Textual disclosure complexity and analysts’ weighting of information

Abstract

This study investigates the influence of textual complexity in firms’ annual reports (Form 10-K) on financial analysts’ weighting of information. Drawing on a sample of U.S.-listed companies spanning from 1994 through 2020, we demonstrate that analysts tend to under-weight private information when 10-K reports are more readable, especially when the disclosed events indicate positive news, and when analysts face high workloads. Additionally, we find that analysts can identify managers’ opportunistic disclosure practices and rationally allocate weight between private and public information. Our findings suggest that analysts are affected by the underlying reporting and business complexity but not misled by the discretionary readability of 10-K reports when weighting information.