Risk Disclosures, International Orientation, and Share Price Informativeness : Evidence from China

This paper examines the effect of textual risk disclosure on the amount of firm-specific information incorporated into share prices, as measured by stock price synchronicity, for Chinese listed firms during 2007-2011. We find that synchronicity is inversely associated with risk disclosure, suggesting that risk disclosure is firm specific and useful to investors. In addition, our results document that the usefulness of risk information is statistically and economically more pronounced among internationally oriented firms than their domestically oriented peers, consistent with the necessity for risk disclosure to be more meaningful when it relates to greater uncertainty. Finally, we find that internationally oriented firms tend to disclose more risk factors than their domestically oriented counterparts. Our findings are robust to a variety of specifications and the use of alternative measures of risk disclosure, stock price synchronicity and international orientation. Our paper has practical implications since its findings shed light on the current debate on whether or not narrative sections of annual reports convey useful information to investors