The benefits of specific risk-factor disclosures

Ole-Kristian Hope (), Danqi Hu () and Hai Lu ()
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Ole-Kristian Hope: University of Toronto
Danqi Hu: Northwestern University
Hai Lu: University of Toronto

Review of Accounting Studies, 2016, vol. 21, issue 4, No 1, 1005-1045

Abstract: Abstract Practitioners have long criticized risk-factor disclosures in the 10-K as generic and boilerplate. In response, regulators emphasize the importance of being specific. By using a computing algorithm, this paper establishes a new measure (Specificity) to quantify the level of specificity of firms’ qualitative risk-factor disclosures. We first examine determinants of variations in Specificity, and document that firms with high proprietary costs provide less specific risk-factor disclosures. More importantly, we find that, controlling for numerous determinants, the market reaction to the 10-K filing is positively and significantly associated with Specificity. In addition, our results suggest that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more specific. Together, these findings suggest that more specific risk-factor disclosures benefit users of financial statements.

Keywords: Risk-factor disclosure; Specificity; Market reactions; Trading volume; Analyst risk assessments; Scenario analysis (search for similar items in EconPapers)
JEL-codes: G30 G31 G34 L20 M1 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (61)

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DOI: 10.1007/s11142-016-9371-1

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