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.
Risk-factor disclosure, Specificity, Market reactions, Trading volume, Analyst risk assessments, Scenario analysis
Accounting | Corporate Finance
Financial Intermediation and Information
Review of Accounting Studies
Springer Verlag (Germany)
HOPE, Ole-Kristian; HU, Danqi; and Hai LU.
The benefits of specific risk-factor disclosures. (2016). Review of Accounting Studies. 21, (4), 1005-1045. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1621
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