Textual risk disclosures and investors’ risk perceptions

Textual risk disclosures and investors’ risk perceptions We examine the association between changes in companies’ textual risk disclosures in 10-K filings and changes in stock market and analyst activity around the filings. We find that annual increases in risk disclosures are associated with increased stock return volatility and trading volume around and after the filings. Increases in risk disclosures are also associated with more dispersed forecast revisions around the filings. In contrast to prior literature documenting resolved uncertainties in response to various types of company disclosures, our findings suggest that textual risk disclosures increase investors’ risk perceptions. However, the results are less pronounced for firm-level disclosures that deviate from those of other companies in the same industry and year. These results lend support for critics’ arguments that firm-level risk disclosures are more likely to be boilerplate. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Textual risk disclosures and investors’ risk perceptions

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-013-9228-9
Publisher site
See Article on Publisher Site

Abstract

We examine the association between changes in companies’ textual risk disclosures in 10-K filings and changes in stock market and analyst activity around the filings. We find that annual increases in risk disclosures are associated with increased stock return volatility and trading volume around and after the filings. Increases in risk disclosures are also associated with more dispersed forecast revisions around the filings. In contrast to prior literature documenting resolved uncertainties in response to various types of company disclosures, our findings suggest that textual risk disclosures increase investors’ risk perceptions. However, the results are less pronounced for firm-level disclosures that deviate from those of other companies in the same industry and year. These results lend support for critics’ arguments that firm-level risk disclosures are more likely to be boilerplate.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 7, 2013

References

  • The financial reporting environment: Review of the recent literature
    Beyer, A; Cohen, DA; Lys, TZ; Walther, BR
  • Disclosure level and the cost of equity capital
    Botosan, C
  • Information in equity markets with ambiguity-averse investors
    Caskey, JA
  • Confirming management earnings forecasts, earnings uncertainty, and stock returns
    Clement, M; Frankel, R; Miller, J
  • Disclosure, liquidity, and the cost of capital
    Diamond, DW; Verrecchia, RE
  • Information and the cost of capital
    Easley, D; O’Hara, M
  • Ambiguity, information quality, and asset pricing
    Epstein, LG; Schneider, M

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