The Information Content of 10-K’s Disaggregation Quality on Future Firm Performance

Abstract

We propose that the disaggregation quality (DQ) of 10-K reports, which measures the detail of accounting information based on a count of non-missing Compustat line items, is valuable in predicting firms’ future performance. Empirical results show that firms with higher DQ have higher subsequent profitability and valuation. The DQ can also positively predict future stock returns in the cross section. The return predictability is stronger for young firms, firms with higher return volatility, and in periods with high investor sentiment. The findings are robust to the inclusion of variables shown to be correlated with firm operating and stock performance in the literature.

Keywords: 10-K, disaggregation quality, profitability, Tobin’s Q, stock returns

JEL Classification: G11, G12, G14, G32