Management Disclosure of Risk Factors and COVID-19
15 Pages Posted: 14 Apr 2020 Last revised: 15 Sep 2022
Date Written: September 15, 2022
Public companies in the United States are required to file annual reports (i.e., Form 10-K) and disclose, among other things, the risk factors that might negatively affect the price of their stock. The risk of a pandemic was well known before the recent crisis and we now know the initial impact for many shareholders was significant and negative. To what extent did managers forewarn their shareholders of this valuation risk? We examine all 10-K filings from 2018, well before any knowledge of the current pandemic, and find that less than 21% of the filings contain any reference to pandemic-related terms. Given management’s presumably deep understanding of their business and general awareness that, for at least the past decade, pandemics have been identified as a significant global risk, it seems that this number should have been higher. At the industry level, we find an unexpected positive correlation (0.137) between the use of pandemic-related words in annual reports and realized stock returns during the actual pandemic. Some of the industries hardest hit by COVID barely mentioned pandemic risk in their financial disclosures to shareholders, indicating that managers were not effective in highlighting their exposure to pandemic risks to investors.
Keywords: pandemic, COVID-19, Form 10-K, risk factors
JEL Classification: G12, G18, G38, G02
Suggested Citation: Suggested Citation