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

41 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

Keywords

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

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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