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Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors

60 Pages Posted: 8 Jun 2014 Last revised: 30 Jun 2015

Karen K. Nelson

Texas Christian University - Department of Accounting

Adam C. Pritchard

University of Michigan Law School

Multiple version iconThere are 2 versions of this paper

Date Written: June 29, 2015

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.

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

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: https://ssrn.com/abstract=2447066 or http://dx.doi.org/10.2139/ssrn.2447066

Karen K. Nelson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

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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