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 6, 2014

U of Michigan Law & Econ Research Paper No. 14-013

Abstract:     
This study investigates risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act and the SEC’s subsequent disclosure mandate. 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. 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: 58

Keywords: risk factors, disclosure regulation, litigation risk, information content

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Date posted: June 8, 2014 ; Last revised: July 4, 2014

Suggested Citation

Nelson, Karen K. and Pritchard, Adam C., Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors (June 6, 2014). 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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