10-K Filings Research Articles

Comparing the Cybersecurity Risk Disclosures of U.S. and Foreign Firms

ABSTRACTThis study explores the cybersecurity risk disclosure differences between foreign firms listed in the U.S. and U.S. firms. We first extract cybersecurity risks disclosures text with a Python program based on a list of cybersecurity keywords. We then perform textual analysis of the cybersecurity risk disclosures in foreign firms' 20-F filings and U.S. firms' 10-K filings. During our study period, we observe that foreign firms disclose more about their cybersecurity risks and their disclosures are more readable than U.S. firms. Foreign firms also use more numbers, fewer uncertainty words and fewer litigious language than their U.S. counterparts. In general, our study suggests that cybersecurity risk disclosures made by foreign firms are clearer and more specific than those made by U.S. firms. This finding could have implications for disclosure regulation and home bias research.

Tax aggressiveness and the proportion of quantitative information in income tax footnotes

PurposeThis paper aims to analyse the determinants of the proportion of quantitative data in financial statement footnote disclosures. Quantitative data represents “hard” information and has been considered to be more persuasive than qualitative data. The primary focus is on income tax footnotes because revenue agents use them as a reference in tax audits, and citizen groups use them to analyse tax inequalities. This study posits that firms with lower effective tax rates (“tax aggressive” firms) disclose less quantitative data in their income tax footnotes.Design/methodology/approachThe multivariate analysis uses data from the contents of income tax footnotes extracted from 10-K filings in eXtensible Business Reporting Language (XBRL). It uses the alphanumeric characters identified in the income tax footnotes to calculate the proportion of quantitative data relative to the entire footnote disclosure as the dependent variable in a multivariate regression analysis.FindingsThe findings show that firms which avoid more taxes disclose less quantitative data in income tax footnotes after controlling for the readability of the income tax footnotes and the entire annual report. Therefore, firms seem to reduce the publication of measurable data accessible to revenue agencies and citizen groups.Originality/valueThis analysis provides evidence that firms weigh the financial reporting requirements and tax audit risks when they disclose quantitative income tax data. Also, it supports the Financial Accounting Standards Board’s (FASB’s) proposal to require more disaggregated income tax disclosure. To the researcher’s knowledge, this is the first analysis that focuses on the determinants of disclosing quantitative data in income tax footnotes.

The potential benefits of employee equity funds in the United States

PurposeThe mainstream framework for corporate governance is that all corporate activity should be directed towards shareholder wealth maximization. This article posits that public policy should move away from shareholder primacy and instead recognize employees as key contributors to corporate value-creation. One way to implement this approach is to require the creation of Employee Equity Funds (EEFs) at large corporations, which would pay employees dividends alongside external shareholders and establish a collective employee voice in corporate governance. EEFs may reduce economic inequality while improving firm performance and macroeconomic stability. This article provides an original estimate of average employee dividends, illustrating the potential of employee equity funds.Design/methodology/approachAnalysis of employee dividends for Employee Equity Funds at large U.S. corporations, using publicly available corporate finance data.FindingsBased on historic dividend payments and employee counts in public 10-K filings, I find that, if EEFs held 20% of outstanding equity, the average employee dividend across this sample would be $2,622 per year, while the median is $1,760. This indicates that employee dividends can be a small but meaningful form of redressing wealth inequality for the low-wage workforce, though it should emphatically not be seen as a replacement for fair wages.Originality/valueOriginal data analysis of a proposed policy reform to increase the benefits of employee equity in the United States.

How Has the Change in the Way Auditors Determine the Audit Report Date Changed the Meaning of the Audit Report Date? Implications for Academic Research

SUMMARY Archival research in accounting often relies on the audit report date to capture the constructs of audit efficiency, audit timeliness, audit effort, or audit completion. Auditors' view of what constitutes sufficient appropriate evidence to support the audit opinion, and consequently the date of the audit report, previously coincided with the substantial completion of audit fieldwork, which would be days or weeks before a 10-K filing. However, this view has shifted to coincide with the timing of the public issuance of clients' financial statements (i.e., the 10-K filing date) following several regulatory actions, audit practice changes, and professional standard-setting changes occurring since the turn of the century. In this study, we present evidence of this shift in auditor perspective and discuss implications for academic research and standard setting.

Does the precision oncology medicine development pathway deliver value for health systems?

e18818 Background: While there is increasing evidence that precision cancer medicines (PCMs) can be more effective than “one-size-fits-all” (OSFA) oncology medicines, questions persist as to their cost, availability, and overall patient benefit. We determined whether using a PCM approach to medicines discovery/development delivers medicines within cost constraints of health systems. R&D costs of developing a medicine are a subject of debate, with average estimates ranging from $314 million (M) - $2.8 billion (B). Methods: Data on oncology medicines approved (2011-2020) by the US Food and Drug Administration (FDA) were analyzed, employing two approaches to estimate R&D costs to bring the medicine to market: (i) Securities and Exchange Commission (SEC) data were compiled from 10-K and 10-Q financial performance filings on the medicine’s development cost through its R&D lifetime. (ii) Employing a base figure of $100,271 (the estimated cost per patient in a phase III clinical trial), costs were calculated, based on data from clinicaltrials.gov. Trial data were split into clinical trial phases and probability of trial success calculated, along with preclinical costs. Cost-of-capital (CoC) approach was applied and if appropriate an orphan drug tax credit (ODTC) was subtracted from the total. Results: 19 PCMs and 11 OSFA oncology drugs listed by the National Cancer Institute which had complete data were analyzed from 22 companies (Table). Initial costs from SEC data suggest a 50% reduced development spend for PCM, ($605M; range = $181M-$1.1B) (Clinical Trial Modelling Analysis: $604M ($63M-$2.29B)), compared to an OSFA oncology drug development spend ($877M; $333M-$3.34B) (Modelling Analysis: $597M ($41M-$1.64B)). Once preclinical costs were added total R&D costs capitalized and ODTC subtracted, there was an 83% increase in costs, from $2.44B ($614M-$5.23B) (Modelling Analysis: $3.1B ($209M-$11.52 B)) for PCMs to $4.46B ($1.59-$14.9B) (Modelling Analysis: $3.92B ($282-$12.74B) for OSFA oncology drugs. SEC data are more accurate, as they capture real data, rather than modelling assumptions. Conclusions: Our results provide an estimate of the R&D spend required to bring an oncology medicine to market. R&D cost of a PCM is below the top range of prior estimates published, while R&D cost of an OSFA oncology medicine is almost twice the cost of a PCM, emphasizing the potential for PCM treatments to deliver care at greater value to patients and health systems.[Table: see text]

Skilled Labor Risk and Corporate Policies

Abstract We measure U.S. listed companies’ skilled labor risk—that is, the potential failure in attracting and retaining skilled labor, by the intensity of discussions on this issue in 10-K filings. We show that this measure effectively captures firm risk due to the mobility of skilled labor. We find that an increase from the 25th to the 75th percentile in the skilled labor risk would increase the skilled labor wage by 22% (or $15,593) and also lead to higher equity-based incentive pay. The skilled labor risk also interacts with other corporate policies such as financial leverage, cash holdings, and M&As. (JEL G30, G32, G34, H20, J20, J24, J40, J41) Received September 28, 2020; editorial decision March 12, 2021 by Editor Andrew Ellul.

CEO Power and Nonconforming Reference Group Selection

Research shows that reference group selection underpins critical organizational processes, but less is known about publicly disclosed choices of reference groups, such as those for the evaluation of firm performance. Because audiences, such as investors and analysts, prefer reference groups created by independent entities they can trust, they disapprove of choices of custom peer groups created by reporting firms. Nevertheless, firms frequently choose reference groups that do not conform to audiences’ expectations. We seek to explain why firms deviate from these externally held standards even when incurring penalties by developing theory and formulating hypotheses about the influence of chief executive officer (CEO) power. Using data from 10-K filings, we find that firms led by high-power CEOs are more likely to use nonconforming, custom peer groups despite incurring penalties. However, the relationship between CEO power and the use of custom peer groups is weaker when CEOs face greater scrutiny from shareholders and analysts. We also find that low firm performance increases the use of custom peer groups among high-power CEOs. Contrary to our expectations, high CEO compensation attenuates the effect of CEO power on the choice of custom peer groups, arguably because high levels of CEO pay increase scrutiny. Although firms incur costs for using nonconforming reference groups, supplemental analyses reveal that CEOs benefit by receiving higher compensation, especially when performance is low. We conclude by discussing implications for research on publicly disclosed reference groups, the consequences of power, and information disclosure.

Narrative Investment-Risk Disclosure & REIT Investment

We study narrative investment-risk disclosure, applying computational linguistic analysis to the qualitative discussions of risk throughout 10-K filings. Our sample covers the real estate investment trust (REIT) sector, where firms rely heavily on external capital sources to fund new investment. Using granular investment data from a source that is independent from annual filings, we document a positive relation between changes to investment-risk disclosure and changes to actual investment. Such linkage previously evades the disclosure-informativeness literature, but is feasible in our study based on data advantages to the REIT sector. Changes to risk disclosure do not appear to increase simply the perception of risk among investors. Unlike evidence from the broader market, we find no significant relation to the volatility of stock returns or the volatility of analyst forecast revisions following the filing. Instead, changes to investment-risk disclosure appear informative as they are followed by a pronounced enhancement to market liquidity. The average increase in post-filing trading volume for firms that increase acquisitions is 8%, conditional on a top-tercile increase to investment-risk disclosure; or 0%, when disclosure is non-increasing.

Future Earnings Information in Business Text

We show that measures of business text sentiment are highly affected by transitory events. These transitory events lead to a strong positive association between sentiment and contemporaneous earnings. However, the association between sentiment and future earnings is insignificant. We develop a quantification of business text that is less affected by transitory events and is therefore better suited for prediction. Applied to 10-K filings, our proposed measure is strongly associated with both contemporaneous and future earnings. Further, applied to earnings announcements, our measure is strongly associated with future returns. Other tests verify and confirm the value of our measurement approach.

Data Visualization and Infographics in 10-K Filing

The Securities and Exchange Commission encourages the presentation of financial data in graphical form (infographics) to improve users’ ability to understand financial disclosures. We examine a large sample of infographics disclosed in 10-K filings and find a dramatic increase in their use from 2003-2020. We explore firm characteristics associated with the presentation of infographics and the types of information disclosed. We find significantly positive associations between infographics and the magnitude of both 10-K filing abnormal returns and analysts’ forecast revisions. The return results are attributable to both qualitative and quantitative infographics, but especially for those containing non-financial key performance indicators. The forecast revision results are attributable to infographics containing GAAP and macroeconomic information. Overall, our evidence suggests that infographics have become an important element of corporate disclosure.

Is Positive Sentiment in Corporate Annual Reports Informative? Evidence from Deep Learning

Abstract We use a novel text classification approach from deep learning to more accurately measure sentiment in a large sample of 10-Ks. In contrast to most prior literature, we find that positive and negative sentiments predict abnormal returns and abnormal trading volume around the 10-K filing date and future firm fundamentals and policies. Our results suggest that the qualitative information contained in corporate annual reports is richer than previously found. Both positive and negative sentiments are informative when measured accurately, but they do not have symmetric implications, suggesting that a net sentiment measure advocated by prior studies would be less informative. (JEL C81, D83, G10, G14, G30, M41)

Strategic Position and Value Implication of Cloud Computing

In this paper, we examine the determinants and consequences of adopting cloud computing technologies. Using text-based measures of cloud computing and business strategies obtained from 10-K filings, we show that firms focusing on a product differentiation strategy are more likely to adopt cloud computing technologies. We also document that the contemporaneous stock market values the adoption of cloud computing positively. This positive valuation is higher for firms adopting a product differentiation strategy than for those adopting a cost leadership strategy. We further show that cloud-computing-adopters focusing on a product differentiation strategy earn higher future excess returns than those focusing a cost leadership strategy, suggesting that investors fail to fully recognize the value created by cloud computing technology adopted by differentiators. Additional analyses suggest that cloud-computing-adopters with a differentiation strategy exhibit an increase in return on asset and profit margin, while those adopters with a cost leadership strategy do not experience such an improvement. Overall, our study suggests that a company’s strategic positioning affects the adoption decision and the value implication of cloud computing technologies.

Behavioral spillover between firms with shared auditors: The monitoring role of capital market investors

This paper examines the monitoring role of investors in the behavioral spillover between firms with shared auditors. Our context involves firms receiving U.S. Securities and Exchange Commission comment letters on issues relating to the recognition of revenue, gains, or losses (RRGL) in their 10-K filings and subsequently engaging in a higher degree of accounting conservatism. Investors of firms who did not receive a comment letter but share auditors with RRGL comment letter recipients react adversely to the release of these comment letters. Through the threat of downward stock price pressure on the value of Chief Financial Officers' equity compensation, investors induce the nonrecipients to also engage in a higher degree of accounting conservatism. When exposed to higher reputation and litigation risks, the shared auditors further contribute to the behavioral spillover between their clients by acting as informational intermediaries.

Is information in deferred tax valuation allowance useful in predicting the firm’s ability to continue as a going concern incremental to MD&A disclosures and auditor’s going concern opinions?

This study explores the role of deferred tax valuation allowances, management’s discussion of ability to continue as a going concern, and auditor going concern opinions in predicting the financial distress of a firm. Mayew et al. (Account Rev 90(4):1621–1651, 2015) show that textual disclosures in the Management, Discussion, and Analysis (MD&A) section of a firm’s SEC 10-K filing predict a firm’s ability to continue as a going concern. This study advances their analysis by including deferred tax valuation allowances in their framework. To the extent valuation allowances incorporate managers’ private information about future profitability, valuation allowances are useful in identifying the transitory nature of losses and thus the going concern status of the firm. Using a sample of firms that filed for bankruptcy over the period 2002–2018, the study shows that increases to valuation allowances are incrementally informative in predicting a firm’s ability to continue as a going concern after considering management’s textual disclosures, linguistic tone of the MD&A, auditor’s going concern opinions, financial statement ratios, and market-based variables. These results extend to three years prior to bankruptcy. The results also speak to the evolving roles of MD&A disclosures and auditor opinions on going concern.

Annual report readability and the cost of equity capital

Using a large panel of U.S. public firms, we examine the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors' ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. In addition, we hypothesize and test whether the nature of the relation between readability and cost of capital depends on the tone of 10-K filings. Our results show that the effect of annual report complexity on cost of equity is greater when disclosure tone is more negative or more ambiguous. We also find that the effect of annual report readability on cost of equity capital depends on the degree of stock market competition, level of institutional investors' ownership, and analyst coverage.

Product Market Threats: Implications for Future Profitability and its Use by Market Participants

This study establishes the informational value of a firm’s product market competition, a measure derived from narrative disclosures in 10-K filings. Consistent with economic theory predicting faster mean reversion in earnings, we find that product market fluidity has large explanatory power for future profitability: higher fluidity (i.e., more competitive product market threats) is negatively associated with future earnings. However, capital market participants do not fully use this information leading to predictable future stock returns and sell-side analyst forecast errors. A trading strategy exploiting this information is associated with abnormal future returns and enhances other prominent size and book-to-market strategies. The findings are more consistent with mispricing than risk-based explanations: the results remain after adjusting for risk factors and cluster around subsequent earnings announcements. In addition, future analyst forecast errors and stock returns are directionally consistent with delayed information processing (mispricing). Overall, our findings suggest that qualitative disclosures can convey valuable information to capital market participants and play a meaningful role in fundamental analysis.

Wall Street analysts as investor relations officers

This paper examines the practice of hiring financial analysts as investor relations officers (IRO). We posit that analysts-turned-IROs (AIROs) have a competitive advantage in communicating with investors, thereby lowering the effort expended by the investment community to process corporate disclosures. Using a unique manually-collected dataset on the employment history of IROs compiled from LinkedIn, Capital IQ, RelationshipScience.com, and appointment press releases, we show that disclosure readability in 8-K and 10-K filings improves and that companies are more likely to host analyst/investor days after hiring former analysts as IROs. Most importantly, we find increases in analyst following, institutional investors, and stock liquidity after hiring a former analyst as IRO. We conclude that both a disclosure and a network channel are at play in the relation between AIROs and increased interest from the investment community. Overall, our findings suggest that firms benefit from hiring Wall Street analysts as IROs.

Climate Regulatory Exposure: Evidence from Stock Returns

We propose a new measure of firm-level climate regulatory exposure based on 10-K filings. Using the 2016 Trump election as an exogenous shock to perceived climate regulatory risks, we identify a positive effect on stock returns for firms with higher climate regulatory exposures; they experience 240 to 270 basis points higher cumulative returns post-election. For firms with higher climate regulatory exposure, investor attention falls and carbon emissions rise in the year following the election, consistent with the hypothesis that investors become less concerned with climate regulatory risks after the election. Results are robust to trade, tax and oil price exposures.

Indirect Effects of Regulatory Changes: Evidence From the Acceleration of the 10-K Filing Deadline

This study responds to a recent call for research on the indirect effects of regulatory changes and examines the audit office effects of changes in client time pressure, using the first acceleration of the 10-K filing deadline as the primary research setting. The extant literature provides evidence that increased client time pressure adversely affects the timing and quality of individual engagements. We argue that because audit offices possess finite resources and production capacity, client-level pressure can have office-level effects. We document within-office differences related to changes in audit timeliness. In the same audit office, clients with no pressure (with pressure) experience an increase (a decrease) in audit report lag post-acceleration. This evidence suggests that auditors alter the timing of concurrent engagements in response to client pressure, and clients of the same office are affected differently by changes in time pressure. We also document across-office differences in audit/filing timeliness and audit quality. Clients of audit offices with more time pressure across the entire client portfolio have a greater increase in audit delay, are more likely to file late, and experience lower audit quality. Taken as a whole, our results are consistent with client pressure producing office effects as a result of the auditors’ response to increased resource constraints. These results should be informative to regulators and practitioners, because they suggest there are indirect costs associated with regulation and such effects are not limited to directly affected clients. Further, the results indicate that auditors do not always respond to changes in resource requirements in a manner that prevents undue strain.

The impact of labor unionization on CSR reporting

PurposeCorporate social responsibility (CSR) reporting has been theorized as a key communication device and an integral part of a broader stakeholder integration management strategy. This paper aims to examine the relationship between CSR disclosures and organized labor, an important internal stakeholder, whose institutional role in dynamically advancing employee interests creates opportunities and challenges for strategic management and firm sustainability.Design/methodology/approachBy using a sample of 2,526 US firm-year observations for the period 2002–2015, the authors demonstrate that managers in unionized contexts are more likely to issue CSR reports than managers in firms, where labor is not organized.FindingsThe authors demonstrate that managers in unionized contexts are more likely to issue CSR reports than managers in firms where labor is not organized. Considering stakeholder theory, they argue that, in unionized contexts, managers more intensively resort to CSR disclosures to form an alignment of interests, develop collaborative bonds with unions and smoothen relationships with external financial stakeholders. This effect is more prominent in areas where corporate spatial clustering and the prevailing political ideology facilitate the role of unions.Research limitations/implicationsFirst, the data refer to USA, which may limit the generalization of the results. Hence, researchers could use cross-country datasets to overcome this limitation. Second, it would be important to know what benefits are enjoyed by the unionized companies that issue CSR reports. Third, they acknowledge that there is useful qualitative information they do not analyze. This analysis could potentially relate specific CSR information to unions’ needs and demands. Further, there are alternative channels through which companies disclose relevant information such as 10-K filings, annual reports, firm websites, media, public announcements, etc. These are not captured by the data.Practical implicationsManagers could benefit from the empirical analysis, which suggests that through the initiation of CSR reports a dialogue with unions is greatly facilitated. Managers should consider that CSR reports reduce information asymmetries and may attract the interest of investors. Unionists should be aware that CSR reports constitute an opportunity to identify mutual interests and align goals. Business analysts, investors and shareholders should be aware that standalone CSR reports are used by managers to reduce information asymmetries and disparities with unions and to communicate an investment-friendly context. So, market participants should factor such policies by unionized firms into their investment analyses.Social implicationsThe authors offer implications for managers, labor unionists and market participants.Originality/valueThis paper examines the relationship between CSR disclosures and organized labor, an important internal stakeholder, whose institutional role in dynamically advancing employee interests creates opportunities and challenges for strategic management and firm sustainability.