Strategic Use of Volume of Financial Items in 10-K Reports

Authors

C. S. A. Cheng
Jiajia Fu, The University of Texas Rio Grande Valley
Wenli Huang
Jiao Jing

Document Type

Article

Publication Date

7-2023

Abstract

We investigate whether firms limit the volume of financial items in annual reports (including the financial statements and footnotes) to obfuscate poor future firm performance, and how investors react to this reduced volume. We estimate abnormal volume to capture managers’ discretion over reporting in the 10-K and find that abnormally low volume predicts poor future earnings. This relation is more pronounced in firms where the market has difficulty in detecting managerial intervention in the disclosure process. We also find that abnormally low volume predicts negative future returns, suggesting that managers benefit from disclosing fewer financial items by delaying the incorporation of bad news into stock prices. Further corroborating our results, we find that the volume is abnormally low when there exist strong managerial incentives to withhold bad news and manipulate investor perceptions upward. Overall, our evidence is consistent with the notion that managers attempt to obfuscate poor future performance and inflate current stock prices by disclosing fewer financial items in the 10-K.

Comments

Original published version available at https://doi.org/10.1177/0148558X21989909

Recommended Citation

Cheng, C. S. A., Fu, J., Huang, W., & Jing, J. (2023). Strategic Use of Volume of Financial Items in 10-K Reports. Journal of Accounting, Auditing & Finance, 38(3), 542-571. https://doi.org/10.1177/0148558X21989909

Publication Title

Journal of Accounting, Auditing & Finance

DOI

10.1177/0148558X21989909