Annual reporting, agency costs, and firm valuations

AuthorJunwook Yoo,Igor Semenenko
Date01 January 2020
Published date01 January 2020
Annual reporting, agency costs, and firm valuations
Igor Semenenko
| Junwook Yoo
Acadia University, Wolfville, Nova
Scotia, Canada
California State University, Hayward,
Igor Semenenko, Acadia University,
15 University Ave, Wolfville, NS B4P 2R6,
Shareholder valuations are economically significantly and statistically negatively
correlated with the length of 10 K filings or their digital file sizes, whereas annual
reports posted on corporate websites are uninformative. Firms with longer 10 K
filings are likely to experience slower growth, lower profitability, experience free
cash flow problems, and write off goodwill and intangible assets from past acqui-
sitions. Lengthy filings are more damaging than suggested by three-year perfor-
mance following report filing dates, suggesting that outside investors penalize
firms for information asymmetries and associated agency costs. Full disclosure is
best from the standpoint of long-term shareholder wealth, but managers could be
maximizing short-term term returns that better match their investment horizons.
10 K, agency cost, annual report, obfuscation, Q ratio
While numerous studies have looked at various implica-
tions of level of complexity in financial reports, including
future stock returns (Doucette & Cohen, 2015) and cost
of capital (Ertugrul, Lei, Qiu, & Wan, 2017), none, to the
best of our knowledge, has examined direct valuation
effects. Three studies that come closest to ours in spirit
and focus are Li's (2008) and Subramanian, Insley, and
Blackwell (1993), both of whom document association
between higher profitability with lower readability mea-
sures, and Courtis (1986), who find no link between read-
ability and return on capital. However, none of them
measures impact on valuation multiples.
Using firm-year observations, this article documents
negative correlation between three metrics of annual fil-
ings length 10 K form length, annual report length, and
digital file sizeand corporate valuation proxied by a Q-
ratio. The result is more pronounced for mandatory
filings10 K formsrather than annual reports, tenta-
tively suggesting negative impact of regulatory effects.
Large annual filings are associated with worse growth
prospects, write-offs of goodwill and intangible assets,
and free cash flow problems. This finding supports man-
agement obfuscation hypothesis, which postulates that
difficulty in reading can be by design and not in error
managers have incentives to hide information when their
firms perform poorly (Baker & Kare, 1992; Bloomfield,
2002; Laskin, 2018). Interestingly, longer annual reports
appear to cause more damage than would be justified by
poor growth prospects and future profitability.
The organization of the article is as follows. The next
section reviews literature on annual filings readability
and outlines motivation for this study. It is followed by a
description of the data, discussion of results, and conclud-
ing remarks. Appendix A provides variables definitions.
Existing body of academic evidence tentatively suggests
negative correlation between filings' complexity and valu-
ations (Morunga & Bradbury, 2013; Schick, Gordon, &
Haka, 1990; Snowball, 1980). Managers may intentionally
Received: 25 August 2019 Revised: 16 September 2019 Accepted: 19 September 2019
DOI: 10.1002/jcaf.22419
72 © 2019 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;

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