Textual Risk Disclosures and Investors' Risk Perceptions


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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. The increases in risk disclosures are also associated with more dispersed earnings forecasts and forecast revisions after the filings. In contrast to prior literature documenting reduced uncertainty in response to various types of company disclosures, our findings suggest that risk disclosures reveal unknown unknowns and increase the market's perception of risk and uncertainties. However, the results are less pronounced for companies whose increases in risk disclosures differ from those of other companies in the same industry and for companies whose risk disclosures emphasize negative outcomes. These results lend some support for critics' arguments that firm-level, likely voluntary, risk disclosures and disclosures that emphasize negative outcomes are more likely to be boilerplate.
 
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Paolo Perego

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