Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language

• In Event: The Effects of Disclosures

Abstract

Prior research finds that lengthy and boilerplate risk factor disclosures are associated with negative capital market consequences. Yet regulators and users of financial statements continue to criticize corporate risk factor disclosures as excessively long and boilerplate. We examine two factors that may influence firms’ incentives to disclose lengthy, boilerplate risk factor disclosures by examining how measures of disclosure length and disclosure boilerplate correlate with judicial and regulatory assessments of firms’ risk factor disclosures. Our results suggest that longer and more boilerplate risk factor disclosures are less likely to be flagged as inadequate under judicial and regulatory review. Specifically, we find that longer and more generic risk factor language is positively associated with favorable assessments for purposes of the Private Securities Litigation Reform Act’s safe harbor, and that standardized risk factor language is less likely to be targeted by an SEC comment letter during the SEC’s filing review process.

Authors

• Richard Arnold Cazier, University of Texas at El Paso

• Jeff Lawrence McMullin, Indiana University - Bloomington

• John S. Treu, West Virginia University