Risk Factor Disclosures: A Review and Directions for Future Research*

Abstract

This paper assesses the current state of scholarly work on risk factor disclosures (RFDs) with the goal of synthesizing existing literature and stimulating further research in this area. To a large extent, prior research studies have examined different aspects of the disclosure of corporate risk information in annual reports. Beginning in 2005, the US SEC proposed changes to the disclosure of risk information in annual 10-K reports. The changes mandated large firms in the United States to disclose risk factors in Item 1A of their 10-Ks. While research studies on the impact of the changes are still ongoing, there are concerns among stakeholders that RFDs are vague, repetitive, and boilerplate. As a result, the SEC called on firms to ensure that they clearly disclose all the risks they faced. The SEC's call resulted in the release of an amendment that provides directions to further improve firms' RFDs. Using a systematic literature review method, this paper classifies the RFD literature into five research themes: (i) contents, (ii) informativeness, (iii) determinants, (iv) quality, and (v) effects on firm performance. The paper also reviews theories that have been dominantly applied in RFD studies and provides suggestions for future research.