Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language
58 Pages Posted: 9 May 2018 Last revised: 9 Nov 2018
Date Written: April 23, 2018
Although formal guidance instructs firms to avoid issuing lengthy and boilerplate risk factor disclosures, regulators and users of financial statements note these disclosures continue to be excessively long and boilerplate. The persistence of these characteristics is particularly surprising given that prior research finds firms issuing lengthy and boilerplate risk factors experience negative capital market consequences. We investigate two potential sources of firms’ incentives to issue lengthy, boilerplate risk factor disclosures by examining how judicial and regulatory assessments of firms’ risk factors correlate with measures of disclosure length and disclosure boilerplate. Our results suggest that lengthier and more boilerplate risk factor disclosures are less likely to be considered inadequate under judicial and regulatory review. Specifically, risk factors that are lengthier and less specific are less likely to be found inadequate by judges in shareholder securities lawsuits. In addition, more standardized risk factor disclosures are less likely to be targeted by an SEC comment letter during the SEC’s filing review process.
Keywords: risk disclosure, boilerplate, litigation risk, securities lawsuits, SEC comment letters, disclosure regulation
JEL Classification: D8, G38, M4
Suggested Citation: Suggested Citation