Does Risk Factor Disclosure Really Help Analysts?

• In Event: Analysts and Markets

Abstract

Using Chinese IPO firms, we examine the impact of qualitative information, specifically risk factor disclosure, on financial analysts’ following decision and the properties of their earnings forecasts. We construct disclosure index by manually reading the disclosure of risk factors in IPO prospectus. We find that more risk factor disclosure is associated with less analyst following and greater earnings forecast error and dispersion, suggesting that risk factor disclosure increases the cost of information processing and analysts have difficulty in processing such qualitative risk information. Further analyses reveal that analyst ability and incentive do not affect the relation. Cross-sectional tests show that the effect is less severe in larger firms, firms with higher profitability, and firms with lower ownership concentration. Evidence also suggests that analysts spend less effort on information processing for firms with more risk factor disclosure. We conduct additional robustness tests and address potential endogeneity concerns.

Authors

• Mei Zhao, Nankai University

• Yun Ke, Brock University

• Yi Yao, Nankai University