Does Financial Disclosure Readability Predict Shareholder Activism?

Abstract

We examine the impact of financial disclosures’ readability on future shareholder activism, as expressed by shareholder-initiated proxy proposals. Based on a sample of 1,560 proposals made by shareholders of 818 S& P 1500 firms between 2000 and 2014, we find that the semantic complexity of the MD& A section of the 10-K filings significantly predicts future shareholder proposals. Ceteris paribus, firms with more unreadable MD& A sections are more likely to face a higher incidence of shareholder proposals, up to two years in the future. We show that our results are robust to the inclusion of several alternative readability metrics; reverse causality check, and instrumental variables approach; subsample analyses, as well as a variety of confounding events.

Keywords: 10-K, corporate governance, financial disclosure, readability, semantic complexity, shareholder activism, shareholder proposals, textual analysis

JEL Classification: G14, G34, M41