The Information Content of Mandatory Risk Factor Disclosures in Corporate Filings
John L. Campbell
University of Georgia - J.M. Tull School of Accounting
University of Arizona - Department of Management Information Systems
Dan S. Dhaliwal
University of Arizona - Department of Accounting
National Taiwan University
Logan B. Steele
University of Wisconsin - Madison
September 1, 2010
Review of Accounting Studies, Vol. 19, No. 1, pp. 396-455.
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
Date posted: October 20, 2010 ; Last revised: August 10, 2014