The Information Content of Risk Factor Disclosures in Quarterly Reports

I examine whether recently required Risk Factor update disclosures in quarterly reports provide investors with timely information regarding potential future negative outcomes. Specifically, I examine whether Risk Factor updates in 10-Q filings are associated with negative abnormal returns at the time the updates are disclosed and whether quarterly updates are followed by negative earnings shocks. I find that firms presenting updates to their Risk Factor disclosures have lower abnormal returns around the filing date of the 10-Q relative to firms without updates. Using multiple proxies as measures of expected earnings prior to the release of Risk Factor updates, I find that firms with updates to their Risk Factors section have lower future unexpected earnings and are more likely to experience future extreme negative earnings forecast errors. These findings suggest that the recent disclosure requirement mandated by the SEC was successful in generating timely disclosure of bad news.