Do Investors Turn a Blind Eye to Risk-Factor Disclosures by State-Controlled Firms?

Abstract

There is scant empirical evidence on how government involvement affects the investor demand for firm-specific information. We fill the void by testing how investors respond to risk-factor disclosures in IPO prospectuses in China, where state-controlled firms receive government-offered implicit insurance against bankruptcy risk, but bear significant agency and political risks. We find an insignificant association between risk-factor disclosure quality and IPO underpricing (or post-IPO stock return volatility) among state-controlled firms. State-offered implicit insurance appears to be the predominant consideration when investors value IPO shares of state-controlled firms, thereby weakening the investor demand for high-quality risk-factor disclosures. Our study highlights the state control effect, which renders high-quality risk disclosures ineffective for state-controlled firms in economies with significant government involvement.