Topic:An Unintended Benefit of the Risk Factor Mandate of 2005
Speaker:Allen Huang, Hong Kong University of Science and Technology
Time:Friday, Dec 21th, 14:00-15:00 p.m
Place:Room 115, Guanghua Building 1
This study examines the effect of the Securities and Exchange Commission (SEC) risk factor disclosure mandate on firms’ willingness to provide forward-looking statements. In 2005, the SEC began mandating that firms disclose their risk factors in their 10-K filings to provide the market with useful information on firm risk. Since risk factor disclosures constitute“meaningful cautionary language”under the safe harbor provision of the Private Securities Litigation Reform Act, the mandate resulted in an exogenous increase in legal protection for forward-looking statements for firms that had not previously disclosed their risk factors (named as mandatory disclosers). Using a difference-in-differences design, we compare mandatory disclosers to firms that disclosed their risk factors prior to the mandate. Our results show that mandatory disclosers are more willing to provide forward-looking statements, particularly positive ones, after the mandate. Using management forecasts as an alternative measure, we find that mandatory disclosers are more willing to provide management forecasts and that their forecasts are more positive, have higher precision, and are of a longer horizon. We further use cross-sectional tests to show that this effect is stronger for firms whose forward-looking statements are more susceptible to potential litigation. Last, we find that this increased willingness to provide forward-looking information has a positive effect on the information environment, illustrating an unintended benefit of the 2005 risk factor mandate.
Dr. Allen Huang is an Associate Professor of Accountancy Department in Hong Kong University of Science and Technology. He holds a B.S. in Peking University. And he holds a Ph.D. in Duke University.
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