Study: People Invest More When Specific Risks Are Disclosed

By:
Chris Gaetano
Published Date:
Sep 12, 2017
Inspector

A recent study has found a link between risk-related specificity in the 10-Ks and increased market activity, according to Kellogg Insight (a publication of Northwestern University's Kellogg School of Management). The researchers looked at nearly 15,000 10-Ks filed with the SEC between 2006 and 2011, and then used a computer algorithm to assess just how specific each one was with regards with risk disclosures. Specificity, in this case, was measured as using names, locations, numbers, dates and other information while disclosing qualitative risk (so, for example, naming competitors or the percent of business exposed to adverse economic conditions.) Finally, they compared risk specificity with market activity, analyst forecasts and scenarios, and other measures. What they found was that greater specificity in risk disclosures was related to increased market activity and analyst accuracy. The researchers believe that more information helps investors to incorporate a wider range of risk information in decision-making.This results in a stronger short-term market reaction. 

The researchers also noted, though, that more specificity can be a double-edged sword. While it's great for investors, for a company it might signal something negative to competitors or investors, and possibly discourage investment by making them think the business is too risky or too expensive. 

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