The Information Content of Differences in Financial Constraints Risk Disclosure Requirements

Abstract

We examine whether increased financial constraints risk factor disclosures during and after the financial crisis or in response to SEC comment letters reflect firms’ underlying financial constraints risk outcomes. We find that financial constraints risk factor disclosures are positively associated with ex-ante litigation risk and expected financial constraints levels before, during, and after the financial crisis. We also find that the association between disclosures and litigation risk is significantly greater during and after the financial crisis than that for the pre-crisis period. While we find that the financial constraints risk factor disclosures are positively associated with realized financial constraints outcomes for the pre-crisis period, we find no significant association between these disclosures and realized financial constraints outcomes during or after the financial crisis and this association reduces significantly from the pre-crisis to post-crisis period. Furthermore, we document that, while firms increase their financial constraints risk factor disclosures after receiving SEC comment letters, these disclosures are less reflective of realized financial constraints outcomes. Overall, our findings that increased financial constraints risk factor disclosures following the financial crisis and SEC comment letters are less reflective of the underlying economic risk suggest that sometimes less is more.