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IT risk factor disclosure and stock price crashes

University of British Columbia

As business strategies of many firms and their value creation activities are increasingly more dependent on Information Technology (IT), 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 a text-mining approach of 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 increases a firm’s future stock price crash risk. We use grounded theory to further separate IT risk factor disclosures into two broad 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 cyber security risk that could lead to a loss or leak of data. We find that while the impact of cyber security risk disclosure on a firm’s future crash risk is significant, IT value risk disclosures do not have a significant impact. We also find that the readability, position, and novelty of the IT risk factor disclosure strengthen the relation between the disclosure and the firm’s stock price crash risk.

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2020-04-23

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/74131

Business Administration - Management Information Systems

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/