Readability of 10-K Reports and Stock Price Crash Risk
79 Pages Posted: 15 Jan 2014 Last revised: 13 Dec 2018
Date Written: May 1, 2018
This study shows that less readable 10-K reports are associated with higher stock price crash risk. The results are consistent with the argument that managers can successfully hide adverse information by writing complex financial reports, which leads to stock price crashes when the hidden bad news accumulates and reaches a tipping point. Cross-sectional analyses show that the effect of financial reporting complexity on crash risk is more pronounced for firms with persistent negative earnings news or transitory positive earnings news, greater chief executive officer stock option incentives, or lower litigation risk. Finally, accrual manipulation appears to be positively related to crash risk, even since the Sarbanes-Oxley Act, if the manipulation is accompanied by complex 10-K reports.
Keywords: readability, textual analysis, crash risk, SOX, 10-K
JEL Classification: D82, G12, G17, G18, M41
Suggested Citation: Suggested Citation