Are Words Beneficial to the Consumption of Numbers in Financial Reports?

59 Pages Posted: 19 May 2020 Last revised: 18 Jun 2021

See all articles by Jaehan Ahn

Jaehan Ahn

Northeastern University - Accounting Group

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: June 18, 2021

Abstract

We propose that text in financial disclosures is used to complement, expand upon, and provide context to numerical disclosures. We use the ratio of words to numbers, which are often examined in silos, to consider how their combination contributes to disclosure quality. We focus on disclosures in three inherently complicated footnotes and the Management Discussion and Analysis (MD&A) in annual filings. Using comment letters (CLs) to capture regulators’ perspective of disclosure deficiencies, we find that the ratio of words to numbers in each disclosure is associated with a lower likelihood to receive a CL related to the topic of that disclosure. We further find that the ratio of words to numbers in the MD&A is associated with lower analyst forecast errors, a stronger market reaction, and greater liquidity. These results suggest that the use of more words to explain numbers in financial reports reduces the likelihood of regulators’ intervention and is more useful to analysts and investors. The paper’s findings suggest that to improve one dimension of disclosure quality, sufficient text should be disclosed to explain numerical information.

Keywords: Textual analysis, disclosure quality, disclosure complexity, XBRL, financial statement footnotes, MD&A

JEL Classification: N20, M40, M41, G18, G28

Suggested Citation

Ahn, Jaehan and Hoitash, Rani and Hoitash, Udi, Are Words Beneficial to the Consumption of Numbers in Financial Reports? (June 18, 2021). Available at SSRN: https://ssrn.com/abstract=3582662 or http://dx.doi.org/10.2139/ssrn.3582662

Jaehan Ahn

Northeastern University - Accounting Group ( email )

404 Hayden Hall
360 Huntington Ave.
Boston, MA 02115
United States

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

HOME PAGE: http://www.xbrlresearch.com

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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