Measurements of risk exposure based on disclosures in annual reports

Firms operate in a complex world characterized by interdependencies among various factors which are difficult to anticipate and can pose a risk to a firm’s operations. However, prior research has not explained which external uncertainties actually turn into what type of risk exposure, and whether firms should have managed these potential risks. In order to fill this gap in our knowledge, the present study has developed a new measurement of a firm’s exposure to risk. To this end, it scrutinizes a firm’s 10-K reports, applies linguistic computer analysis to the self-disclosed textual data, and transforms the unstructured data into quantitative information. The resulting novel datasets already provide first general insights on the extent to which firms have identified risk factors and on the scope of their production networks. As a result, this study lays the groundwork for finding new answers to new and existing research questions.