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

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 cur-rent understanding of risk reporting practices is limited. The sample consists of Dutch companies rais-ing 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 sec-tions, 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 fluctu-ations, 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.