Do Risk Factor Disclosures Reduce Stock Price Crash Risk?

Abstract

We test whether voluntary or mandatory risk factor disclosures (RFDs) in 10-K filings is associated with a reduction in stock price crash risk. We find that the level of mandatory RFDs in 10-K filings is associated with a reduction in stock price crash risk, but find no similar relationship for voluntary RFDs. We exploit two exogenous shocks to mitigate endogeneity concerns that remain to be addressed in the literature. We investigate the moderators for this relationship and find the reduction is magnified among firms with higher information asymmetry, higher litigation risk, or better corporate governance. Overall, our findings identify a potential avenue to mitigate stock price crash risk and provide evidence that mandated RFDs contain useful information content and benefit investors.

Keywords: Item 1A, Risk factor disclosures, Crash risk, Information asymmetry, Corporate governance, Litigation risk

JEL Classification: G10