For over a decade, the SEC has required corporations to disclose in their 10-K filings the nature and extent of their risk exposures using one or more of the following three methods: (1) sensitivity analysis; (2) the so-called "tabular" format; and (3) value-at-risk (VaR). After discussing the significant differences in the type and level of information revealed by each method, this article presents the findings of a study that examines how corporate choices of disclosure method vary with firm-specific and industry characteristics. 2007 Morgan Stanley.

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We examine the extent of systemic risk and competitive interaction in a segment of the financial services industry: over-the-counter derivatives dealers. Using an extended series of derivatives-related failures in the 1990s, we analyze the investor reaction to the clients' losses for the directly-involved and non-involved derivatives dealers. We find that the involved dealers experience significantly negative stock returns around the announcements of losses by their clients. In contrast, non-involved dealers experience positive event period returns, revealing a competitive effect. Over time, as new losses are revealed, the competitive effect for the still non-involved dealers becomes more pronounced. An expanded industry definition including securities brokers, dealers, and advisors results in a significant and negative reaction. This finding provides support for the existence of industry contagion. A cross-sectional analysis of the determinants of the abnormal returns provides evidence for the existence of information contagion and against pure contagion and systemic risk. Some evidence of moral hazard related to potential government intervention is also detected. Our findings have important implications for the financial services industry in general and government sponsored enterprises and hedge funds in particular.

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