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The information content of mandatory risk factor disclosures in corporate filings |
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| Authors: | John L. Campbell Hsinchun Chen Dan S. Dhaliwal Hsin-min Lu Logan B. Steele |
| Affiliation: | 1. J.M. Tull School of Accounting, University of Georgia, 228 Brooks Hall, 310 Herty Drive, Athens, GA, 30602, USA 2. Management Information Systems Department, University of Arizona, McClelland Hall 430Z, 1130 E. Helen St., Tucson, AZ, 85721, USA 3. Department of Accounting, University of Arizona and Korea University Business School, McClelland Hall 301D, 1130 E. Helen St., Tucson, AZ, 85721, USA 4. Department of Information Management, National Taiwan University, Room 509, Management Building II, No. 1, Sec. 4, Roosevelt Rd., Taipei City 106, Taiwan 5. Department of Accounting, University of Connecticut, 2100 Hillside Road, Unit 1041, Storrs, CT, 06269, USA |
| Abstract: | Beginning in 2005, the Securities and Exchange Commission (SEC) mandated firms to include a “risk factor” section in their Form 10-K to discuss “the most significant factors that make the company speculative or risky.” In this study, we examine the information content of this newly created section and offer two main results. First, we find that firms facing greater risk disclose more risk factors, and that the type of risk the firm faces determines whether it devotes a greater portion of its disclosures towards describing that risk type. That is, managers provide risk factor disclosures that meaningfully reflect the risks they face. Second, we find that the information conveyed by risk factor disclosures is reflected in systematic risk, idiosyncratic risk, information asymmetry, and firm value. Overall, our evidence supports the SEC’s decision to mandate risk factor disclosures, as the disclosures appear to be firm-specific and useful to investors. |
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