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Taking Information Seriously: A Firm-side Interpretation of Risk Factor Disclosure

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  • M. J. Histen

    (California State University Northridge)

Abstract

Information plays a key role in how markets assess a firm’s value. Disclosure is expensive to comply with and to interpret. Narrative information about risks is particularly challenging to evaluate. Though results on the informativeness of narrative risk disclosure are mixed, previous research focuses on the value to investors. However, risk disclosure does more than provide transparency to investors. It also affects firm behavior through an elevated assessment and increased preparation in response to risk. This study takes this active view of risk disclosure by analyzing firm-side effects through multifactor fixed effects regressions of approximately 13,000 firm-year observations from 2015–2018. The robust results show firm performance is correlated with topic models of narrative risk disclosures. These findings support the argument that risk disclosure corresponds to risk management. A firm disclosing cybersecurity risk responds better in the event of a data breach compared to one that has not, despite the firm itself sourcing the information. Overall, narrative risk disclosure both provides investors with useful information and strengthens a firm’s responsiveness. This provides empirical evidence to policymakers and market participants on the value of forward-looking statements even when the news is pessimistic.

Suggested Citation

  • M. J. Histen, 2022. "Taking Information Seriously: A Firm-side Interpretation of Risk Factor Disclosure," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 28(3), pages 119-131, November.
    • Handle: RePEc:kap:iaecre:v:28:y:2022:i:3:d:10.1007_s11294-022-09856-5
    DOI: 10.1007/s11294-022-09856-5
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    References listed on IDEAS

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