How Causal Focus and Specificity in Risk Factor Disclosures Jointly Affect Investor Judgments

We examine how investors’ investment judgments are jointly affected by two important linguistic features that vary considerably across firms’ risk factor disclosures: namely, causal focus—the extent to which managers’ disclosures focus on the causes versus consequences of risk events—and specificity, which refers to specific references to names of objects and quantitative values. Results of controlled experiments show that, when the disclosure focus is on risk causes, greater specificity increases investment willingness because of enhanced feelings of knowable uncertainty in a risk event. In contrast, when the focus is on risk consequences, greater specificity reduces investment willingness because of diminished feelings of knowable uncertainty. Contrary to the Securities and Exchange Commission’s positive view of specific risk factor disclosures, our results suggest that specificity can have an opposite effects on investors’ judgments depending on the causal focus of risk factor disclosures. This paper was accepted by Ranjani Krishnan, accounting. Funding: This work was supported by Korea University Business School and the United Overseas Bank Professorship Endowment Fund. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00445 .