Accounting for Financial Instruments and Risk Disclosure Effectiveness

Abstract

This research introduces a novel methodological framework for evaluating the effectiveness of risk disclosures related to financial instruments, moving beyond traditional content
analysis to incorporate computational linguistics, network analysis of disclosure interdependencies, and behavioral finance constructs. Traditional accounting research has predominantly focused on compliance with disclosure standards (IFRS 7, IFRS 9) and the volume of
information provided, often neglecting the cognitive accessibility, contextual relevance, and
decision-usefulness of disclosed content for heterogeneous user groups. Our study posits that
disclosure effectiveness is not a linear function of quantity but a multidimensional construct
involving clarity, connectivity, forward-looking orientation, and risk materiality articulation.
We develop and validate the Financial Instrument Disclosure Effectiveness (FIDE) Index, a
composite metric derived from machine learning-based text analysis of annual reports from
150 global financial institutions over a five-year period, paired with experimental studies
involving investment analysts and non-professional investors. The methodology uniquely
integrates semantic coherence scoring, sentiment trajectory analysis across risk narratives,
and graph-based mapping of risk interlinkages disclosed. Results demonstrate a significant,
non-uniform gap between regulatory compliance and genuine communicative effectiveness,
with key findings indicating that overly technical and fragmented risk disclosures, while compliant, can obfuscate material risk exposures rather than illuminate them. Furthermore, we
identify a ’disclosure complexity paradox,’ where institutions with the most complex financial
instrument portfolios tend to produce disclosures that score lowest on cognitive accessibility
metrics, potentially exacerbating information asymmetry. The paper concludes by proposing a principles-based supplement to existing standards, emphasizing dynamic, user-centric
disclosure design. This research contributes original insights to accounting, risk communication, and financial regulation by reframing disclosure effectiveness as a human-computer
interaction and behavioral communication challenge, rather than solely a compliance exercise.