The Evolution of 10-K Textual Disclosure: Evidence from Latent Dirichlet Allocation

We document marked trends in 10-K disclosure over the period 1996–2013, with increases in length, boilerplate, stickiness, and redundancy and decreases in specificity, readability, and the relative amount of hard information. We use Latent Dirichlet Allocation (LDA) to examine specific topics and find that new FASB and SEC requirements explain most of the increase in length and that 3 of the 150 topics—fair value, internal controls, and risk factor disclosures—account for virtually all of the increase. These three disclosures also play a major role in explaining the trends in the remaining textual characteristics.

[1]  Ray J. Pfeiffer,et al.  Say Again? Assessing Redundancy in 10-K Disclosures , 2015 .

[2]  John D. Lafferty,et al.  A correlated topic model of Science , 2007, 0708.3601.

[3]  Xiao-Jun Zhang,et al.  Financial reporting complexity and investor underreaction to 10-K information , 2009 .

[4]  B. Miller.  The Effects of Reporting Complexity on Small and Large Investor Trading , 2010 .

[5]  Peter Demerjian,et al.  Accounting Standards and Debt Covenants: Has the ‘Balance Sheet Approach’ Led to a Decline in the Use of Balance Sheet Covenants? , 2011 .

[6]  R. Gunning.  The Technique of Clear Writing. , 1968 .

[7]  Douglas J. Skinner,et al.  Measuring Securities Litigation Risk , 2012 .

[8]  Michael I. Jordan,et al.  Latent Dirichlet Allocation , 2001, J. Mach. Learn. Res..

[9]  Yen†Jung Lee,et al.  The Effect of Quarterly Report Readability on Information Efficiency of Stock Prices , 2012 .

[10]  The Effects of Reporting Complexity on Small and Large Investor Trading , 2010 .

[11]  Stephen V. Brown,et al.  Large-Sample Evidence on Firms’ Year-Over-Year MD&A Modifications , 2011 .

[12]  Vojislav Maksimovic,et al.  Disclosure, Business Change and Earnings Quality , 2015 .

[13]  Dan Givoly,et al.  The Changing Time-Series Properties of Earnings, Cash Flows and Accruals: Has Financial Reporting Become More Conservative? , 2000 .

[14]  Rong Zheng,et al.  Analyst Information Discovery and Interpretation Roles: A Topic Modeling Approach , 2016, Manag. Sci..

[15]  David M. Blei,et al.  Probabilistic topic models , 2012, Commun. ACM.

[16]  Mark Lang,et al.  Textual analysis and international financial reporting: Large sample evidence ☆ , 2015 .

[17]  Lisa Rhody.  Topic Modeling and Figurative Language , 2012 .

[18]  Justin Grimmer,et al.  A Bayesian Hierarchical Topic Model for Political Texts: Measuring Expressed Agendas in Senate Press Releases , 2010, Political Analysis.

[19]  Kristina Rennekamp,et al.  Processing Fluency and Investors’ Reactions to Disclosure Readability , 2012 .

[20]  Ilia D. Dichev,et al.  Matching and the Changing Properties of Accounting Earnings over the Last 40 Years , 2008 .

[21]  Eva Labro,et al.  The Importance of the Internal Information Environment for Tax Avoidance , 2015 .

[22]  Mark Lang,et al.  Textual Analysis and International Financial Reporting: Large Sample Evidence , 2015 .

[23]  Gerard Hoberg,et al.  Do Fraudulent Firms Produce Abnormal Disclosure? , 2015 .

[24]  Hai-fan Lu,et al.  The benefits of specific risk-factor disclosures , 2016 .

[25]  M. White.  The Path Forward on Disclosure , 2013 .

[26]  Allen H. Huang,et al.  A Thematic Analysis of Analyst Information Discovery and Information Interpretation Roles , 2014 .

[27]  R. Bloomfield.  The 'Incomplete Revelation Hypothesis' and Financial Reporting , 2002 .

[28]  A. Lawrence.  Individual investors and financial disclosure , 2013 .

[29]  Elizabeth Blankespoor.  The Impact of Information Processing Costs on Firm Disclosure Choice: Evidence from the XBRL Mandate , 2019, Journal of Accounting Research.

[30]  R. Bloomfield.  Discussion of “Annual report readability, current earnings, and earnings persistence” , 2008 .

[31]  Paula J. Pomerenke.  Book Reviews : A Plain English Handbook: How To Create Clear SEC Disclosure Documents , 1999 .

[32]  Alina Lerman,et al.  The Changing Landscape of Accrual Accounting , 2015 .

[33]  Anindya Datta,et al.  Simultaneously Discovering and Quantifying Risk Types from Textual Risk Disclosures , 2014, Manag. Sci..

[34]  R. Gunning.  The Fog Index After Twenty Years , 1969 .

[35]  Daniel W. Collins,et al.  Changes in the value-relevance of earnings and book values over the past forty years , 1997 .

[36]  Alina Lerman,et al.  The Changing Landscape of Accrual Accounting: THE CHANGING LANDSCAPE OF ACCRUAL ACCOUNTING , 2016 .

[37]  Mark Stevenson,et al.  Measuring the Similarity between Automatically Generated Topics , 2014, EACL.

[38]  J. Francis,et al.  Have financial statements lost their relevance , 1999 .

[39]  Eva Labro,et al.  The Importance of the Internal Information Environment for Tax Avoidance , 2015 .

[40]  Ray J. Pfeiffer,et al.  Why are 10-K Filings so Long? , 2016 .

[41]  Bill McDonald,et al.  Measuring Readability in Financial Disclosures , 2013 .

[42]  A. Pritchard,et al.  Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors , 2015 .

[43]  Hsinchun Chen,et al.  The information content of mandatory risk factor disclosures in corporate filings , 2010 .

[44]  Anup Srivastava.  Why Have Measures of Earnings Quality Changed Over Time? , 2014 .

[45]  The Impact of Information Processing Costs on Firm Disclosure Choice: Evidence from the XBRL Mandate , 2019, Journal of Accounting Research.

[46]  Paul Zarowin,et al.  The boundaries of financial reporting and how to extend them , 1999 .

[47]  Tim Loughran,et al.  Measuring Readability in Financial Disclosures: Measuring Readability in Financial Disclosures , 2014 .

[48]  Feng Li.  Annual Report Readability, Current Earnings, and Earnings Persistence , 2008 .

[49]  Chong Wang,et al.  Reading Tea Leaves: How Humans Interpret Topic Models , 2009, NIPS.