Abstract

http://ssrn.com/abstract=2447066
 


 



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

Abstract:     
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


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Date posted: June 8, 2014 ; Last revised: June 30, 2015

Suggested Citation

Nelson, Karen K. and Pritchard, Adam C., Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors (June 29, 2015). U of Michigan Law & Econ Research Paper No. 14-013. Available at SSRN: http://ssrn.com/abstract=2447066 or http://dx.doi.org/10.2139/ssrn.2447066

Contact Information

Karen K. Nelson (Contact Author)
Rice University - Jones Graduate School of Business ( email )
337 McNair Hall
6100 South Main Street
Houston, TX 77005
United States
713-348-5388 (Phone)
713-348-6331 (Fax)
Adam C. Pritchard
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

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