Market value of 10-K readability and corporate cash holdings

Abstract

We investigate the effect of 10-K readability on the association between stock returns and changes in cash holdings and find that readability significantly increases the marginal value of cash holdings (MVCH). The value spread for firms with high-readability reports is about US $0.08 per dollar of cash. This effect is stronger for firms with more severe managerial agency problems, less external monitoring, and greater financial constraints. Additional analyses suggest that the direction of causality runs from readability to the MVCH. We posit that more readable 10-Ks facilitate investors’ monitoring, inducing firms’ efficient cash use.