The benefits of specific risk-factor disclosures

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’ q...

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Bibliographic Details
Published in:	Review of accounting studies 2016-12, Vol.21 (4), p.1005-1045
Main Authors:	Hope, Ole-Kristian, Hu, Danqi, Lu, Hai
Format:	Article
Language:	eng
Subjects:	Accounting Accounting/Auditing Analysis Business and Management Corporate Finance Disclosure Financial statements Investments Proprietary Public Finance Risk factors Securities trading Students Studies Valuation
Online Access:	Get full text
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Summary:	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.
ISSN:	1380-6653 1573-7136