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

32 Pages Posted: 12 May 2016

See all articles by Karen K. Nelson

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 2016

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 mandatory. Overall, the results suggest that for some firms voluntary disclosure of risk factors is not a substitute for a regulatory mandate.

Suggested Citation

Nelson, Karen K. and Pritchard, Adam C., Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors (June 2016). Journal of Empirical Legal Studies, Vol. 13, Issue 2, pp. 266-297, 2016. Available at SSRN: https://ssrn.com/abstract=2778851 or http://dx.doi.org/10.1111/jels.12115

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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