The Strategic use of Language in Corrupt Firmss Financial Disclosures

Abstract

This paper explores the role of language (tone and readability) in financial disclosures in detecting a firm’s likelihood of violating the FCPA. Matching FCPA violators with a control sample of non-violators, we examine whether the tone and readability of management’s 10-K filings can be linked to the likelihood of getting involved in an FCPA violation. We find that the management of FCPA violators uses more negative, uncertain, litigious, and complex language when disclosing financials compared to non-violators. Furthermore, we find that managers make strategic use of language after FCPA prosecution. Although they face additional litigation risk from FCPA prosecution, they lower their negative, uncertain, and litigious tone in 10-K filings. This effect is particularly strong for firms with low readability in SEC filings and low board independence.