Management disclosure of risk factors and COVID-19

Public companies in the United States are required to file annual reports (i.e., Form 10-K) and disclose, among other things, the risk factors that may harm their stock price. The risk of a pandemic was well-known before the recent crisis, and we now know that the initial impact on many shareholders was significant and negative. To what extent did managers forewarn their shareholders about this valuation risk? We examine all 10-K filings from 2018, before any knowledge of the current pandemic, and find that less than 21% of them contain any reference to pandemic-related terms. Given the management's presumed in-depth knowledge of their business and the general awareness that pandemics have been identified as a significant global risk for at least the past decade, this number should have been higher. We find an unexpectedly positive correlation (0.137) between the use of pandemic-related words in annual reports and realized stock returns during the actual pandemic at the industry level. Some industries most severely impacted by COVID-19 barely mentioned pandemic risk in their financial disclosures to shareholders, indicating that managers were ineffective in highlighting their exposure to pandemic risks to investors.