Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

Abstract

We find that mandating risk factor disclosures (RFDs) in 10-K filings reduces the chance of
a large negative movement in stock prices—stock price crash risk. Further, possible channels 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. We exploit two exogenous shocks
to mitigate the endogeneity concerns that remain to be addressed in the literature. Overall, our
findings provide evidence that RFDs contain useful information content and benefit investors.

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

JEL Classification: G10