Evolutionary Mechanism of Risk Factor Disclosure in American Financial Corporation Annual Report

Since 2005, most U.S. listed firms have been mandated by the Securities and Exchange Commission (SEC) to disclose an additional section, named Item 1A risk factors, in annual reports (i.e. Form-10-K filing) to discuss risk factors these firms are facing with. The current research rarely study the evolutionary mechanism of risk factor disclosure. Based on 263310 risk factors extracted from 9730 U.S. financial firm annual reports during 2006–2016, this paper draws the trends of the risk disclosure in terms of risk factor number, redundancy, specificity, fog index, sentiment subjectivity and boilerplate. The empirical analysis shows that the overall trends of these six textual attributes are arising. This paper further studies the evolutionary mechanism from the perspective of firm characteristics, regulation and financial crisis. There are two main findings. Firstly, the overall trends of these textual attributes can be explained by the changes in company characteristics. Secondly, the occurrence of important events such as the release of regulations and financial crisis can lead to leapfrogging of textual attributes.