The benefits of specific risk-factor disclosures

Review of Accounting Studies · 2016 · Volume 21 · Issue 4

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 inSpecificity, 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 withSpecificity. 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.

Keywords

Risk-factor disclosure, Specificity, Market reactions, Trading volume, Analyst risk assessments, Scenario analysis

Enable JavaScript for citation tools and additional paper interactions.