Accounting Adjustments and the Valuation of Financial Statement Note Information in 10-K Filings

Abstract

We examine the valuation of financial statement note information at the time of 10-K filings. We conjecture that financial statement users explore the information in these notes to compute accounting adjustments to correct the imperfections in financial statements. We find that stock returns around 10-K filings are positively related to accounting adjustments, calculated from note information. We further find that the likelihood of equity analysts updating their target price estimates at the 10-K dates is increasing in the magnitude of the adjustments. Those analysts who do update their target prices at this time revise their estimates consistent with the sign and magnitude of the adjustments. These findings are consistent with financial statement users using financial statement note information to make accounting adjustments, thereby incorporating this information into stock prices.

Keywords: Accounting adjustments, financial statement note information, 10-K filings, equity analysts, target price estimates

JEL Classification: G14, G29, M40, M41, M44