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The Information Content of Mandatory Risk Factor Disclosures in Corporate Filings

61 Pages Posted: 20 Oct 2010 Last revised: 10 Aug 2014

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 Wisconsin - Madison

Date Written: September 1, 2010

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.

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

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: https://ssrn.com/abstract=1694279 or http://dx.doi.org/10.2139/ssrn.1694279

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 Wisconsin - Madison ( email )

Fitchburg, WI 53706
United States

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