Impact of Segment Level Natural Resource Operational Risk Reporting on Earnings Predictions

Abacus, 2017, vol. 53, No. 4, 431-449

19 Pages Posted: 14 Sep 2015 Last revised: 21 Jul 2018

See all articles by Shuwen (Wendy) Cai

Shuwen (Wendy) Cai

Trinity College, University of Melbourne

Jayne M. Godfrey

University of Auckland

Robyn Moroney

Monash University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2017

Abstract

Non-financial reports alert investors to operational risks associated with issues such as insufficient access to natural resource inputs and related costly interruptions to production, while segment level reports alert investors to operational risk distribution across a firm. An important issue, to date unexplored, is how segment level non-financial reporting impacts earnings predictions. We report the results of an experiment used to examine how mining company segment-level water reports affect investors’ earnings predictions, where water reports indicate whether the firm and its segments will have access to sufficient water to meet production needs. We find that investors do not change their earnings predictions when firm and segment-level reports indicate low water risk but they do revise down their earnings predictions when firm and segment-level water reports indicate high water risk. This is consistent with investors responding to the additional information provided in segment-level reports confirming that water risk is high across the firm. Regardless of whether firm-level water reports indicate high or low water risk, when segment-level reports indicate that one segment is low water risk and another is high water risk, investors revise down their earnings predictions. This is consistent with investors recognizing that natural resource operational risk concentration in one segment can affect earnings more than evenly-distributed risk. Overall, our findings suggest that belief-adjustment theory explains how investors react to prospective operational risk information contained in segment-level water reports according to the similarity of the segment-level risks, and that this information is factored into earnings predictions.

Keywords: operational risk, segment reporting, earnings predictions, sustainability reports, water accounting

JEL Classification: M42

Suggested Citation

Cai, Shuwen (Wendy) and Godfrey, Jayne M. and Moroney, Robyn, Impact of Segment Level Natural Resource Operational Risk Reporting on Earnings Predictions (October 12, 2017). Abacus, 2017, vol. 53, No. 4, 431-449, Available at SSRN: https://ssrn.com/abstract=2659667 or http://dx.doi.org/10.2139/ssrn.2659667

Shuwen (Wendy) Cai

Trinity College, University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Jayne M. Godfrey

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Robyn Moroney (Contact Author)

Monash University - Department of Accounting ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia

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