Are Risk Factor Disclosures Still Relevant? Evidence from Market Reactions to Risk Factor Disclosures Before and After the Financial Crisis

58 Pages Posted: 9 Dec 2012 Last revised: 21 Dec 2017

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Lin Cheng

The University of Arizona - Eller College of Management

Haiwen Zhang

University of Minnesota

Date Written: December 19, 2017

Abstract

The SEC’s Disclosure Effectiveness Initiative (December 2013) highlights a difference between accounting regulators and academics in their perceptions of Item 1A risk factor disclosure effectiveness. Because most academic evidence relies on pre-financial crisis data, we compare changes in risk factor disclosure informativeness before and after the crisis as a possible explanation for this disconnect. We further explore this discrepancy by considering i) three classes of market participants, ii) new, discontinued, and repeated disclosures, and iii) non-market outcomes. Our results confirm previous findings but indicate that those results no longer hold in the subsequent period. Specifically, we find that although equity, option, and bond markets react to unexpected risk factor disclosures in the period leading up to the financial crisis (2006-2008), the market reactions decline significantly in the post-crisis period (2009-2014). Perhaps surprisingly, the documented changes in informativeness are not driven by disclosures repeated from one year to the next but instead result from new disclosures initiated in the current year and, in the option and debt markets, also from disclosures discontinued from the previous year. Finally, using the Altman Z-score as an objective bankruptcy risk measure, we find that the association between risk factor disclosures and companies’ future bankruptcy risk declines significantly in the post financial crisis period. Taken together, these findings contribute to the current disclosure effectiveness debate by highlighting that risk factor disclosures, which were informative in the preceding period, become less reflective of the underlying economic risks and thus less informative to investors in the post-crisis period.

Keywords: Risk factor disclosure; Financial crisis; Litigation risk; Market reaction

JEL Classification: D8; G01; G12; M48

Suggested Citation

Beatty, Anne L. and Cheng, Lin and Zhang, Haiwen, Are Risk Factor Disclosures Still Relevant? Evidence from Market Reactions to Risk Factor Disclosures Before and After the Financial Crisis (December 19, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2186589 or http://dx.doi.org/10.2139/ssrn.2186589

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Lin Cheng

The University of Arizona - Eller College of Management ( email )

McClelland Hall, Room 301Q
1130 E. Helen Street
Tucson, AZ 85721
United States

Haiwen Zhang (Contact Author)

University of Minnesota ( email )

3-122 Carlson School of Management
321-19th Avenue South
Minneapolis, MN 55455
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
387
Abstract Views
1,789
rank
77,540
PlumX Metrics