The Information Content of 10-K Narratives: Comparing MD&A and Footnotes Disclosures

45 Pages Posted: 12 Jul 2016 Last revised: 1 Dec 2016

See all articles by Amir Amel-Zadeh

Amir Amel-Zadeh

University of Oxford - Said Business School

Jonathan Faasse

University of Cambridge - Judge Business School

Date Written: November 27, 2016

Abstract

This paper examines the textual characteristics of firms’ 10-K filings over a 20 year time period. We find that investors’ reaction to textual characteristics of the MD&A in 10-Ks is much stronger and more timely than their reaction to textual characteristics of the notes to the financial statements. Characteristics of the MD&A and footnotes are also predictive of future returns, volatility, and firm profitability. Particularly, changes in the text of the MD&A and footnotes and differences between the tone of the two sections predict negative future stock returns and operating performance. Our evidence suggests that investors generally underreact to the information in the narrative sections particularly to information in the footnotes compared to the MD&A. We also find suggestive evidence that firms exploit these limits in investors’ information processing through their disclosure choices within 10-K filings.

Keywords: 10-K Filing, MD&A, Footnotes, Disclosure, Textual Analysis

JEL Classification: G02, G12, G14, M41

Suggested Citation

Amel-Zadeh, Amir and Faasse, Jonathan, The Information Content of 10-K Narratives: Comparing MD&A and Footnotes Disclosures (November 27, 2016). Available at SSRN: https://ssrn.com/abstract=2807546 or http://dx.doi.org/10.2139/ssrn.2807546

Amir Amel-Zadeh (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Jonathan Faasse

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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