Risk Factor Disclosures and Discount Rates

This dissertation investigates whether and how risk factor disclosures (RFDs) affect discount rates. Using a difference-in-difference (DID) test based on firms' staggered compliance with the 2005 SEC mandate on RFDs, I show that the mandate leads to higher discount rate news (e.g., a larger increase in discount rates), even after controlling firm betas and cash flow volatility. Larger increases in RFDs are positively associated with higher discount rate news post mandate, consistent with a dominant risk reflection impact of RFDs over the information transparency improvement effect. The association is stronger for firms with poorer performance, higher stock market risk, higher operation uncertainty, and higher bankruptcy risks. More RFDs pre-mandate are associated with lower discount rates, consistent with a dominant improvement effect of information asymmetry over the risk reflection effect. Additional tests suggest that the effect of more RFDs on discount rate news outweighs their effect on cash flow news. Analysts decrease target price forecasts and downgrade recommendations for firms with higher discount rate news adjusted by RFDs. Future firm stock performance and firm value increase for firms with higher RFDs after the mandate. Overall, the results suggest that RFDs convey important information for dynamic firm-specific discount rates useful for investors.