Corporate Risk Reporting: A Content Analysis of Narrative Risk Disclosures in Prospectuses

Abstract

This study examines whether companies report risk-relevant information to prospective investors. While corporate risk communication is important for the well-functioning of capital markets, our current understanding of risk reporting practices is limited. The sample consists of Dutch companies raising capital on the Amsterdam Stock Exchange in the late 1990s. In this setting, companies had much discretion in writing the risk section of the prospectus. After a detailed content analysis of the risk sections, the author demonstrates that a measure of risk extracted from these texts successfully predicts the volatility of companies' future stock prices, the sensitivity of future stock prices to market-wide fluctuations, as well as severe declines in future stock prices. Overall, these results support the view that prospectuses of Dutch companies provide adequate information about material investment risks.

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