Why Do Managers Disclose Risks Accurately? Textual Analysis, Disclosures, and Risk Exposures

I provide an economic model that justifies using bag-of-words, topic modeling, and machine learning techniques to measure firms' risk exposures using the percentage they allocate to each risk in their financial statements. The model provides a theoretical set of sufficient conditions under minimal assumptions that make managers optimally disclose risk accurately and give more space to the most critical risks. I document that the SEC Regulation S-K satisfies this set of sufficient theoretical conditions and induces rational managers to disclose risks truthfully