IAS 39 and Biases in the Risk Perception of Financial Instruments

There is a wide variety of reporting choices when presenting and disclosing financial instruments under IFRS. Behavioral theory suggests that the label under which a financial instrument is presented affects the risk perception of investors. We analyze in an experimental setting how and why the reporting choices under IAS 39 and IFRS 7 affect an investor's risk perception. We find that companies presenting the fair value category are perceived to be of a particularly high risk but that the perceived risk decreases when investors learn that the fair value category does not contain derivatives. We conclude that investors cognitively view each measurement category to be representative for a certain type of financial instrument and that they base their risk evaluation on this representativeness heuristic. This conclusion is also suggested by the statistical association of the risk evaluation with behavioral variables describing how familiar an investor is with financial investments and how strongly he is aware of past negative outcomes of certain investments.