Risk Disclosure in SEC Corporate Filings

Beginning in 2005, the SEC required firms to include qualitative disclosures of risk factors in item 1A in their annual 10-K forms. In this paper, we examine the textual content of this section and determine whether it reflects the firm’s performance. We first categorized each risk disclosure that a firm presented into one of 29 categories and then examined these categorizations. Our investigation yields three main results. First, we find that several risk factor categories, such as government and competitive risks, are common across our sample of firms. Second, we find that a firm’s industry classification (as given by its SIC code) is not a differentiating factor in the disclosures that a firm makes. Third, we find that risk factor disclosures are generally not predictive of a firm’s financial performance in the form of leverage, capital structure, cash, and acquisitions. Our analysis expands on previous work by considering the content of the disclosures in more detail rather than focusing on more quantitative characteristics of disclosures.