IT Risk Factor Disclosure and Stock Price Crashes

Abstract

As firms are increasingly more dependent on Information Technology (IT) for their business strategies and value creation activities, risks associated with IT become one of the top concerns for corporate boards and managers. This study examines the impact of IT-related risk factor disclosure in Item 1A of the 10-K annual report on stock price crashes. We use Latent Dirichlet Allocation topic modeling to identify risk categories in risk disclosures between 2006 and 2017. IT risk emerged as one of the key risk categories. We find that IT risk disclosure is positively correlated with a firm’s future stock price crash risk. We further separate IT risk factor disclosures into two categories: IT value risk that relates to a firm’s use of and reliance on information technology for its operations to reach its goals and objectives, and cybersecurity risk that could lead to a loss or leak of data. We find that while the correlation between cyber security risk disclosure and a firm’s future crash risk is significant, IT value risk disclosures do not have a significant correlation.