Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

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