The benefits of specific risk-factor disclosures

By Ole‐Kristian Hope, Danqi Hu, Hai-fan Lu. Review of accounting studies, 2016

405 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/228eb4f052dd56775542fb8e24f5d43fddc9861d

Citations in the corpus

• Does the CDS Market Reflect Regulatory Climate Risk Disclosures? (2020, unknown): “See, e.g., Hope et al. (2016); Friberg and Seiler (2017); Lopez-Lira (2019).”
• The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure (2017, unknown): “Hope et al. (2016) find that specific risk disclosure enhances users’ understanding of risks.”
• Customers’ Risk Factor Disclosures and Suppliers’ Investment Efficiency (2019, unknown): “Although the mandated RFDs are deemed as boilerplate or redundant by critics (Malone 2005), recent papers (e.g., Campbell et al. 2014; Hope et al. 2016; Chiu et al. 2017) document that the amount and specificity of risk disclosures in the annual report increase investors’ perception of firm risk,…”
• Do key audit matters impact financial reporting behavior? (2020, unknown): “For example, Hope et al. (2016) show that greater specificity in risk disclosure induces greater market reactions, posited to be the result of increased information processing.”
• The Evolution of 10-K Textual Disclosure: Evidence from Latent Dirichlet Allocation (2017, unknown): “Hope et al. (2016) show that more specific risk disclosures lead to greater market reactions and better risk assessments by analysts.”
• Going digital: implications for firm value and performance (2019, unknown): “Furthermore, studies have conducted textual analysis of corporate disclosures to examine relationships between nonfinancial variables and prices, much like we do here (Li 2008, 2010; Li, Lundholm, and Minnis 2013; You and Zhang 2009; Feldman et al. 2010; Campbell et al. 2014; Hope et al. 2016).”