Changes in Risk Factor Disclosures and the Variance Risk Premium

Abstract

ABSTRACT This paper examines how changes in risk disclosures affect uncertainty about risk. We measure changes in risk disclosures using the addition and removal of individual risk factors to firms’ 10-K filings, identified via textual analysis of the risk factors section. Our market outcome is the variance risk premium (VRP), which captures the market’s pricing of uncertainty about firm risk. Following recent theoretical predictions, we predict and empirically document that newly disclosed signals of risk factor exposure—reflected in added and removed individual risk factors—decrease the uncertainty surrounding firm risk, as proxied via the VRP. We further confirm that individual risk factors offer incremental insights compared with alternative textual risk measures. Collectively, our findings suggest that textually evaluating individual risk factors reveals information about the uncertainty regarding firm risk. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G18; G32; M40.