Firm-Level Risk Disclosures: Effects on the Market Value of Firms during the Risk Materialization in the Case of the COVID-19 Crisis

How does the stock market react to risk disclosures in annual reports of firms? Various studies investigated the reactions to the information at the time of disclosure. Still, there is little evidence about the differences between the market reaction to firms disclosing the risks and firms without disclosure when the risks indeed materialize. By using the COVID-19 pandemic, we are able provide empirical evidence about the effect of a disclosed systematic risk on the stock market returns across a broad set of industries. Our data consists of 3,433 annual reports from firms listed on US stock exchanges filed in 2019, from which only 652 firms (19%) disclosed the risk of a pandemic or epidemic. We find a significant increase in the stock return volatility for disclosing firms during the pandemic. Furthermore, the stock returns of disclosing firms fell significantly more at the start of the pandemic, but also increased more during the initial recovery phase than non-disclosing firms. Additionally, our study indicates that the importance of the risk disclosure in annual reports decreases with a growing market value.