Financial reporting complexity and investor underreaction to 10-K information
- 2.9k Downloads
We study the immediate and delayed market reaction to U.S. Securities and Exchange Commission (SEC) EDGAR 10-K filings. Unusual trading volumes and stock-price movements are documented during the days around the 10-K filing dates. The abnormal price movements are positively associated with future accounting profitability, indicating that 10-K reports contain useful information about future firm performance. In addition, investors’ reaction to 10-K information seems sluggish, as demonstrated by the stock-price drift during the 12-month period after 10-K filing. We find that investors’ underreaction tends to be stronger for firms with more complex 10-K reports.
KeywordsStock price drift 10-K filing Financial reporting complexity
JEL ClassificationD8 D53 G14 M41
This paper has benefited greatly from comments and suggestions of an anonymous referee, Patricia Dechow, Shai Levi, and Katherine Schipper (editor). The editorial assistance of Joseph Cadora and the financial support of the Center for Financial Reporting and Management at University of California are gratefully acknowledged.
- Brandt, M., Kishore, R., Santa-Clara, P., & Venkatachalam, M. (2007). Earnings announcements are full of surprises. Working paper, Duke University.Google Scholar
- Li, F. (2006). Do stock market investors understand the risk sentiment of corporate annual reports? Working paper, University of Michigan.Google Scholar
- Petersen, M. (2006) Estimating standard errors in finance panel data sets: Comparing approaches. Northwestern University Working Paper.Google Scholar
- Qi, D., Wu, W., & Haw, I. (2000). The incremental information content of SEC 10-K reports filed under the EDGAR system. Journal of Accounting Auditing and Finance, 15, 25–46.Google Scholar
- Rangan, S., & Sloan, R. (1998). Implications of the integral approach to quarterly reporting for the post-earnings announcement drift. The Accounting Review, 73, 353–371.Google Scholar
- Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71, 289–315.Google Scholar
- Stice, E. (1991). The market reaction to 10-K and 10-Q filings and to subsequent the Wall Street Journal earnings announcements. The Accounting Review, 66, 23–41.Google Scholar
- Stickel, S. (1991). Common stock returns surrounding earnings forecast revisions: More puzzling evidence. The Accounting Review, 66(April), 402–416.Google Scholar