The benefits of specific risk-factor disclosures

• Main Authors: HOPE, Ole-Kristian, HU, Danqi, Hai LU
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Risk-factor disclosure; Specificity; Market reactions; Trading volume; Analyst risk assessments; Scenario analysis; Accounting; Corporate Finance
• 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
• Institution: Singapore Management University

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.