Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

Abstract

We examine whether risk factor disclosures in 10-K filings change the third moment of stock returns — skewness or stock price crash risk. We use textual analysis to measure risk factor disclosure and find that risk factor disclosure is negatively associated with 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 mitigate the effects of information asymmetry and the impact of hoarding negative news on crash risk — the effect is stronger in firms with higher information asymmetry, litigation risk, and short interest. Overall, our findings provide evidence that additional disclosure can have positive effects on firm outcomes such as stock price crash risk.

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

JEL Classification: G10