The Nature of Business Risk . Canada Many important risky decisions in society are taken by business firms. While there have been extensive studies of the financial risks of a business firm, surprisingly perhaps, there have been few attempts to deal empirically with the totality of risks faced by a firm. In this paper we characterize the complete range of risks that a firm must assess and manage. The data is derived from the Initial Public Offering prospectus prepared when a company converts from being a private company to a public company.
Forceful incentives produce a wealth of qualitative information in the risk factor section.
Our analysis dealt with 529 of the firms that public in the period from February 1995 to May 1996. An iterative categorical analysis of the risk factor section reduced 12,800 risk factors to 76 types of company risks. We use content analysis to provide a unique risk analysis of unobtrusive data. This analysis can be based on simple counts of the number of risk factors in a prospectus, on the number of words used in each factor, on the order in which factors are listed, and what is said about them. The key derivation was a measure of a company's degree of risk based on how it matched to a critical subset of 10 of the 76 factors.