Corporate risk reporting: a content analysis of narrative risk disclosures in prospectuses.

Changing client requirements 19

Seasonality demand 20

Personnel 63 Internal sources 29

Dependence on management 60

Dependence on product 14

Research and development 41

Intellectual property rights 31

Product defects 19

Liability 46

Accounts receivable 16

Information systems 13

and controls

Limited flexibility 16

cost structure

Debt covenants 11

Excessive debt 12

Management of growth 41

Acquisitions, alliances, 69

and joint-ventures Other sources 5

Millennium 43

Euro 20 Loss and probability of loss 3

History of losses and expectation 11

to continue to incur losses

Dilution due to future sale of shares 22 Variance 3

Volatility of share price 20

Variability of operating results 16 Lack of information 5

Limited operating history 11

Accuracy of forward- 10

looking statements

Absence of prior public market 51 Lack of control 5

Takeover defenses 15

Influence of large shareholder 45 Cronbach's coefficient alpha Eigenvalue % total variance

Component

Loadings

on Dimension Risk Factor 1 2 3 Macro environmental sources

Economic

General economic conditions -- -- .74

Currency, interest, and -- -- .40

price fluctuations

Political -- -- --

Social and environmental -- -- --

Regulation and legislation .58 -- --

Technological change .56 -- -- Industry sources

Competition .57 -- --

Potential entrants .56 -- --

Substitutes .53 -- --

Suppliers -- -- .49

Strategic partners .60 -- --

Customers

Market acceptance .59 -- --

Dependence on clients -- -- --

Changing client requirements -- -- .45

Seasonality demand -- -- --

Personnel -- .51 -- Internal sources

Dependence on management -- -- --

Dependence on product -- -- --

Research and development .56 -- --

Intellectual property rights .53 -- --

Product defects -- -- --

Liability -- .50 --

Accounts receivable -- -- --

Information systems -- -- --

and controls

Limited flexibility -- -- --

cost structure

Debt covenants .55 -- --

Excessive debt .53 -- --

Management of growth -- .66 --

Acquisitions, alliances, -- -- --

and joint-ventures Other sources

Millennium -- -- --

Euro -- -- -- Loss and probability of loss

History of losses and expectation .69 --

to continue to incur losses

Dilution due to future sale of shares .72 -- -- Variance

Volatility of share price .76 -- --

Variability of operating results -- -- .54 Lack of information

Limited operating history .52 -- --

Accuracy of forward- .55 -- --

looking statements

Absence of prior public market -- .63 -- Lack of control

Takeover defenses .40 -- --

Influence of large shareholder -- -- -- Cronbach's coefficient alpha .91 .85 .82 Eigenvalue 11.82 6.04 5.37 % total variance 24.62 12.59 11.19 Note: Shown are risk factors that were reported by at least 10% of the firms in the sample. Component loadings are shown when exceeding .40. Table 2. Descriptive Statistics of All Variables

Median

or % Variable Sample N M (a) Measure of risk

disclosures

RDS 1 all prospectuses 90 .00 -.41

RDS 1 initial public offerings 49 .23 -.30

RDS 1 seasoned offerings 31 -.18 -.69

RDS 1 high-risk industry 35 .43 -.06

RDS 1 low-risk industry 55 -.29 -.49 Ex-post measures

of equity risk

TRR (+6) all prospectuses 90 .14 .12

TRR (+12) all prospectuses 89 .15 .14

TRR (+18) all prospectuses 86 .15 .13

TRR (+24) all prospectuses 84 .15 .14

TRR (+30) all prospectuses 80 .14 .13

BETA (+30) all prospectuses 80 .86 .74

TRR (+6) seasoned offerings 31 .12 .11

TRR (+12) seasoned offerings 31 .14 .10

TRR (+18) seasoned offerings 31 .13 .12

TRR (+24) seasoned offerings 31 .13 .11

TRR (+30) seasoned offerings 31 .12 .11

TRR (-18) seasoned offerings 31 .12 .09

BETA (+30) seasoned offerings 31 .86 .71

BETA (-30) seasoned offerings 31 .75 .63 Measures of severe

declines in

stock price

FAIL1(+30) all prospectuses 80 10%

FAIL5(+30) all prospectuses 80 25%

FAIL75(+30) all prospectuses 80 20%

FAIL50(+30) all prospectuses 80 43% Control variables

SIZE all prospectuses 90 5.61 5.34

IND all prospectuses 90 39%

IPO all prospectuses 90 54%

SIZE seasoned offerings 31 6.45 6.49

IND seasoned offerings 31 21% Variable SD Min. Max. Measure of risk

disclosures

RDS 1 1.00 -1.03 2.99

RDS 1 1.04 -.95 2.99

RDS 1 .98 -.96 2.64

RDS 1 1.15 -.81 2.75

RDS 1 .78 -1.03 2.99 Ex-post measures

of equity risk

TRR (+6) .08 .02 .49

TRR (+12) .09 .05 .46

TRR (+18) .08 .05 .41

TRR (+24) .08 .05 .39

TRR (+30) .06 .05 .37

BETA (+30) .51 .01 1.99

TRR (+6) .06 .04 .31

TRR (+12) .09 .05 .46

TRR (+18) .07 .05 .35

TRR (+24) .06 .06 .32

TRR (+30) .06 .05 .30

TRR (-18) .08 .05 .31

BETA (+30) .50 .20 1.95

BETA (-30) .47 .01 1.81 Measures of severe

declines in

stock price

FAIL1(+30)

FAIL5(+30)

FAIL75(+30)

FAIL50(+30) Control variables

SIZE 1.62 2.90 9.80

IND

IPO

SIZE 1.64 3.51 9.80