Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

This paper investigates the impact of a firm’s annual report readability and ambiguous tone on its borrowing costs. We find that firms with larger 10-K file sizes and a higher proportion of uncertain and weak modal words in 10-Ks have stricter loan contract terms and greater future stock price crash...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2017-04, Vol.52 (2), p.811-836
Main Authors: Ertugrul, Mine, Lei, Jin, Qiu, Jiaping, Wan, Chi
Format: Article
Language:English
Subjects:
Ambiguity
Annual reports
Collateral
Financial disclosure
Initial public offerings
Investments
Loans
Quantitative analysis
Readability
Stockholders
Valuation
Volatility
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Summary:This paper investigates the impact of a firm’s annual report readability and ambiguous tone on its borrowing costs. We find that firms with larger 10-K file sizes and a higher proportion of uncertain and weak modal words in 10-Ks have stricter loan contract terms and greater future stock price crash risk. Our results suggest that the readability and tone ambiguity of a firm’s financial disclosures are related to managerial information hoarding. Shareholders of firms with less readable and more ambiguous annual reports not only suffer from less transparent information disclosure but also bear the increased cost of external financing.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109017000187