Voluntary risk disclosure and values of FTSE350 firms: the role of an industry-based litigation risk

Abstract

There is conflicting research on whether litigation risk affects voluntary disclosure positively or negatively. This study thus aims to examine how litigation risk affects the voluntary disclosure of risk information. It also explores whether litigation risk influences the extent to which voluntary risk disclosure is value relevant. The paper utilises a sample from UK FTSE350 firms, the computerised textual analysis is employed to measure the voluntary risk disclosure level, and empirical analyses are estimated using OLS and fixed-effect regressions. The study finds that voluntary risk disclosure in the UK is a positive function of litigation risk. Likewise, investors react positively to voluntary risk information, leading to enhanced UK corporate values. However, this nexus is more substantial in firms facing higher litigation risk. The further analysis supports the view that firms facing high (low) litigation risk voluntarily disclose more (less) relevant risk information. Our findings encourage FTSE350 firms to increase the magnitude of voluntary risk information, whether a firm is facing a high or low level of litigation risk, and the policymakers to issue further rules regulating the disclosure of voluntary risk information. Likewise, the study provides relevant implications for the protection of investors in the UK.