Investments in Accounting Resources and the Implications for External Reporting and Disclosure

Abstract

We examine whether grammatical violations (GVs) in annual financial reports (10-Ks) provide a timely signal of financial reporting quality. To the extent that GVs capture the time, effort, and resources devoted to the preparation of financial filings, we predict that GVs are correlated with the reliability of the accounting numbers. We validate this assumption by documenting that GVs are negatively correlated with empirical measures of (i) the quality of the firm’s internal information environment, (ii) the time that firms have to file their financial statements, and (iii) the strength of the firm’s monitoring over the financial reporting process. Consistent with our prediction, we find that GVs are positively correlated with the likelihood of a restatement and internal control weakness. Overall, we document that GVs can provide a timely, ex ante signal of the reliability of accounting information, and our findings shed light on the relation between the qualitative and quantitative characteristics of financial disclosures.