Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports?

Li, Feng

doi:10.2139/ssrn.898181

Cited by 235 publications

(184 citation statements)

References 14 publications

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“…For example, Li (2006) counts the frequency of the word stems "risk" and "uncertain" over a sample period that pre-dates the risk factor disclosure mandate, 1993 to 2004, and finds that an increase in the risk sentiment of annual reports is associated with lower future earnings and equity returns. Kravet and Muslu (2013) counts the number of sentences containing risk-related keywords in corporate annual reports over a sample period that spans both the PSLRA safe harbor and the risk factor disclosure mandate, 1994 to 2007, and finds that increases in this measure are associated with increased stock return volatility and trading volume around the 10-K filing date, as well increased volatility of analyst forecast revisions.…”

Section: Risk Disclosuresmentioning

confidence: 99%

Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors

Nelson

Pritchard

2014

SSRN Journal

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This study investigates risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act and the SEC's subsequent disclosure mandate. Firms subject to greater litigation risk disclose more risk factors, update the language more from year-to-year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate. Consistent with these findings, the risk factor disclosures of high litigation risk firms are significantly more informative about systematic and idiosyncratic firm risk when disclosure is voluntary but not when disclosure is mandated. Overall, the results suggest that for some firms voluntary disclosure of risk factors is not a substitute for a regulatory mandate.

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Section: Risk Disclosuresmentioning

confidence: 99%

Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors

Nelson

Pritchard

2014

SSRN Journal

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“…stories and disclosures seem to decrease the cost of capital and negative disclosures increase it. 10 Related to this line of enquiry, is the study by Li (April, 2006) This goes against the intuition that higher pessimism should lead to lower returns, or equivalently, lower risk, suggesting that the pessimism factor captured by negative words may be distinct from risk. This is further corroborated by the fact that the effects of pessimism seem to be temporary and future stock returns reverse.…”

Section: Prior Researchmentioning

confidence: 99%

The Incremental Information Content of Tone Change in Management Discussion and Analysis

et al. 2008

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This study explores whether the Management Discussion and Analysis (MD&A) section of Form 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises, accruals and operating cash flows (OCF). It uses a well-established classification scheme of words into positive and negative categories to measure the tone change in a specific MD&A section as compared to those of the prior four filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone of the MD&A section, even after controlling for accruals, OCF and earnings surprises. We also show that the tone of the MD&A section adds significantly to portfolio drift returns in the window of two days after the SEC filing date through one day after the subsequent quarter's preliminary earnings announcement, beyond financial information conveyed by accruals, OCF and earnings surprises. The incremental information of tone change is larger the weaker is the firm's information environment. The Incremental Information Content of Tone Change in Management Discussion and AnalysisThere is a substantial body of literature in financial economics and accounting that examines the value relevance and information content of quantitative factors in the pricing of stocks. While economic and statistical modeling has become more sophisticated over the years, the somewhat disconcerting conclusion that seems to have emerged is that these quantitative factors inadequately explain movement of stock prices.Persuasive evidence of this is provided by Shiller (1981), Roll (1988), and Cutler et al. (1989), and others in the finance literature, who demonstrate that stock prices do not respond to change in quantitative measures of firm fundamentals as would be expected from models incorporating only quantitative variables of firm performance. In the accounting literature, Thiagarajan (1993), and Lev (1996) earnings and stock returns on the day after the publication of these news articles. They find that the proportion of negative words in these news stories (especially, negative words about a firm's fundamentals) do provide information about future earnings even after controlling for other factors; the higher the proportion of negative words the larger are the negative shocks to future earnings. In addition, they provide persuasive evidence that potential profits could be made by trading on negative words from DJNS, a timely news service (but not from the one day old information published in the WSJ). 2The two Tetlock papers remain among the first of their kind to assess the predictive content of non-quantitative verbal information and are the main motivators of our work. 3 By focusing on news stories in media, their work is more concerned with 1 Following the initial impact on stock prices due to the media pessimism factor, the prices of indexes of smaller stocks reverse more slowly than those of large firms. In addition, he also provides persuasive evidence to show that pessimism i...

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“…Some studies further reported that disclosure decisions are associated with management incentives (Merkley, 2014;Kravet & Muslu, 2013;Davis, Piger, & Sedor, 2012;Price, Doran, Peterson, & Bliss, 2012;Loughran & McDonald, 2011;Henry, 2008;Li, 2006). This study differs from above-mentioned studies in attempting to examine the relationship between the disclosure of MI and CSR companies by examining whether CSR companies are more likely to disclosure the MI, because CSR matters to the market, and assessments of CSR can potentially provide useful and timely information to investors.…”

Section: Literature Reviewmentioning

confidence: 92%

“…These findings indicate that CSR is among the most important reputation assets of a company and that market participants perceive such disclosure as responsible behavior. Third, previous studies (Ertimur, Sletten, & Sunder, 2011;Brown, Hillegeist, & Lo, 2009;Li, 2006Li, , 2008Bloomfield, 2008) found that disclosures are often associated with uncertainty in a firm's operations. This study takes the examination further by demonstrating that the disclosure of MI by CSR companies may reflect in the quality of financial reporting.…”

Section: Introductionmentioning

confidence: 93%

Exploring the Nature of Material Information: Disclosure and Its Implications

Wang¹,

Syu²

2015

IJEF

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Understanding the nature of material information is of crucial importance to regulators and the investment community, particularly with regard to the implications of disclosure. This study examined the disclosure of material information by companies listed in Taiwan in various stages of their life cycle to identify the nature of material information as well as related firm performance and provides insights into their causes and consequences. Evidence suggests that companies intent on fulfilling their corporate social responsibilities are more likely to disclose material information and when doing so, they are highly valued by market participants. Our empirical results provide strong evidence that the disclosure of material information by socially responsible companies is associated with higher earnings quality. Furthermore, mature companies are more likely than growing companies to receive favorable reactions from market participants when they disclose material information.

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Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports?

Cited by 235 publications

References 14 publications

Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors

Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors

The Incremental Information Content of Tone Change in Management Discussion and Analysis

Exploring the Nature of Material Information: Disclosure and Its Implications

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