Information Supporting Investor Valuations: Evidence from a Comparative Content Analysis of Analyst Reports and Form 10-K

Abstract

We address whether financial reports include information supporting investor valuations. We view analyst reports (AR) as reflecting this information and employ topic modeling to compare the contents of AR and Form 10-K. Our main findings follow. (i) Form 10-K focuses heavily on financial reporting, whereas AR focuses most on performance, followed by analysis, and business. However, AR discusses financial reporting almost as much as business, which suggests financial reporting is a crucial component of AR. The proportion of AR and Form 10-K dedicated to each category of topics has been converging since 2005. (ii) For topics within the performance category, AR and Form 10-K both focus most on revenues and margins. As expected, Form 10-K focuses more than AR on earnings and expenses, whereas AR focuses more on ratios, target prices, recommendations, and adjusted earnings. How AR and Form 10-K discuss performance topics diverged early in our sample. (iii) Form 10-K’s MD&A section focuses more than AR on performance, analysis, and business, which suggests MD&A discussion resembles AR discussion. (iv) AR and Form 10-K are more similar for loss firms. Additionally, technology firms exhibit similar differences in AR and Form 10-K as nontechnology firms. Together, our findings reveal financial reports include information supporting investors’ valuations, which is inconsistent with financial reports lacking relevance.

Keywords: Capital Markets; Financial Reporting; Textual Analysis; Analyst Reports; Value Relevance

JEL Classification: G10, G18, M40, M41