Future firm performance and textual characteristics of 10-K disclosures Online publication date: Fri, 29-Oct-2021
by Anestis C. Ladas
International Journal of Banking, Accounting and Finance (IJBAAF), Vol. 12, No. 4, 2021
Abstract: The paper examines the influence of contextual information within 10-K reports on the future performance of a firm. Based on an earnings expectation model, we uncover the incremental informational contribution of two fundamental textual characteristics of 10-K disclosures on future performance; readability and the frequency of terms related to accounting judgement. We assert that the higher the use of terms relating to judgement in the 10-K reports, the higher the judgement exercised in the accounting procedures and the preparation of the financial statements. Both readability, measured either using 10-K's raw size or their word count and judgement sentiment are found to be positively related to future performance. Moreover, a cross-term of the two textual characteristics has incremental information content for future firm performance. Our findings indicate that textual analysis may offer an array of new information that is related to firm performance.
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