Abstract

http://ssrn.com/abstract=1694279
 
 

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The Information Content of Mandatory Risk Factor Disclosures in Corporate Filings


John L. Campbell


University of Georgia - J.M. Tull School of Accounting

Hsinchun Chen


University of Arizona - Department of Management Information Systems

Dan S. Dhaliwal


University of Arizona - Department of Accounting

Hsin-min Lu


National Taiwan University

Logan B. Steele


University of Connecticut

September 1, 2010

Review of Accounting Studies, Vol. 19, No. 1, pp. 396-455.

Abstract:     
Beginning in 2005, the SEC mandated firms to include a “risk factor” section in their Form 10-K to discuss “the most significant factors that make the company speculative or risky.” This suggests that regulators believe that investors benefit from disclosures about firm risk and uncertainties. Critics argue that the disclosures are qualitative and boilerplate, and thus uninformative. In this study, we examine the information content of this newly-created risk factor section and offer two main results. First, we find that firms that face greater risk disclose more risk factors, and that the type of risk that a firm faces (i.e. systematic, idiosyncratic, financial, legal, or tax) determines whether they devote a greater portion of their disclosures towards describing that risk type. In other words, managers provide informative risk factor disclosures. Second, we find that market participants incorporate the information conveyed by risk factor disclosures into their assessments of firm risk and stock price, and that the public availability of the disclosure decreases information asymmetry amongst firms’ shareholders. We are the first study to document that when managers increase negative/pessimistic qualitative disclosure, market-based measures of firm risk increase. These results provide further insight into the relationship between disclosure and firm risk, and may inform current policy decisions of the SEC.

Number of Pages in PDF File: 61

Keywords: Disclosure, cost of capital, risk disclosures, qualitative disclosures, textual analysis

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Date posted: October 20, 2010 ; Last revised: August 10, 2014

Suggested Citation

Campbell, John L. and Chen, Hsinchun and Dhaliwal, Dan S. and Lu, Hsin-min and Steele, Logan B., The Information Content of Mandatory Risk Factor Disclosures in Corporate Filings (September 1, 2010). Review of Accounting Studies, Vol. 19, No. 1, pp. 396-455.. Available at SSRN: http://ssrn.com/abstract=1694279 or http://dx.doi.org/10.2139/ssrn.1694279

Contact Information

John L. Campbell
University of Georgia - J.M. Tull School of Accounting ( email )
Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)
Hsinchun Chen
University of Arizona - Department of Management Information Systems ( email )
AZ
United States
Dan S. Dhaliwal (Contact Author)
University of Arizona - Department of Accounting ( email )
McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States
Hsin-min Lu
National Taiwan University ( email )
1 Sec. 4, Roosevelt Road,
Taipei 106, 106
Taiwan
Logan B. Steele
University of Connecticut ( email )
Storrs, CT 06269-1063
United States
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