Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

45 Pages Posted: 14 Mar 2016  

Mine Ertugrul

University of Massachusetts Boston

Jin Lei

Brock University - Goodman School of Business

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Date Written: July 23, 2015

Abstract

This paper investigates the impact of a firm’s annual report readability and ambiguous tone on its borrowing costs. We find that firms with larger 10-K file sizes and a higher proportion of uncertain and weak modal words in 10-Ks have stricter loan contract terms and greater future stock price crash risk. Our results suggest that readability and tone ambiguity of a firm’s financial disclosures are related to managerial information hoarding. Shareholders of firms with less readable and more ambiguous annual reports not only suffer from less transparent information disclosure but also bear the increased cost of external financing.

Keywords: Readability, Financial Report, 10-K, Crash Risk, Bank Loan

JEL Classification: G14, G38

Suggested Citation

Ertugrul, Mine and Lei, Jin and Qiu, Jiaping and Wan, Chi, Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing (July 23, 2015). Available at SSRN: https://ssrn.com/abstract=2432797 or http://dx.doi.org/10.2139/ssrn.2432797

Mine Ertugrul

University of Massachusetts Boston ( email )

100 Morrissey Blvd
Boston, MA 02125
United States

Jin Lei

Brock University - Goodman School of Business ( email )

500 Glenridge Avenue
St. Catharines, Ontario L2S3A1
Canada

Jiaping Qiu (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

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