Soft Risk Disclosure with Feedback Effect

Abstract

This paper studies firms' optimal qualitative disclosure about hard-to-quantify risk exposure to affect investors' information acquisition under the feedback effect channel. Based on a model with unknown payoff distribution, disclosure softness, and ambiguity aversion, I find that firms with lower risk exposure disclose more precisely. Particularly, low (medium) exposure firms provide perfect (partially informative) risk disclosures, whereas high exposure firms always disclose vaguely. In addition, the softness of risk disclosure enables firms to induce different risk perceptions among informed and uninformed investors with one disclosure, which gives firms the flexibility to separately influence the beliefs of the two groups of investors. Finally, I find that lower cost of information acquisition may improve economic efficiency at the expense of risk disclosure quality.