Doctor of Philosophy (PhD)
Lazaridis School of Business and Economics
Dr. Robert Mathieu
Dr. Chima Mbagwu
Dr. Darren Henderson
Beginning in 2005, the US Securities and Exchange Commission (SEC) proposed changes to the disclosure of risk information in the annual 10-K reports. Based on these changes, large firms in the US are required to disclose risk factors in Item 1A of their 10-K. This study contains three essays that review the current literature on Risk Factor Disclosures (RFDs) and employ empirical methods to test the usefulness of this disclosure.
The first essay reviews the existing literature on RFDs and provides direction for future research. This review discusses the strengths and limitations of current research in the field and suggests further research relating to the call for comment by the SEC, the contents and topics in RFDs, the usefulness of RFDs to investors, in contractual settings, and the market in general.
In the second essay, I develop a new measure of RFDs that captures managerial discretion in risk factor reporting to examine the usefulness of RFDs in the private and public debt markets. In both debt markets, I find that RFDs are informative and that the risk profile of firms is reflected in their cost of debt. In the private debt market, I find that firms with RFDs above expectation have lower cost of debt as possible reward for transparency. Similarly, firms with RFDs below expectation also have lower cost of debt, suggesting banks already know that the firms are less risky. In the public debt market, I find that firms with RFDs above expectation have higher cost of debt while firms with lower risk disclosure than expected have lower cost of debt. The results suggest public lenders take RFDs as representative of firm risk.
The third essay examines the effect of corporate governance on managerial discretion in reporting RFDs and the subsequent impact on cost of debt. To examine this effect, I focus on firms that pay a penalty for perceived higher risk in the public debt market. I find evidence that corporate governance promotes transparency in reporting RFDs. I also find that risky firms with either strong or weak corporate governance have higher cost of debt, suggesting corporate governance may not be important to public lenders.
The findings in this dissertation suggest that RFDs are both informative and useful to borrowers and lenders. The findings are useful to regulators in setting mandatory disclosure requirements, debt providers in evaluating firm risk, and management in implementing organizational corporate governance structures.
Isiaka, Abiodun, "Three Essays on Risk Factor Disclosures" (2018). Theses and Dissertations (Comprehensive). 2032.