Risk Disclosures in Annual Reports and Firms’ Default Risk

Journal of Corporate Accounting & Finance, Forthcoming

43 Pages Posted: 23 May 2024

See all articles by Shunyao (Cynthia) Jin

Shunyao (Cynthia) Jin

University of Michigan - Dearborn, College of Business

Hei Wai Lee

University of Michigan at Dearborn - School of Management

Yan Alice Xie

University of Michigan at Dearborn

Date Written: December 1, 2023

Abstract

This study examines how the length, content, and tone attributes of risk disclosures in a firm’s 10-K annual report relate to its default risk in the subsequent fiscal year. We find a significant association between specific attributes of risk disclosures and the default risk in the subsequent period. Using the 2008 financial crisis as a shock to firms’ risk environment, we further find that the documented association is more pronounced in the post-financial crisis era. Our cross-sectional analyses reveal that the documented relationship is particularly prominent for firms undergoing substantial shifts in default risk, facing significant financial distress, operating in industries with lower litigation risk, or subject to heightened scrutiny from external monitors. Overall, our findings suggest that risk disclosures in firms’ annual reports offer valuable insights for investors assessing financial distress and default risk.

Keywords: Default risk, disclosure tone, financial crisis, risk disclosure, textual analysis

Suggested Citation

Jin, Shunyao (Cynthia) and Lee, Hei Wai and Xie, Yan, Risk Disclosures in Annual Reports and Firms’ Default Risk (December 1, 2023). Journal of Corporate Accounting & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4795103 or http://dx.doi.org/10.2139/ssrn.4795103

Shunyao (Cynthia) Jin (Contact Author)

University of Michigan - Dearborn, College of Business ( email )

Fairlane Center South
19000 Hubbard Drive
Dearborn, MI 48126-2683
United States

Hei Wai Lee

University of Michigan at Dearborn - School of Management ( email )

4901 Evergreen Road
Dearborn, MI 48128-1491
United States
313-593-5524 (Phone)
313-593-5636 (Fax)

Yan Xie

University of Michigan at Dearborn ( email )

Dearborn, MI
United States

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