Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

55 Pages Posted: 2 May 2019 Last revised: 31 Jul 2020

See all articles by Shiu-Yik Au

Shiu-Yik Au

University of Manitoba - Asper School of Business

Bin Qiu

Missouri Western State University, Craig School of Business

Szu-Yin (Jennifer) Wu

State University of New York, University at Buffalo

Date Written: June 29, 2020

Abstract

The informativeness of risk factor disclosures is a subject of debate. We predict and find that risk factor disclosures in 10-K filings reduce the chance of a large negative movement in stock prices—stock price crash risk. This effect is further identified through a difference-in-differences analysis and the regression discontinuity design approach. The channels for this effect appear to be the reduction of information asymmetry and bad news hoarding—the effect is stronger in firms with higher information asymmetry, litigation risk, short interest, or better corporate governance. Overall, our findings provide evidence that the disclosures contain information content and constitute an underlying cause of stock price crash risk.

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

JEL Classification: G10

Suggested Citation

Au, Shiu-Yik and Qiu, Bin and Wu, Szu-Yin (Jennifer), Do Risk Factor Disclosures Reduce Stock Price Crash Risk? (June 29, 2020). Available at SSRN: https://ssrn.com/abstract=3363912 or http://dx.doi.org/10.2139/ssrn.3363912

Shiu-Yik Au

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada
(204) 474-9783 (Phone)

Bin Qiu

Missouri Western State University, Craig School of Business ( email )

4525 Downs Drive Popplewell Hall
Saint Joseph, MO 64506
United States
8162715954 (Phone)

HOME PAGE: http://www.missouriwestern.edu

Szu-Yin (Jennifer) Wu (Contact Author)

State University of New York, University at Buffalo ( email )

349 Jacobs Management Center
Buffalo, NY 14260
United States
7166453276 (Phone)
14260 (Fax)

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