An Unintended Benefit of the Risk Factor Mandate of 2005

70 Pages Posted: 9 Aug 2018 Last revised: 26 May 2020

See all articles by Allen Huang

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Jianghua Shen

Hong Kong University of Science & Technology (HKUST)

Amy Zang

Hong Kong University of Science and Technology - Department of Accounting

Date Written: May 25, 2020

Abstract

In 2005, the SEC began mandating that firms disclose risk factors to provide useful information on firm risk. Although not intended by regulators, mandatory RF disclosure may constitute “meaningful cautionary language” as defined in the Private Securities Litigation Reform Act, providing legal protection for forward-looking statement (FLS). Using both a difference-in-differences design and a two-stage least squares approach, we find that firms that had not previously disclosed risk factors (late RF disclosers) became more willing to provide qualitative FLS, particularly positive ones, than other firms, consistent with the mandate reducing managers’ perceived litigation risk in late RF disclosers. Cross-sectional tests show that this effect is stronger for firms whose managers perceive a higher level of benefit from safe harbor protection availed by the provision of meaningful cautionary statements. Last, we find that late RF disclosers experience improvement in their information environment, illustrating an unintended benefit of the 2005 RF mandate.

Keywords: risk factor disclosure; safe harbor provision; forward-looking statements; voluntary disclosure; qualitative disclosure; information environment

JEL Classification: K22; M41; M43

Suggested Citation

Huang, Allen and Shen, Jianghua and Zang, Amy, An Unintended Benefit of the Risk Factor Mandate of 2005 (May 25, 2020). Available at SSRN: https://ssrn.com/abstract=3219712 or http://dx.doi.org/10.2139/ssrn.3219712

Allen Huang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong
+852-23587559 (Phone)

HOME PAGE: http://www.AllenHuang.org

Jianghua Shen

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Amy Zang

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
Clear Water Bay, Kowloon
Hong Kong
+852-23587561 (Phone)

HOME PAGE: http://www.AmyZang.org

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
160
Abstract Views
2,113
rank
208,279
PlumX Metrics