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.

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Fig. 1


  1. 1.

    Not all forward-looking disclosures resolve uncertainties. Rogers et al. (2009) document higher implied volatilities derived from exchange-traded options around managerial forecasts (especially around irregular managerial forecasts and forecasts that convey bad news).

  2. 2.

    FRR No. 48 mandates these disclosures to be made as Item 7A as described in Item 305 of Regulation S–K introduced under the Securities Exchange Act of 1934, which had encouraged registrants to provide market risk disclosures.

  3. 3.

    These factors have to be provided under the caption “Risk Factors” (as Item 1A in the 10-K filing) as described in Item 503(c) of Regulation S–K introduced under the Securities Exchange Act of 1934.

  4. 4.

    A related strand of literature examines how information precision and asymmetry affect the cost of capital (Diamond and Verrecchia 1991; Botosan 1997; Francis et al. 2004; Easley and O’Hara 2004; Lambert et al. 2007; Bhattacharya et al. 2009; Kravet and Shevlin 2010).

  5. 5.

    The theoretical literature on risk disclosures focuses on cost of capital. Jorgensen and Kirschenheiter (2003) propose a partial disclosure equilibrium, in which managers voluntarily disclose (not disclose) if their firm has low (high) variance of future cash flows, and the disclosing firm has a lower risk premium ex post.

  6. 6.

    We use the TextPipe software to convert rich text formatted files from 10-K Wizard to ASCII-code formatted files.

  7. 7.

    We acknowledge that this algorithm does not perfectly measure the intensity of risk disclosures in annual reports. For instance, our algorithm defines tables as single sentences, some of which present extensive information about how future performance can vary with respect to various factors. Furthermore, we do not differentiate between audited risk statements that are in the footnotes and unaudited risk statements that are elsewhere in the annual report. However, the changes methodology of our tests should prevent such measurement errors affecting our conclusions. Further, our out-of-sample validation tests (untabulated) show that our routine is well-specified and powerful.

  8. 8.

    Alternative methods to measure changes in textual risk disclosures involve examining the rate of change in the frequency of specific words within the text or frequency of word groups within a sentence (Brown and Tucker 2011; Nelson and Pritchard 2007).

  9. 9.

    For this comparison, we calculate the Li (2006) and Campbell et al. (2011) risk disclosure measures on sentence basis rather than word basis, because this is the form for which we have the data to calculate these measures.

  10. 10.

    Our analysis is constrained by the possibility of other news that may correlate with risk disclosures over long windows. Therefore our causality interpretation is potentially confounded, but—we argue—this is less likely with our study than for studies investigating changes in longer horizons such as years.

  11. 11.

    There are also arguments that firm-level stock return volatility is associated with noise and less information about the company (Roll 1988). However, this view seems to have lost support in recent years (Liu and Wysocki 2007).

  12. 12.

    Differential belief revision around disclosures can arise from either (1) differential interpretations of the disclosures or (2) differences in the precision of investors’ pre-disclosure information.

  13. 13.

    A meaningful number of analysts is needed to compute the standard deviation of forecast revisions. The results are similar if the number of analysts used is higher or lower than five.

  14. 14.

    ΔMarket Return Volatility and ΔMarket Return are calculated excluding daily returns from the three-day window centered on the 10-K filing date.

  15. 15.

    The results are essentially the same when standard errors are clustered for filing quarter or filing year.

  16. 16.

    In order to fully capture analysts’ differential interpretations around 10-K filings, we try two dependent variable alternatives to σ(Forecast Revision). First, ΔForecast Dispersion is the difference in standard deviation of one-year-ahead earnings forecasts issued during the first 2 months after the filings and during the last 2 months before the filings. Second, KP Forecast Divergence is the proportion of all pairs of analysts’ forecast revisions that diverge from each other (Kandel and Pearson 1995). While these two variables correlate positively with ΔRisk Disclosure, the related coefficient estimates in Eq. (1) are not significant.

  17. 17.

    In untabulated tests, we include firm fixed-effects and find similar results as those that are reported.


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The authors thank Anwer Ahmed, Ashiq Ali, Bill Cready, Tom Lopez, Russell Lundholm (editor), Karen Nelson, Suresh Radhakrishnan, Shiva Rajgopal, Peter Wysocki, an anonymous reviewer, and participants at the AAA 2011 FARS conference, AAA 2011 Annual conference, RSM Erasmus University, University of Texas at Dallas 2010 Corporate Governance Conference for helpful comments. We thank Dongkuk Lim for research assistance. We acknowledge Thomson Financial Services Inc. for providing earnings per share forecast data as part of a broad academic program to encourage earnings expectation research.

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Correspondence to Volkan Muslu.


Appendix 1: Descriptive information of risk disclosure measure

See Tables 6, 7, 8.

Table 6 Average number of risk-related keywords in an annual report
Table 7 Examples of new risk sentences in 10-K filings
Table 8 Average number of total sentences and risk sentences in the sections of 10-K filings

Appendix 2: Anecdote

Appendix presents the daily stock returns for the 60-day period before and after the January 1, 2006, 10-K filing of Take-Two Interactive. The standard deviation of returns (Δσ(Return)) increased from 2.6 to 3.1 %. The example is based on a news media article citing risk disclosures in the company’s 10-K filing (Consumer Electronics Daily, February 2, 2006).

Article excerpts

“Take-Two Interactive ‘reached an agreement in principle’ to retain, for 3 years, key employees at its Rockstar game studio responsible for the hit Grand Theft Auto series, the company disclosed in its 10-K filing at the SEC. But Take-Two said the ‘compensation arrangements could result in increased expenses and have a negative impact on our operating results.’”

“Take-Two warned in the 10-K … that a failure to reach a definitive deal with the Rockstar employees and if one or more of them leave Take-Two, ‘we may lose additional personnel, experience material interruptions in product development and delays in bringing products to market.’ It said that ‘could have a material adverse effect on our operating results.’”

“Take-Two also warned investors that its publishing and distribution activities require significant cash resources [and that it] may be required to seek debt or equity financing to fund the cost of continued expansion.”

Appendix 3

See Table 9.

Table 9 Variable definitions

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Kravet, T., Muslu, V. Textual risk disclosures and investors’ risk perceptions. Rev Account Stud 18, 1088–1122 (2013). https://doi.org/10.1007/s11142-013-9228-9

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  • Disclosure
  • Risk
  • Uncertainty
  • 10-K filings
  • Trading volume
  • Stock return volatility

JEL Classification

  • D8
  • G24
  • G12
  • M4