In this study we use the recently mandated risk factor disclosure to examine the spillover effect of the Securities and Exchange Commission (SEC) review of qualitative corporate disclosure. We find that firms not receiving any comment letter (“No‐letter Firms”) modify their subsequent year's disclosures to a larger extent if the SEC has commented on the risk factor disclosure of (i) the industry leader, (ii) a close rival, or (iii) numerous industry peers. We refer to this effect as “spillover.” Further, we find that after SEC comments on the industry leader's disclosure, No‐letter Firms also provide more firm‐specific disclosures in the subsequent year. The increased disclosure specificity reduces these firms’ likelihood of receiving SEC risk disclosure comments on their new filings. Our evidence suggests an indirect effect of the SEC review of qualitative disclosure.

Many institutions are attracted to diversified portfolios of hedge funds, referred to as Funds of Hedge Funds (FoHFs). In this article, we examine a new database that separates out for the first time the effects of diversification (the number of underlying hedge funds) from scale (the magnitude of assets under management). We find with others that the variance-reducing effects of diversification diminish once FoHFs hold more than 20 underlying hedge funds. This excess diversification actually increases their left-tail risk exposure once we account for return smoothing. Furthermore, the average FoHF in our sample is more exposed to left-tail risk than are naïve 1/N randomly chosen portfolios. This increase in tail risk is accompanied by lower returns, which we attribute to the cost of necessary due diligence that increases with the number of hedge funds.

Accounting research frequently uses R2, for example, to measure value relevance. We show analytically that scale effects present in levels regressions increase R2, and this effect increases in the scale factor's coefficient of variation. Thus, between-sample comparisons of R2 are invalid, unless one controls for differences in the scale factor's coefficient of variation. Applying our analysis to prior research, we show that the documented increase in value relevance of accounting is attributable to increases in the coefficient of variation of the scale factor. Controlling for this effect, there has been a decline in value relevance, as measured by R2.

The Securities and Exchange Commission (SEC) has expressed concern about the informativeness of firms’ Management Discussion and Analysis (MD&A) disclosures. A firm's MD&A is potentially uninformative if it does not change appreciably from the previous year after significant economic changes at the firm. We introduce a measure for narrative disclosure—the degree to which the MD&A differs from the previous disclosure—and provide three findings on the usefulness of MD&A disclosure. First, firms with larger economic changes modify the MD&A more than those with smaller economic changes. Second, the magnitude of stock price responses to 10‐K filings is positively associated with the MD&A modification score, but analyst earnings forecast revisions are unassociated with the score, suggesting that investors—but not analysts—use MD&A information. Finally, MD&A modification scores have declined in the past decade even as MD&A disclosures have become longer; the price reaction to MD&A modification scores has also weakened, suggesting a decline in MD&A usefulness.

Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. We find that such evidence is consistent with an economy where there are in fact k “equally important” priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important “factor” is the return on an equally weighted market index.

Stephen J. Brown, Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory: Discussion, The Journal of Finance, Vol. 43, No. 3, Papers and Proceedings of the Forty-Seventh Annual Meeting of the American Finance Association, Chicago, Illinois, December 28-30, 1987 (Jul., 1988), pp. 734-735

Stephen J. Brown, Benefits of Bank Diversification: The Evidence from Shareholder Returns: Discussion, The Journal of Finance, Vol. 39, No. 3, Papers and Proceedings, Forty-Second Annual Meeting, American Finance Association, San Francisco, CA, December 28-30, 1983 (Jul., 1984), pp. 893-894