Corporate Risk Disclosure and Audit Fee: A Text Mining Approach

Posted: 28 Jul 2017

See all articles by Rong Yang

Rong Yang

Rochester Institute of Technology

Yang Yu

Rochester Institute of Technology (RIT)

Manlu Liu

Rochester Institute of Technology (RIT) - Saunders College of Business

Kean Wu

Rochester Institute of Technology

Date Written: June 5, 2017

Abstract

The aim of this study is to introduce an innovative text mining approach to assess firms’ risks using unstructured textual disclosure from annual reports. Specifically, we use Natural Language Processing techniques to extract firms’ self-identified risks including financial, strategic, operational, and hazard risks based on an enterprise risk management framework. We examine the association between these four risk measures derived from the risk factor section in 10-K filings and audit fees. The results show that audit fees are significantly and positively related to firm-specific financial, strategic, and operational risks, indicating the informativeness of corporate textual risk disclosures. This study provides direct support for the recent US reporting regulatory requirement of adding a new section on risk factors in corporate annual reports.

Keywords: Textual Risk Disclosure, Audit Fee, Risk Management, Text Mining

JEL Classification: M42, G14, G32, D81

Suggested Citation

Yang, Rong and Yu, Yang and Liu, Manlu and Wu, Kean, Corporate Risk Disclosure and Audit Fee: A Text Mining Approach (June 5, 2017). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2980919

Rong Yang (Contact Author)

Rochester Institute of Technology ( email )

Saunders College of Business
Rochester Institute of Technology
Rochester, NY 14623
United States

Yang Yu

Rochester Institute of Technology (RIT) ( email )

Rochester, NY 14623
United States

Manlu Liu

Rochester Institute of Technology (RIT) - Saunders College of Business

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

Kean Wu

Rochester Institute of Technology ( email )

Saunders College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States

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