the downside potential• Thus, companies keep risk disclosure to the
minimum (not mention risks if not explicitly askedetc.)
• No information about time horizon of particularrisks
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Some findings• The dialogical/polyphonic character of uncertainty
communication• “Front-stage” and “back-stage”• “Impression management” vs. “bullshitting”
(Frankfurt 2005)• More than monetary incentives (friendship,
collegiality, theatricality)
The company produces certainty;analysts perform themselves as professionals;analysts accept “no-answers” (relationships/friendships) business as usual; conventions
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• To require companies to present uncertainties (upside anddownside)
• To establish the quality criteria for uncertainty communication(e.g., 5 criteria for effective communication of uncertainty inscience, Nano-technology in Gavankar et al. 2014)
• To make companies to communicate the results of their internalstress-testing
• To visualize short-term risks and long-term uncertainties in apicture (e.g., a forward-looking EPS bridge with ranges?) + visualizethe interdependencies between risks
Suggestions how to improve uncertaintycommunication
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MANY THANKS FOR YOUR ATTENTION!
QUESTIONS? COMMENTS?
(Enron)