Risk Exposures from Risk Disclosures: What They Said and How They Said It

40 Pages Posted: 30 Nov 2023 Last revised: 29 Apr 2024

See all articles by Rahul Mazumder

Rahul Mazumder

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Seth Pruitt

Arizona State University (ASU) - Finance Department

Landon Ross

Tulane University

Date Written: August 1, 2023

Abstract

We extract information from 10-K risk disclosures: topic models measure what is discussed, and context models measure how it is discussed. We find that both contain significant predictive information about future aggregate risk exposures, even controlling for (structured) firm characteristics, and that this information is economically valuable. For market exposure, only management's choice of context is useful; for other factors, tradable and nontradable, both context and topic information is useful. Further, we show that topics and contexts are statistically distinct. We present evidence that management's discussion helps to predict some future corporate actions, which in turn can alter the firm's exposure to aggregate risk.

Keywords: Text Analysis, Asset Pricing, Factor Model, Conditional Betas, Word embedding

JEL Classification: C23, C53, G11, G12, G17

Suggested Citation

Mazumder, Rahul and Pruitt, Seth and Ross, Landon, Risk Exposures from Risk Disclosures: What They Said and How They Said It (August 1, 2023). Available at SSRN: https://ssrn.com/abstract=4637697 or http://dx.doi.org/10.2139/ssrn.4637697

Rahul Mazumder

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Seth Pruitt

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Landon Ross (Contact Author)

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

HOME PAGE: http://landonjross.com

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