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The benefits of specific risk-factor disclosures

Author

Listed:
  • Ole-Kristian Hope

    (University of Toronto
    BI Norwegian Business School)

  • Danqi Hu

    (Northwestern University)

  • Hai Lu

    (University of Toronto)

Abstract

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.

Suggested Citation

  • Ole-Kristian Hope & Danqi Hu & Hai Lu, 2016. "The benefits of specific risk-factor disclosures," Review of Accounting Studies, Springer, vol. 21(4), pages 1005-1045, December.
    • Handle: RePEc:spr:reaccs:v:21:y:2016:i:4:d:10.1007_s11142-016-9371-1
    DOI: 10.1007/s11142-016-9371-1
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    More about this item

    Keywords

    Risk-factor disclosure; Specificity; Market reactions; Trading volume; Analyst risk assessments; Scenario analysis;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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