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The benefits of specific risk-factor disclosures

Ole‐Kristian Hope^1,2; Danqi Hu³; Hai Lu²

¹ BI Norwegian Business School · ² University of Toronto · ³ Northwestern University

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.

DOI

10.1007/s11142-016-9371-1

Volume

21 (4)

Pages

1005-1045

Language

en

Export

BibTeX

Sources

semanticscholar crossref openalex