Professor Jorgensen among winners of KPMG & UIUC Competitive Manuscript Competition

A paper by Professor Bjorn Jorgensen (and Michael Kirschenheiter, Purdue) is one of six winners of the 2003 KPMG & UIUC Competitive Manuscript Competition on Reporting Risk. The paper, titled “Voluntary versus Mandatory Risk Disclosures with Asymmetric Information and Costly Investment in Information Technology,” presents a model for understanding how uncertainty on the part of financial statement users affects firms’ market values in the absence of risk disclosures.

SYNOPSIS: Traditional financial accounting considers transactions recorded at historical costs and does not report risks or uncertainties. Under the current SEC standard for market risk disclosures, Financial Report Release No. 48 (FRR 48), firms use one of three methods — tabular, sensitivity or value-at-risk — to inform financial statement users about future cash flow variances. Jorgensen and Kirschenheiter offer a theoretical framework for understanding what risk disclosures managers would make voluntarily. Their model predicts how financial statement users’ uncertainty about future cash flow variance and about managers’ possession of private information affect firms’ market values in the absence of risk disclosures.