Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

Abstract

We predict and find that risk factor disclosures (RFDs) in 10-K filings reduce the chance of a large negative movement in stock prices—stock price crash risk. Further, the moderators for this effect appear to be reduced information asymmetry, better shareholder rights, and various real outcomes, such as short-term debt and cash flow distribution. This suggests that RFDs improve the firm’s information environment and shareholder rights, as well as affecting key real outcomes surrounding the firm. Overall, our findings provide evidence that risk factor disclosures contain useful information content and benefit investors.

Keywords: Item 1A, Risk Factor Disclosures, Crash Risk, Information Asymmetry, Stock Return Skewness

JEL Classification: G10