Are Disclosures of Pandemics as a Source of Risk Informative? Evidence from Changes in Equity Risk Before and After the COVID-19 Pandemic

The materialization of supply chain risks leads to negative operational and financial consequences. Gathering information on risks in a supply chain is still a significant challenge for supply chain members. However, firms are required to disclose their material risks in 10-K reports, leading to a substantial amount of information on their risk status. However, whether the information is informative when risks indeed materialize remains an unanswered question. Given the unique natural experiment presented by the COVID-19 pandemic, we use the event study methodology to gauge the impact of COVID-19 on firms’ equity risk, idiosyncratic risk, and systematic risk. Our analysis provides evidence that firms disclosing pandemics as a source of risk experience a positive abnormal increase in equity risk and idiosyncratic risk and no abnormal change in systematic risk due to COVID-19. Hence, risk disclosures are informative because firms disclosing the risk of a pandemic are indeed perceived riskier than non-disclosing firms when the risk materializes