Some People Say: Immature Information in Corporate Disclosures
52 Pages Posted: 3 Apr 2018 Last revised: 26 Jul 2018
Date Written: March 29, 2018
We develop a measure of equivocation using sentences marked with the “weasel tag” on Wikipedia. The weasel tag is used by Wikipedia to identify vague and unverifiable information. Consistent with this meaning, we show that corporate disclosures (10-K documents and paragraphs) with a high fraction of equivocation tend to exhibit greater uncertainty, and use more words that express shades of possibility, particularly words that weaken (i.e., weak modal words). Equivocation in 10-K disclosures increases when a firm faces heightened product market threats or when the firm faces greater financial constraints in equity markets. Firms also tend to use more equivocating language during periods of low and declining profitability. Consistent with equivocation reflecting immature information that would not otherwise be disclosed, equivocation in corporate disclosures is accompanied by an eventual positive market reaction. In addition, high-equivocation firms subsequently experience greater operating volatility than otherwise similar firms, and invest more, particularly in intangible investments such as R&D. Collectively, these findings suggest that disclosing immature information can be valuable during bad times.
Keywords: Textual analysis, 10K filings, Wikipedia, Weasel words, Equivocation, Immature information, Product markets, Financial constraints
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