Download this Paper Open PDF in Browser

The Benefits of Specific Risk-Factor Disclosures

60 Pages Posted: 19 Mar 2016 Last revised: 7 Dec 2016

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Danqi Hu

Northwestern University - Kellogg School of Management

Hai Lu

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2016

Abstract

Practitioners have long criticized risk-factor disclosures in the 10-K as generic and boilerplate. In response, regulators emphasize the importance of being specific. By using a computing algorithm, this paper establishes a new measure (Specificity) to quantify the level of specificity of firms’ qualitative risk-factor disclosures. We first examine determinants of variations in Specificity and document that firms with high proprietary costs provide less specific risk-factor disclosures. More importantly, we find that, controlling for numerous determinants, the market reaction to the 10-K filing is positively and significantly associated with Specificity. In addition, our results suggest that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more specific. Together, these findings suggest that more specific risk-factor disclosures benefit users of financial statements.

Keywords: Risk-Factor Disclosure, Specificity, Market Reactions, Trading Volume Reactions, Analyst Risk Assessments, Scenario Analysis

JEL Classification: G30, G31, G34, M41, M1, L20

Suggested Citation

Hope, Ole-Kristian and Hu, Danqi and Lu, Hai, The Benefits of Specific Risk-Factor Disclosures (September 15, 2016). Review of Accounting Studies, Forthcoming; Singapore Management University School of Accountancy Research Paper No. 2016-49. Available at SSRN: https://ssrn.com/abstract=2749132

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Danqi Hu

Northwestern University - Kellogg School of Management

2211 campus drive
EVANSTON, IL 60208
United States

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Paper statistics

Downloads
381
Rank
15,577
Abstract Views
1,067