Changes in Risk Factor Disclosures and the Variance Risk Premium

The Accounting Review, Forthcoming

54 Pages Posted: 29 Apr 2022 Last revised: 10 Apr 2023

See all articles by Matthew R. Lyle

Matthew R. Lyle

Goizueta Business School

Eddie Riedl

Boston University - Questrom School of Business

Federico Siano

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: March 06, 2023

Abstract

This paper examines how changes in risk disclosures affect uncertainty about risk. We measure changes in risk disclosures using the addition and removal of individual risk factors to firms’ 10-K filings, identified via textual analysis of the risk factors section. Our market outcome is the variance risk premium (VRP), which captures the market’s pricing of uncertainty about firm risk. Following recent theoretical predictions, we predict and empirically document that newly disclosed signals of risk-factor exposure—reflected in added and removed individual risk factors—decrease the uncertainty surrounding firm risk, as proxied via the VRP. We further confirm that individual risk factors offer incremental insights compared to alternative textual risk measures. Collectively, our findings suggest that textually evaluating individual risk factors reveals information about the uncertainty regarding firm risk.

Keywords: risk factors, disclosure, textual analysis, variance risk premium

JEL Classification: D8, G24, G12, M4

Suggested Citation

Lyle, Matthew R. and Riedl, Edward J. and Siano, Federico, Changes in Risk Factor Disclosures and the Variance Risk Premium (March 06, 2023). The Accounting Review, Forthcoming , Available at SSRN: https://ssrn.com/abstract=4090024 or http://dx.doi.org/10.2139/ssrn.4090024

Matthew R. Lyle

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Edward J. Riedl (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

Federico Siano

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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