Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language

69 Pages Posted: 9 May 2018 Last revised: 10 Dec 2019

See all articles by Richard A. Cazier

Richard A. Cazier

University of North Texas

Jeff L. McMullin

Indiana University - Kelley School of Business - Department of Accounting

John Treu

West Virginia University - College of Business & Economics

Date Written: April 23, 2018

Abstract

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 disclosing lengthy and boilerplate risk factors experience negative capital market consequences. We investigate two potential sources of firms’ incentives to issue such disclosures by examining how judicial and regulatory assessments of firms’ risk factor disclosures 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. Further analysis finds that when risk factor language is assessed as adequate in judicial review, industry peers borrow that language more frequently. Finally, we find that judicial assessments of risk factor disclosures prompt industry peers to lengthen their own risk factor disclosures regardless of whether the risk disclosure was deemed adequate or not.

Keywords: risk disclosure, boilerplate, litigation risk, securities lawsuits, SEC comment letters, disclosure regulation, text analysis, disclosure borrowing

JEL Classification: D8, G38, M4

Suggested Citation

Cazier, Richard A. and McMullin, Jeff L. and Treu, John, Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language (April 23, 2018). Kelley School of Business Research Paper No. 18-43. Available at SSRN: https://ssrn.com/abstract=3167611 or http://dx.doi.org/10.2139/ssrn.3167611

Richard A. Cazier

University of North Texas ( email )

College of Business Administration
P.O. Box 305219
Denton, TX 76203
United States
940-369-8612 (Phone)

Jeff L. McMullin (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

John Treu

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

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