The benefits of specific risk-factor disclosures

Ole Kristian Hope*, Danqi Hu, Hai Lu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

266 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1005-1045
Number of pages41
JournalReview of Accounting Studies
Volume21
Issue number4
DOIs
StatePublished - Dec 1 2016

Funding

We have benefited from discussions with Chang Liu regarding the Named Entity Recognition technique. We would also like to thank Yimin Cheng, Mahfuz Chy, Han Wu, Ke Wang (discussant), two anonymous reviewers, and seminar participants at the Rotman School of Management, Hong Kong Polytechnic University, Tsinghua University, University of Lausanne, VU Amsterdam, 2014 Temple University Conference, 2014 Peking University Summer Accounting Camp, 2014 Canadian Academic Accounting Association Meeting, and 2014 American Accounting Association Meeting for valuable comments. Hope gratefully acknowledges the financial support of the Deloitte Professorship.

Keywords

  • Analyst risk assessments
  • Market reactions
  • Risk-factor disclosure
  • Scenario analysis
  • Specificity
  • Trading volume

ASJC Scopus subject areas

  • Accounting
  • General Business, Management and Accounting

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