Different time, different tone: Company life cycle

Abstract

This paper examines how the qualitative characteristics of annual reports vary across different phases of the corporate life cycle. We measure the complexity, tone, and sentiment of 10-Ks, and classify firms into their distinct life cycle phases. Considering a sample of 24,268 firm-year observations from 2000 to 2014, we find that each of the life cycle indicators is a determinant of different textual characteristics. The results show that firms’ 10-K disclosures become less complex, less ambiguous, and more optimistic as they progress from the introduction to the maturity stage. Clarity and readability peak at the maturity level, prior to firms entering the final decline stage, characterized by the most negative and ambiguous disclosures. This paper provides timely evidence to regulators and investors on the circumstances under which firms provide qualitatively different disclosures and shows that the textual characteristics of firm disclosure are not static over life cycle stages.