Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors
Karen K. Nelson
Rice University - Jones Graduate School of Business
Adam C. Pritchard
University of Michigan Law School
June 29, 2015
U of Michigan Law & Econ Research Paper No. 14-013
This study investigates risk factor disclosures, examining both the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act as well as the SEC’s subsequent mandate of these disclosures. Firms subject to greater litigation risk disclose more risk factors, update the language more from year-to-year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate, as low risk firms improved the quality of their risk factor disclosures. Consistent with these findings, the risk factor disclosures of high litigation risk firms are significantly more informative about systematic and idiosyncratic firm risk when disclosure is voluntary but not when disclosure is mandated. Overall, the results suggest that for some firms voluntary disclosure of risk factors is not a substitute for a regulatory mandate.
Number of Pages in PDF File: 60
Keywords: risk factors, disclosure regulation, litigation risk, information content
Date posted: June 8, 2014 ; Last revised: June 30, 2015
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