Textual Disclosures Research Articles

Carbon disclosures and information asymmetry: Empirical evidence on the importance of text in understanding numerical emission allowance disclosures

AbstractCarbon disclosures are essential for investors to evaluate firms’ efforts to combat climate change. In this study, we focus on a specific type of carbon disclosures—namely, emission allowance disclosures—that capture how firms implement emission reductions under the European Union emission trading system (EU ETS). Given the continuously changing institutional features of the EU ETS and the lack of authoritative guidance on how firms should account for emission allowances in their financial statements, it is exceedingly difficult for investors to understand numerical emission allowance disclosures and to compare them across—and even within—firms. Motivated by this criticism, we hypothesize and find that textual disclosures complementing numerical emission allowance disclosures are associated with lower information asymmetries between firms and their investors. Further analyses show that textual disclosures that: (i) describe the accounting approach, and (ii) contain institutional information on the EU ETS, respectively, are particularly important for improving the information environment of numerical emission allowance disclosures. Overall, our findings suggest that text can improve the understanding of numbers in a carbon disclosure context. Therefore, our study not only contributes to the (industrial ecology) literature but also has important implications for regulators, policymakers, investors, financial analysts, and firms.

Mitigating product placement effects induced by repeated exposure: Testing the effects of existing textual disclosures in children’s movies on disclosure awareness

Abstract In certain cases, children can react strongly in favor of product placements inserted in movies. Scholars therefore argue that existing disclosures might be one strategy in protecting children from any negative effects. However, disclosure research indicates that viewers should both notice disclosures and, in cases of textual cues, read them. We conducted an experiment with 139 children (Mage = 8.46; SD = 1.12; girls = 53.2 %) and tested the influence of textual disclosure format on disclosure awareness as well as brand-related effects. When comparing with no disclosure, results showed that exposure to an existing textual disclosure positively affects disclosure awareness while exposure to an expanded version of it (i.e., by using more textual elements) did not. Further analyses revealed that prior movie exposure positively affected brand evaluation. However, disclosure awareness reversed this effect. We conclude that children appear to be socialized with the existing textual disclosure and that disclosure awareness might be of importance in shielding children against persuasive influence.

Does Readability of Textual Disclosures in Modern Slavery Reports Pay Off? Evidence from a Regulatory Setting

This study examines the association between textual disclosure readability in modern slavery reports and firm value. Using 212 Australian modern slavery statements for the financial year 2019–2020, a positive association is found between more readable textual disclosures in modern slavery reports and firm value. The study also finds that an optimistic tone in textual disclosures and better firm-level corporate governance accentuate this impact. Further analysis shows that the informative information component of textual disclosures in modern slavery reports is positively priced by investors. Our study’s findings contribute to the debate on why firms should consider improving the textual disclosure readability of modern slavery reports. The study also informs various regulators (e.g. Australian Border Force, Australian Securities and Investments Commission [ASIC], European Union [EU] and United Kingdom [UK] government agencies, etc.) and international organisations about firm-level efforts to promote high-quality reporting on the modern slavery risk.

On the (in)effectiveness of textual disclosures on expectancies, attitudes, and perceived appropriateness of alcohol

Objective Drinking alcohol is frequently portrayed in the media, often overemphasizing its positive attributes. In particular, hip-hop music videos regularly depict alcohol consumption. Building on social cognitive theory, we conduct three pre-registered experimental studies to examine whether textual disclosures from different sources and with varying degrees of explicitness about the consequences of alcohol consumption can influence viewers’ alcohol expectancies, attitudes toward alcohol, and the appropriateness of alcohol presentations following a hip-hop video depicting alcohol consumption. Methods and measures We test 1) the established YouTube product placement disclosure, 2) a disclosure that explicitly refers to alcohol and a disclosure that additionally refers to the harmful consequences of alcohol consumption, 3) and finally the role of user comments on YouTube that discuss the negative or positive consequences of alcohol. Results We found that none of the disclosures tested were able to reduce positive attitudes toward alcohol, positive drinking expectancies, or perceived appropriateness of alcohol portrayals. Instead, one’s own drinking behavior was most important in explaining these dependent variables, with frequent drinkers reporting higher scores on attitudes toward alcohol, positive drinking expectancies, and a positive evaluation of alcohol portrayals in the media compared to people who never or rarely drink. Conclusions Our findings across the three studies paint a picture of the ineffectiveness of various forms of textual disclosure on alcohol-related attitudes, expectancies, and ratings of the appropriateness of alcohol portrayals in the media. Alternative steps forward, i.e., the creation of offerings for content creators that encourage them to consider the consequences of their representations, are therefore needed.

Bankruptcy in the UK: Do Managers Talk the Talk Before Walking the Walk?

AbstractThis study examines whether managers employ annual report textual disclosures as a conduit to communicate the probability of future corporate bankruptcy or to intentionally mislead stakeholders owing to impression management incentives. We conduct various examinations around the information content of the tone conveyed by textual disclosures in unstructured UK annual reports and the probability of corporate bankruptcy. We document that firms that communicate a more net positive tone are associated with lower bankruptcy risk. Importantly, this association is found to be stronger for firms whose managers have a lower incentive to mislead investors owing to better board monitoring, stringent stock market regulation, and Big 4 audits. We also offer complementary evidence that firms conveying a more net positive tone exhibit higher future performance and earnings persistence, and lower future performance volatility. These firms are also less likely to exhibit extreme corporate policies and to receive a qualified auditor's opinion. Overall, this study sheds light on whether managers tend to inform or misinform (bury their heads in the sand) about corporate bankruptcy.

Does Readability of Textual Disclosures in Modern Slavery Reports Pay Off? Evidence from a Regulatory Setting

Does Readability of Textual Disclosures in Modern Slavery Reports Pay Off? Evidence from a Regulatory Setting

Does peer firms’ tone affect corporate investment? Evidence from China

It is unclear how valuable textual disclosures from peers are to a firm’s investment decisions in emerging markets. Using a dataset of Chinese listed firms from 2007 to 2019, the results show that peers’ MD&A tone has a significant and positive effect on corporate investment, supporting the incremental information content hypothesis in emerging markets. A one standard deviation increase in peers’ tone raises investment by about 5%. Further analyses show the effect of peers’ tone on investment is higher when peers’ disclosure quality is higher, the firm’s management has a stronger motivation to learn, or the industry competitiveness is greater. After addressing the endogeneity problem, ruling out alternative explanations, and a series of robustness tests, the results remain consistent. This paper confirms the value of textual disclosures and enriches the study of their economic consequences in emerging markets.

Identifying M&A Targets from Textual Disclosures: A Transformer Neural Network Approach

Identifying M&A Targets from Textual Disclosures: A Transformer Neural Network Approach

Security breaches and modifications on cybersecurity disclosures

Research Question: How do firms approach their cybersecurity disclosure obligations, especially for those who experienced a cyber-attack? Prior research has found that year-after-year modification on textual disclosures adds more appreciable information that makes it more relevant. But do firms provide meaningful disclosures to promote market transparency? Motivation: Because of growing cybersecurity threats in recent years, the U.S. Securities and Exchange Commission (SEC) has issued several regulations and guidance that emphasized on the disclosure of material information on cybersecurity. Given that the mandatory risk factor disclosures in SEC Form 10-K is the first place firms are encouraged to disclose cybersecurity-related assessment, it is important to examine how firms approach their disclosure expectations. Idea: To examine whether firms respond to cyber-attacks with meaningful disclosures, we use the Vector Space Model (VSM) to calculate disclosure modifications before and after major cyber-attack incident. Data: We extracted cybersecurity breach incidents from the Data Breach Database, a centralized and global database of data breaches maintained by a leading security company. In addition, we use the SEC data depository to find firms’ 10-K disclosures. Findings: We find that firms modify their cybersecurity disclosures by increasing the quantity of disclosures, but not necessarily the quality of disclosures as measured by document similarity. Furthermore, we find partial evidence that the degree of modification is positively associated with the severity of cyber-attacks. Contribution: Our evidence suggests that firms tend to use boilerplate language to disclose cybersecurity-related issues. This finding is consistent with prior research. That is, consistent with prior literature, the information content in public company 10-Ks is limited. We find that this seems to be the case as well when it comes to cybersecurity disclosures.

Incorporating soft information from financial news media for management decisions in dynamic business environments

Because the nature of numerical information is intuitive and comprehensible, it has been widely used to form a basis for decision making, yet numerical information based on historical principle does not reflect messages about future corporate performance. To confront this issue, one may consider textual information that can transmit future corporate potential without any hysteresis. The key point is how to digest an extensive amount of textual information and identify those topics most likely to precede changes in operation status. Topic modeling can categorize these textual disclosures based on their underlying content and help examine which topics have a strong relevance to corporate operations. To extract decisive words from textual information, we set up a statistical-based approach with objectivity as opposed to frequently used heuristics (i.e., dictionary-based approaches with human involvement). Joint utilization of topic modelling and a statistical-based approach can compress an excessive amount of textual information into a manageable size in a timely manner and further realize a discrepancy among various topics in terms of relevance and influence on corporate operations. Our results benefit managers and current and future investors in how to structure regulatory filings and how word choices are decisive to them in their decision judgments.

Public and Private Information: Firm Disclosure, SEC Letters, and the JOBS Act

This paper examines the impact of the recently passed Jumpstart Our Business Startups (JOBS) Act on the behavior of market participants. Using the JOBS Act — which relaxed mandatory information disclosure requirements — as a natural experiment on firms’ choices of the mix of hard, accounting information and textual disclosures, we find that relative to a peer group of firms, initial public offering (IPO) firms reduce accounting disclosures and change textual disclosures. Because it allows a partial revelation of IPO quality, only textual disclosures affect underpricing. We also find that the Securities and Exchange Commission (SEC) changes its behavior post-JOBS Act in responding to draft registration statements. Specifically, the SEC’s comment letters to firms are more negative in tone, and more forceful in their recommendations, focusing on quantitative information. Finally, under the JOBS Act, investors place more emphasis on the information produced by the SEC when pricing the stock. Returns following public release of the letters vary by about 4% based on letter tone.

Does managerial tone matter for stock liquidity? Evidence from textual disclosures

This study investigates the effect of managerial tone on stock liquidity using a sample of U.S.-listed firms over the 1994–2019 period. We find that firms with SEC filings exhibiting more positive managerial tone experience higher stock liquidity. Our findings remain unchanged after controlling for firm fixed effects, investor sentiment, firm size differences and using alternative variable approaches. Further, we identify that the relationship is less pronounced during times of high policy uncertainty measured by EPU and presidential elections. Overall, this paper provides evidence that the management tone in SEC filings has price discovery and efficiency implications for investor trading decisions.

Nothing but good intentions: the search for equity and stock price crash risk

In this study, we examine whether and how managers’ intentions to raise equity are associated with future stock price crash risk. Therefore, we apply modern information retrieval techniques to corporate textual disclosures by constructing document embeddings that preserve contextual relationships in managers’ discussions on liquidity and capital resources. Using these document embeddings, we construct a continuous measure of managers’ intentions to raise equity. We document that the search for equity is associated with higher future stock price crash risk. Further analyses suggest that managers with stronger intentions to raise equity are more likely to block negative news flow and that these intentions reinforce the effects of earnings manipulation and textual obfuscation on stock price crash risk. In summary, our results suggest that managers’ search for equity incentivises managerial bad news hoarding.

The Recall Decision Exposed: Automobile Recall Timing and Process Data Set

Problem definition: There is a concerted effort across multiple academic disciplines to understand the recall decision-making process. Specifically, what steps does a manufacturer take following a product defect discovery and resulting in the product recall decision? This effort has often been limited to case studies within a particular manufacturer, largely due to the absence of consistent and comparable data across firms. Methodology/results: This data paper provides a foundation for future research on recall decisions by processing and coding textual disclosures on 2,120 recalls initiated in the United States by 27 automobile manufacturers from 2009 to 2018. For each recall, the data set provides the time the firm took to make the recall decision by comparing the defect awareness date to the recall decision date, whether the recall was associated with a supplier, the number of events in the recall decision-making process, and the date and description of each event. Managerial implications: Not only can these data enhance product recall research by providing key recall decision-making variables unavailable in related research, but an additional indication of the value of our data set also comes from National Highway Traffic Safety Administration (NHTSA), the automobile regulator in the United States. We held discussions with a senior leader at the NHTSA’s Recall Management Division related to this data set. This discussion revealed that the NHTSA does not have these data in an analyzable form and that they might be interested in using our data set for their reports, such as the NHTSA’s biennial reports to the U.S. Congress. This signal suggests that regulators, as well as researchers, practitioners, and other safety advocates, may find our data set useful.

Predicting future financial performance of banks from management’s tone in the textual disclosures

Predicting future financial performance of banks from management’s tone in the textual disclosures

Reporting Technologies and Textual Readability: Evidence from the XBRL Mandate

The eXtensible Business Reporting Language (XBRL) can standardize numerical disclosures and make it easier for computers to process and compare financial reports. This perceived benefit of XBRL has prompted the U.S. Securities and Exchange Commission to mandate that public firms must submit financial statements in the XBRL format as part of their financial reports. Leveraging the research opportunity created by the XBRL mandate, we examine whether financial reporting technologies affect how firms construct textual disclosures. We find that the initial adopters’ HTML-formatted annual reports become harder to read after the XBRL mandate. Further analysis reveals that this effect is concentrated among adopters with more quantitative disclosures, a smaller firm size, or a higher level of financial complexity. Importantly, we show that managers’ reduced attention to preparing HTML-formatted annual reports, rather than increased disclosures, is likely the explanation for this decrease in textual readability. We also find that the negative effect on textual readability persists at least in the subsequent year. Our findings suggest that the XBRL adopters need to pay attention to process optimization and technology enablement to mitigate the possible negative effect of XBRL adoption on the readability of financial reports.

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.

Is the Tone of Risk Disclosures in MD&As Relevant to Debt Markets? Evidence from the Pricing of Credit Default Swaps*

ABSTRACTThis paper examines whether the tone of corporate textual disclosures related to risk and uncertainty conveys relevant information to the credit default swap (CDS) market. Prior studies largely focus on the amount of risk disclosures and provide inconclusive evidence on the usefulness of risk disclosures for investors in assessing firm risk. Using a large sample of textual risk disclosures in the Management's Discussion and Analysis (MD&A) section of 10‐K and 10‐Q filings, I predict and find that the change in CDS spreads over the three‐day window surrounding the 10‐K/Q filing date is positively associated with the pessimism of the language used in the risk disclosures. I conduct several analyses to show that the effect of the tone of risk disclosures is distinguishable from that of the amount of such disclosures. Cross‐sectional analyses reveal that the CDS market reaction to the tone of MD&A risk disclosures is more pronounced for reference entities closer to default, consistent with creditors' particular concern about downside risk. Further, the CDS market reacts more significantly to the tone of MD&A risk disclosures for reference entities with a weaker information environment. Overall, these results support the view that the tone of textual risk disclosures in MD&As has information content for investors in the CDS market in particular and debt markets in general. My findings improve the understanding of textual risk disclosures by showing that the tone and the amount of such disclosures have different implications for debt market investors' risk perceptions.

Analyst Coverage and Managers’ Disclosure of Forward-Looking Information

Prior research documents that managers respond to an exogenous decrease in analyst coverage by increasing the quantity of earnings forecasts, presumably to fill the information void left by a reduction in coverage. I extend this research by considering management forecast quality and an alternative form of guidance, managers’ forward-looking textual disclosures. First, although forecast quantity increases after loss of coverage and liquidity partially improves, I find forecast quality decreases (i.e., larger signed and unsigned errors) and the decrease in quality attenuates the improvement in liquidity. These results suggest analysts not only play an informational role, but also a monitoring role with respect to managers’ forward-looking disclosures. These findings are more pronounced when other monitors are less present and when managers have insider selling incentives to engage in this disclosure behavior. Second, with respect to textual disclosures, managers’ quantity and tone of forward-looking statements increase following loss of coverage. Although these results do not vary with the presence of other monitors, the increase in positive tone is concentrated in managers who engage in insider selling. Overall, my study provides a more nuanced view of analysts’ role in influencing managers’ forward-looking disclosures.

Predicting shareholder litigation on insider trading from financial text: An interpretable deep learning approach

The detrimental effects of insider trading on the financial markets and the economy are well documented. However, resource-constrained regulators face a great challenge in detecting insider trading and enforcing insider trading laws. We develop a text analytics framework that uses machine learning to predict ex-ante potentially opportunistic insider trading (using actual insider trading allegation by shareholders as the proxy) from corporate textual disclosures. Distinct from typical black-box neural network models, which have difficulty tracing a prediction back to key features, our approach combines the predictive power of deep learning with attention mechanisms to provide interpretability to the model. Further, our model utilizes representations from a business proximity network and incorporates the temporal variations of a firm’s financial disclosures. The empirical results offer new insights into insider trading and provide practical implications. Overall, we contribute to the literature by reconciling performance and interpretability in predictive analytics. Our study also informs the practice by proposing a new method for regulators to examine a large amount of text in order to monitor and predict financial misconduct.