Why do managers disclose risks accurately? Textual analysis, disclosures, and risk exposures

Alejandro Lopez-Lira

Economics Letters, 2021, vol. 204, issue C

Abstract: I provide an economic model that justifies using bag-of-words, topic modeling, and machine learning techniques to measure firms’ risk exposures using the percentage they allocate to each risk in their financial statements. The model provides a theoretical set of sufficient conditions under minimal assumptions that make managers optimally disclose risk accurately and give more space to the most critical risks. I document that the SEC Regulation satisfies this set of sufficient theoretical conditions and induces rational managers to disclose risks truthfully.

Keywords: Optimal disclosure; Textual analysis; Machine learning; Risk disclosures; Risk factors (search for similar items in EconPapers)
JEL-codes: C18 G00 G30 G32 G38 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:204:y:2021:i:c:s0165176521001737

DOI: 10.1016/j.econlet.2021.109896

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