Stop Throwing the Book at Investors; the average size of a 10-K filing so far is 152 pages
April 4, 2014 Leave a comment
Stop Throwing the Book at Investors
JUSTIN LAHART
March 23, 2014 1:20 p.m. ET
Most firms have filed their 10-Ks for last year and boy, must investors’ arms be tired.
The annual financial reports filed with the Securities and Exchange Commission make for heavy reading. For the roughly 1,100 companies in the broad S&P 1500 index with a fiscal year that ended in December, the average size of a 10-K filing so far is 152 pages. Some would give Leo Tolstoy a run for his money: Trinity Industries TRN +0.80% ‘ filing runs to a (no doubt riveting) 1,913 pages.
But even with financial disclosure, less can be more.
Annual reports weren’t always so fat. Measured in terms of data, the average one for 2000 (stripped of computer formatting and the like) was 92 kilobytes, according to Tim Loughran and Bill McDonald of Notre Dame Mendoza School of Business. For 2012, it was 484 kilobytes.
To a degree, this reflects fuller disclosure, which is good; big banks, for example, need to be more voluble after the financial crisis. But loading investors down with details isn’t always the same as real transparency. One way to judge clarity is to check 10-Ks against readability gauges, weighing factors such as sentence length and vocabulary.
But in a coming paper in the Journal of Finance, Messrs. Loughran and McDonald suggest that size may be what really matters. They studied 66,707 10-Ks filed for the years 1994 through 2011. Controlling for factors including size and industry—bigger or highly regulated companies naturally file longer 10-Ks—they looked at how well the stock market appeared to read the performance of companies with lengthy filings.
Answer: Not so well. In the weeks after filing, shares of those with longer reports tended to be more volatile than those favoring brevity. Views on valuation may have changed as investors struggled to parse the data dump. Analysts, too, had a harder time understanding companies with long 10-Ks: Earnings estimates for these were less accurate overall, and more widely dispersed. Filing size was as good as, or better than, readability gauges at predicting confusion about a company.
So next time a company hits you with a haystack of a filing, ask yourself if you really feel more informed—or if there is a needle hiding in there that could prick your investment.
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