The benefits of specific risk-factor disclosures

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’ qua...

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Bibliographic Details
Main Authors: HOPE, Ole-Kristian, HU, Danqi, Hai LU
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2016
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Online Access:https://ink.library.smu.edu.sg/soa_research/1621
https://ink.library.smu.edu.sg/context/soa_research/article/2648/viewcontent/BenefitsSpecificRisk_FactorDisclosures_2016.pdf
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Institution: Singapore Management University
Language: English
Description
Summary: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.