Readability of 10-K Reports and Stock Price Crash Risk

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

Kim, Chansog (Francis) and Wang, Ke and Zhang, Liandong, Readability of 10-K Reports and Stock Price Crash Risk (May 1, 2018). Contemporary Accounting Research, Forthcoming, University of Alberta School of Business Research Paper 2378586, Singapore Management University School of Accountancy Research Paper Series Vol. 6, No. 3 Paper No 2018-88, Available at SSRN: https://ssrn.com/abstract=2378586 or http://dx.doi.org/10.2139/ssrn.2378586