Lost in the Language: Data Breaches and the Strategic Fog of Risk Disclosures
This study examines whether firms strategically adjust the readability of Item 1A (“Risk Factors”) disclosures following data breaches. Using U.S. firm‐year observations from 2006 to 2023, we find that data breaches are associated with a significant decline in Item 1A readability. This decline is not accompanied by a meaningful increase in informational content; instead, post‐breach disclosures exhibit higher syntactic complexity, more positive tone, and lower textual similarity to prior and industry peers' filings, consistent with strategic obfuscation rather than transparent reporting. The readability decline is amplified among firms facing higher litigation risk but attenuated among firms with stronger reputations for technological innovation. Notably, less readable disclosures soften negative market reactions, suggesting that obfuscation works as investors are challenged to fully process risk related information buried in complex language. These findings demonstrate that firms use narrative complexity for impression management following adverse events, with real capital market consequences.