The Association of the Qualitative Informativeness of Market Risk Disclosures With Stock Liquidity

Abstract

The SEC’s 2016 Concept Release summarizes the ongoing debate regarding the usefulness of market risk disclosures and calls for additional discussion. We respond to the SEC’s call and investigate market risk disclosures. Using textual analysis, we evaluate and classify the qualitative content of market risk disclosures and expect that more informative disclosures are associated with improved liquidity, consistent with disclosure theory. We find that informative textual contents of market risk disclosures are associated with higher liquidity levels and lower liquidity uncertainty (i.e., an improved investors’ information environment). Our study is relevant to the ongoing discussion regarding the usefulness of market risk disclosures, calls for more detailed regulatory guidance for market risk disclosures, and contributes to the literature on stock liquidity and risk factor disclosures.