The Benefits of Specific Risk-Factor Disclosures

Hope, Ole‐Kristian; Hu, Danqi; Lü, Hai

doi:10.2139/ssrn.2457045

Cited by 63 publications

(133 citation statements)

References 19 publications

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“…In addition, proprietary costs are a major concern for firms when disclosing certain risk information that is previously unknown to the public (Hope et al. ).…”

Section: Resultsmentioning

confidence: 99%

“…1 The SEC expects the inclusion of RFDs to enhance the content and transparency of corporate reporting, thereby allowing investors to make betterinformed portfolio allocation decisions. Extant research on RFDs focuses mostly on equity markets (e.g., Campbell et al 2014;Hope et al 2016). Overall, these studies show that RFDs are informative and useful to equity market participants for risk assessments.…”

Section: Introductionmentioning

confidence: 86%

“…Hope et al. () measure the level of specificity of RFDs and document that the market reaction to 10‐K filings is greater for firms with more specific RFDs, indicating that RFDs with a higher level of specificity benefit financial statement users more. Similarly, Kravet and Muslu () find that textual risk disclosures in the whole 10‐K are associated with return volatility, trading volume, and forecast volatility, suggesting that such disclosures increase investors' risk perceptions.…”

Section: Institutional Background Relevant Literature and Hypothesementioning

confidence: 99%

“…Campbell et al (2014) find that RFDs increase beta and return volatility but reduce bid-ask spreads, implying that equity investors take the information contained in RFDs into account when assessing firm risk. Hope et al (2016) measure the level of specificity of RFDs and document that the market reaction to 10-K filings is greater for firms with more specific RFDs, indicating that RFDs with a higher level of specificity benefit financial statement users more. Similarly, Kravet and Muslu (2013) find that textual risk disclosures in the whole 10-K are associated with return volatility, trading volume, and forecast volatility,…”

Section: Cds Relevant Literaturementioning

confidence: 99%

“…In an attempt to fill this void in the literature, our study aims to examine the incremental effect of qualitative disclosures under the RFD mandate on the pricing of CDS instruments over and above quantitative disclosures in corporate filings. Although previous studies (e.g., Campbell et al 2014;Hope et al 2016) have provided evidence supporting the relevance of RFDs to equity market participants, the information role of RFDs in debt markets has not been well explored so far. It is unclear, a priori, whether information disclosed via the RFD mandate is of similar relevance to debt market participants as it is to equity market participants.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

See 4 more Smart Citations

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Chiu

Guan

Kim

2018

Contemporary Accting Res

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This study examines the relation between narrative risk disclosures in mandatory reports and the pricing of credit risk. In particular, we investigate whether and how the Securities and Exchange Commission (SEC) mandate of risk factor disclosures (RFDs) affects credit default swap (CDS) spreads. Based on the theory of Duffie and Lando (2001), we predict and find that CDS spreads decrease significantly after RFDs are made available in 10‐K/10‐Q filings. These results suggest that RFDs improve information transparency about the firm's underlying risk, thereby reducing the information risk premium in CDS spreads. The content analysis further reveals that disclosures pertinent to financial and idiosyncratic risk are especially relevant to credit investors. In cross‐sectional analyses, we document that RFDs are more useful for evaluating the business prospects and default risk of firms with greater information uncertainty/asymmetry. Overall, our findings imply that the SEC requirement for adding a risk factor section to periodic reports enhances the transparency of firm risk and facilitates credit investors in evaluating the credit quality of the firm.

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“…In addition, proprietary costs are a major concern for firms when disclosing certain risk information that is previously unknown to the public (Hope et al. ).…”

Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 86%

Section: Institutional Background Relevant Literature and Hypothesementioning

confidence: 99%

Section: Cds Relevant Literaturementioning

confidence: 99%

Section: Hypotheses Developmentmentioning

confidence: 99%

See 3 more Smart Citations

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Chiu

Guan

Kim

2018

Contemporary Accting Res

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Do investors value companies' mandatory nonfinancial risk disclosure? An empirical analysis of the Italian context after the EU Directive

2020

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In October 2014, the European Union adopted Directive 2014/95/EU (hereafter, EU Directive), mandating companies of a certain size to draft and publish corporate nonfinancial information (NFI) regarding society and the environment. In this study, we examine the mandatory disclosure of nonfinancial (NF) risks by listed Italian companies, as required by the EU Directive, focusing on both the state‐of‐the‐art of such disclosure and its usefulness for investors. For this purpose, the study adopts a two‐staged research approach; in the first stage, we employed a manual meaning‐oriented content analysis to investigate the NF declarations (NFDs) of the listed Italian companies that were obliged to disclose NFI, returning a quality NF risks disclosure index. In the second stage, we used the value relevance methodology to investigate whether the disclosed NF risk information affects the levels of equity prices, through a modified Ohlson model. Our research is one of the first to investigate the value relevance of mandatory disclosures of NF risks following the implementation of the EU Directive, in the Italian context. The research was carried out in 2017, the first year of the directive's application for listed Italian companies. The main findings support a positive association between NF risk information disclosure levels and companies' market value. Moreover, they provide evidence of a significant mediating effect of NF risk on the relationship between financial risks and market value.

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Are bank risk disclosures informative? Evidence from debt markets

et al. 2020

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This study examines whether financial reporting with a specific focus on risk disclosures have a predictive (informative) effect on banks' credit ratings (BCRs) and, consequently, ascertains whether governance structures can moderate such an association. Using one of the largest bank‐level datasets collected from 12 Middle East and North African (MENA) countries over the 2006–2013 period to‐date, our findings are as follows. First, we find that risk disclosures have a predictive effect on BCRs. Second, we find that the relationship between risk disclosures and BCRs is contingent on the quality of governance structures. Specifically, we find that the informativeness of risk disclosures on BCRs is higher in banks with larger board size, greater independence, higher government ownership, and better Shariah supervisory board, but lower in banks with greater block ownership, higher foreign ownership and the presence of CEO duality. The central tenor of our findings remains unchanged after controlling for a number of firm‐ and country‐level factors, alternative risk disclosure measures, firm‐ and national‐level governance proxies, different types of banks, and potential endogeneities. The findings have important implications for investors, especially bondholders, standard‐setters, regulators, and central governments.

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The Benefits of Specific Risk-Factor Disclosures

Cited by 63 publications

References 19 publications

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Do investors value companies' mandatory nonfinancial risk disclosure? An empirical analysis of the Italian context after the EU Directive

Are bank risk disclosures informative? Evidence from debt markets

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