Changes in Risk Factor Disclosures and the Variance Risk Premium
Lyle, M.,
Riedl, E.,
and F., Siano
2023, The Accounting Review 98 (6): 1-26
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.