Annual reporting, agency costs and firm valuations

Abstract

Shareholder valuations are economically significantly and statistically

negatively correlated with the length of 10K filings or their digital file sizes,

whereas annual reports posted on corporate websites are uninformative.

Firms with longer 10K filings are likely to experience slower growth, lower

profitability, experience free cash flow problems and write off goodwill and

intangible assets from past acquisitions. Lengthy filings are more damaging

than suggested by three-year performance 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.

Keywords: annual report, obfuscation, agency cost, Q ratio, 10K

Introduction

While numerous studies have looked at various implications of level of

complexity in financial reports, including future stock returns (Doucette and

Cohen, 2015) and cost of capital (Ertugrul et al, 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 et
al (1993), both of whom document association between higher profitability

with lower readability measures, and Courtis (1986), who find no link

between readability and return on capital. However, none of them measures

impact on valuation multiples.

Using firm-year observations, this paper documents negative correlation

between three metrics of annual filings length – 10K form length, annual

report length, and digital file size – and corporate valuation proxied by a Q-

ratio. The result is more pronounced for mandatory filings – 10K forms –

rather than annual reports, tentatively 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 management 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 and

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

concluding remarks. Appendix provide variables definition.

Motivation, methodology and data description

Existing body of academic evidence tentatively suggests negative

correlation between filings’ complexity and valuations (Morunga and

Bradbury, 2013; Snowball, 1980; Schick et al, 1990). Managers may

intentionally create information overload, manipulate the readability of

annual reports, and exacerbate information asymmetries to mask their

performance (Adelberg, 1979; Courtis, 1998). In addition, more complex

language may be used to decrease the risk of litigation (Kripke, 1970).

More specifically, existing literature has linked annual reports opacity with

earnings persistency (Li, 2008), higher overinvestment and

underinvestment among firms (Biddle et al, 2009), higher earnings volatility

and lower accuracy of earnings forecasts for firms (Lehavy et al, 2011;

Loughran and McDonald, 2014), higher borrowing costs (Ertugrul et al,

2017) and less pronounced market reactions to lower quality readable

disclosures (You and Zhang, 2009; Miller, 2010; Rennekamp, 2012; Lee,

2012; Lawrence, 2013). All of these findings suggest lower valuation

multiples for firms with less transparent financial reports.

This study attempts to quantify relationship between annual filings’ length

and Q-ratio, both of which have received wide acceptance in academic

literature (Loughran and McDonald, 2014; Chung and Pruitt, 1994; La Porta

et al., 2002; Lindenberg and Ross, 1981; Morck et al., 1988; Villalonga and

Amit, 2006). In addition, we identify channels through which information

processing may affect valuation metrics, including future growth and

profitability.

In order to mitigate transcription errors and avoid prohibitively high cost of

manual information gathering, we focus on the US-based exchange-listed

companies, which meet several numerical criteria. We omit companies that

failed to achieve market capitalization of $10 billion in any of the years in

1999-2018 and company-years with equity and market capitalization below

$1 billion. This leaves 491 firms in our dataset (see exhibit 1 for selection

criteria and steps).

Initially, we collected five metrics to proxy for annual filings’ length, four of

which – 10K form, annual report, annual report on 10K form and annual

report summary1 – required pulling data off corporate websites2. SEC

EDGAR provided data on the digital size of 10K filings.

Continued increase in length of annual filings has been widely documented

in the academic literature (see, among others, Morunga and Bradbury,

2013; Monga and Chasan, 2014). In our sample, length of 10K filings,

annual reports and digital file size of 10K form rose in 1999-2018 by 30

percent, 150 percent and a factor of 18, respectively (see exhibit 2). One

salient feature of the time series reported in exhibit 2 is a sharp spike in

10K form length against the backdrop of the financial crisis of 2008-2009.

The other is a slowdown in the growth of annual filings’ size in the second

half of our sample, which could be attributed to both regulators and

1
By the end of the 20th century, corporate annual reports were divided into two sections:
the 10K and summary, which comprised the narrative portion of the report.
2
Annual report on 10K form is typically shorter than 10K filing itself.
individual firms (Securities and Exchange Commission, 2009; International

Accounting Standards Board, 2010; Harvey, 2017).

The last column in exhibit 2 reports number of firm-years, for which data

are available in the dataset. Not surprisingly, the largest number of

observations is available for digital 10K filings. Notably, many firms choose

to post more than one document with annual financial information. Often,

10K form is accompanied by annual report or “annual report on form 10K”,

both of which are typically shorter than the 10K filing itself.

We define Tobin’s q - the ratio of the firm’s market value to the replacement

cost of its assets - as our dependent variable. We use the market value of

common equity less deferred taxes plus the book value of debt as a proxy

for the firm’s market value:

Book value of assets MCAP - Book value of equity - Deferred Tax

Q= ,
Book value of assets

Q-ratio is measured four months after fiscal year end for each firm. For

instance, if fiscal year ended in December, market value of equity was

measured as of end of April next year, and so forth.

Empirical findings

Exhibit 3 reports pairwise correlations between five log measures of annual

report length and the Q-ratio, winsorized at 2.5 percent level (variables

definitions are reported in Appendix A). All five measures of annual filing

length are negatively correlated with the Q-ratio. The three variables with
the largest number of observations available are, as noted before, 10K form,

annual report, and digital 10K file size on the SEC EDGAR website (columns

2, 3, and 6 in exhibit 3). Correlations of two other measures of annual filings

length – annual report summary and annual report on form 10K – have the

largest negative association with the chosen valuation metric, but these

statistics are based on a relatively small number of observations.

We employ three measures of length – 10K form and annual report, and

digital 10K file size – in a multivariate regression setting. Exhibit 4 reports

our baseline estimates of regression models with three measures of annual

filings length, Q-ratio winsorized at 2.5 percent level and clustered error

terms. Measures of 10K filings length have a negative association with the

Q-ratio in all but one model in panel C, whereas annual report proxy loads

up negatively in only one model. Our results are time invariant – breaking

up the subsample into two along midpoint on the timeline does not alter our

findings.

Estimates are economically significant – increase in the size of the 10K

filing by one standard deviation, or 108 pages, from a median value of 146

pages, is associated with 11 percent drop in valuation in model 5 in panel A

for a firm with a median Q ratio.

The choice of independent variables is consistent with other studies that

examined financial statements readability (Ertugrul et al, 2017; Kim et al,

2017; Luo et al, 2018; Li, 2008). Following Firth (1979), we include data on

business segments. Interestingly, increase in the business segments has a

dampening effect on valuations in line with literature on conglomerate

discounts (Lang and Stulz, 1994; Berger and Ofek, 1995). As in previous

studies, lower leverage and profitability are positively associated with likely

free cash flow problem.

Models 4-6 in exhibit 4 include a categorical variable that represents

financial firms (Appendix A lists SIC codes). Robustness checks

incorporated 48 industries defined in Fama and French (1997), but results

were similar, and we chose to include one variable that represents financial

service industries and lends itself to more intuitive interpretation than 47

fixed-effect variables covering a broad spectrum of industries.

Next, we examine whether effects of annual filings length metrics could be

non-linear and nonmonotonic. Exhibit 5 reports beta coefficients and

goodness-of-fit statistics for piecewise linear regressions, in which each

length metrics is represented with three variables, using cut-offs of 33.3

percent and 66.7 percent. Models in exhibit 4 are identical to specifications

reported in exhibit 5.

Three patterns emerge (see exhibit 5). First, 10K form length measured in

number of pages is the only variable that retains statistical significance.

Second, the pattern in panel A is clearly non-linear and downward convex,

suggesting higher penalty for increase in filings length in the top tercile.

Finally, profitability measured as EBITDA scaled by assets has more

explanatory power than any other variable (see R-squared in model 5 in

exhibits 4-5). An obvious conclusion is that investors would prefer

companies to focus on boosting actual performance keeping communication

with outside investors to a minimum.

Even though length of 10K filings is negatively correlated with valuation

multiples, this relationship does not suggest causality. One important

question is to identify channels length metrics impact corporate valuations.

As a first pass, we examine how filings size affects growth and change in

profitability over 3-year periods after 10K report date.

We employ AR(1) specification to account for serial correlation in error

terms due to momentum effects. Results in exhibit 6 suggest strong and

negative relationship between 10K filing size and future growth and

profitability. As in value regressions with Q-ratio, annual reports posted on

corporate websites have little information content.

Next, we perform three diagnostic tests to identify whether valuations could

be affected by free cash flow problem, value-destroying mergers and

acquisitions, and earnings management. Both panels A and B in exhibit 7

are based on probit models, in which next year free cash flow problem and

value destruction in acquisitions are coded as one. Panel C reports selected

output for models with current year accruals.

Free cash flow tests reported in panel A build up on Jensen’s (1986)

argument that managers may undertake investments viewed excessive from

outside shareholders’ perspective. Following Fogel et al (2015), we identify

free cash flow agency problem when three criteria are met – a below

median Tobin’s Q, above median cash flow to gross property, plant and
equipment ratio, and a below median dividend payout ratio. Panel A in

exhibit 7 reports results for probit model specifications that use the same

set of control variables as models 3-6 in exhibits 4-5, but omit fixed year

effects; the latter only increase statistical significance of the 10K length

metric.

In a similar vein, panel B of exhibit 7 relates longer annual reports with

wasteful takeovers. We proxy for value destruction in acquisitions by

measuring a drop in the value of goodwill and intangible assets in the next

year following annual report filing. Company-years in which a decrease

occurs are coded as one and zero otherwise. Consistent with existing

literature (Malatesta, 1983; Roll, 1986; Morck et al, 1990), beta coefficients

in panel B of exhibit 7 are uniformly positive, confirming value destruction

by bidding firms.

Separately, we examine whether 10K length is associated with higher

probability of making acquisitions in the future periods and determine that

companies filing longer financial reports are less likely to pursue growth by

acquisitions strategy. Apparently, companies that made acquisitions in the

past and recognized them as wasteful gave up on immediate attempts to

merge with other firms (results untabulated for brevity).

Finally, we attempt to measure whether firm s with longer 10K forms are

involved in earnings management. Abnormal earnings accruals are

estimated following Jones (1991), adjusting for growth in credit sales

(Dechow et al, 1995); abnormal accruals are measured as absolute

difference between total accruals and non-discretionary accruals. Contrary

to expectations, we do not find evidence of earnings management either in

current period (panel C of exhibit 7) or future periods (results untabulated).

In summary, we conclude that companies that obfuscate financial reports

are more likely to suffer from free cash flow problem and pursue wasteful

acquisitions. Results reported in exhibit 7 are based on measure of 10K

filing length; digital size of 10K filing yields similar results, whereas annual

reports posted on corporate websites are uninformative. These results are

available upon request.

Exhibit 8 builds up on results in exhibit 7 by incorporating variables that

characterize future performance: growth and profitability over 3-year

period after each report, and next year free cash flow problem,

goodwill/intangible assets write-off and non-discretionary accruals. The

dependent variable is the Q-ratio, and model specifications are identical to

the ones reported in exhibits 4-5.

Essentially, the models in exhibit 8 measure association between valuation

metrics and annual filings length, assuming the market has perfect

information about future performance of each firm. Beta coefficients and

goodness-of-fit statistics in exhibit 8 are directly comparable with output

from regression models reported in exhibit 4.

For brevity, we tabulate only the coefficients for the main variables and

goodness-of-fit statistics (see exhibit 8). Absolute value of length metrics’

coefficients drop, but not substantially, whereas R-squared statistics

improve. Only in one model – model 3 – in panel A beta coefficient drops to

negative 0.10, significantly below its level in exhibit 4.

One possibility is that the market incorporates future growth and

profitability in perpetuity, whereas our models measure performance over

the next 3-year period only; even then, changes are of a smaller magnitude

than could be expected. It appears that capital markets penalize opaque

firms more than future performance would suggest.

Concluding remarks

This paper tested impact of annual filings readability on corporate valuation

metrics proxied by the Q-ratio. We find that annual filings’ length is

negatively related to valuation multiples. The effects are economically and

statistically significant – increase in 10K filing length by about 100 pages

decreases firm valuation by about 10 percent. Our results speak strongly in

favor of the agency cost explanation – managers strategically obfuscate

performance results and camouflage poor performance in financial reports

to outside investors.

Further, we identify several possible channels through which the impact is

transmitted – growth, profitability, wasteful acquisitions and free cash flow

problems. Interestingly, lengthy annual reports are more damaging than

suggested by performance over 3-year period following report filing -

inclusion of future growth and profitability in multivariate regression

models does not render length metrics insignificant. Apparently, outside

investors punish companies for higher cost of information-processing, larger

information asymmetries and agency costs.

In other words, honesty could be the best policy when it comes to financial

performance presentation, at least from the standpoint of long-term firm

valuation. It is possible that managers obfuscate corporate performance to

maximize their utility functions in the short term because long term

performance has less impact on their welfare.

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Exhibit 1. The effect of sample selection procedures on sample size

  Procedure Sample
1 Equity security type (primary listing): common stock 189,265
2 Geographic locations: United States of America (primary) 44,739
3 Company type: public company 16,313
4 Maximum historical market capitalization below $10 bln 563
5 Companies with available 10K forms or annual reports in PDF 501
format
6 Companies with market capitalization and book value of equity 491
above
Note: $1exhibit
The bln reports step-by-step sample construction from Capital IQ
database.
Exhibit 2. Length and size of annual reports and 10-K filings in
1999-2018
  (1) (2) (3) (4) (5)
Annual 10K
10K Annual Annual report
report form
length report on form 10K
Year summary size
(in length length (in
length (in (in
pages) (in pages) pages)
pages) bytes)
1999 141 54 n.a. 79 273,638
2000 137 58 39 86 303,797
2001 164 60 72 108 493,510
2002 159 71 89 103 990,497
2003 165 73 61 120 1,184,44
2004 180 80 36 150 8
1,472,69
2005 175 92 30 141 2
1,755,71
2006 177 100 28 127 8
1,985,62
2007 188 102 36 138 8
1,902,23
2008 212 114 31 154 5
2,045,85
2009 188 123 36 166 5
2,370,66
2010 199 129 32 161 6
2,549,89
2011 181 127 32 153 3
2,953,45
2012 184 129 49 144 8
3,412,18
2013 189 131 54 156 7
3,732,69
2014 180 132 47 155 6
3,921,08
2015 175 134 32 154 9
4,065,35
2016 182 136 56 157 2
4,299,59
2017 185 139 62 159 3
4,519,66
2018 186 144 43 153 7
4,954,66
N, total 5,944 3,320 55 345 4
7,270
Note: The exhibit reports length of different annual filings. Data in columns
1-4 is from corporate websites; data in column 5 is from SEC EDGAR. The
last line in the Exhibit indicates number of observations for 1999-2018 for
each type of filing.
Exhibit 3. Pairwise correlations for various measures of annual filings
length and Q ratio
  (1) (2) (3) (4) (5) (6)
(1) Q ratio 1.00 - - - - -
  0.29*** 3,320
7,365 5,944 0.12*** 55
0.49*** 345
0.41*** 7,270
0.11***
(2) Logarithm (pages, 10K)   1.00 - 0.00 0.69*** 0.38***
    0.28*** 0.98
5,944 2,812 326 5,849
(3) Logarithm (pages, annual    1.00 n.a. 0.38 0.40***
 report)     3,320 n.a. 7 3,308
(4) Logarithm (pages, summary)       1.00 n.a. 0.04
          n.a. 55
(5) Logarithm (pages, annual        1.00 0.68***
 report on 10K)           339
(6) Logarithm (bytes, 10K)           1.00
            7,270
Note: The exhibit reports pairwise correlation coefficients for different measures
of annual filings length. *,**, and *** indicate a p-value of 10%, 5%, and 1%,
respectively. Number of observations is reported under each correlation
Exhibit 4. Value regressions with three annual report/10K length metrics
Panel A. Results for regressions with logarithm and squared logarithm of number
of pages in 10K form.
  (1) (2) (3) (4) (5) (6)
Logarithm (pages, 10K) -0.71*** -0.37*** -0.30*** -0.38*** -0.34*** -0.36***
  (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Logarithm (assets, $mln)   -0.35*** -0.31*** -0.36*** -0.34*** -0.36***
    (0.00) (0.00) (0.00) (0.00) (0.00)
Return on assets         0.83***  
          (0.04)  
Return on equity           0.03**
            (0.02)
Payout           -0.003***
            (0.00)
Debt at market value/assets           0.001***
            (0.00)
R&D intensity       0.86**    
        (0.05)    
CapEx intensity       0.00    
        (0.90)    
Logarithm (age)     -0.15**      
      (0.02)      
Logarithm (N. geographic    0.30***      
 segments)     (0.00)      
Logarithm (N. business    -0.40***      
 segments)     (0.00)      
Financial sector     -0.07 -0.12 -0.11 -0.21
      (0.62) (0.35) (0.44) (0.13)
Fixed year effects no no yes yes yes yes
N 5,881 5,881 5,146 5,866 5,880 5,803
R-squared 0.07 0.17 0.29 0.25 0.24 0.26
             
Panel B: Selected output for models with logarithm and squared logarithm of
annual report length.
Logarithm (pages, annual-0.20*** 0.04 -0.04 -0.00 0.06 0.01
 report) (0.03) (0.28) (0.58) (0.96) (0.47) (0.87)
N 3,254 3,254 2,855 3,245 3,253 3,205
R-squared 0.01 0.15 0.26 0.23 0.35 0.22
             
Panel C: Selected output for models with logarithm and squared logarithm of size
of 10K filing
Logarithm in bytes.
(bytes, 10K) -0.12*** -0.01 -0.16*** -0.18*** -0.15* -0.18***
  (0.00) (0.61) (0.00) (0.00) (0.00) (0.00)
N 7,156 7,156 6,196 7,126 7,154 6,895
R-squared 0.01 0.15 0.27 0.23 0.22 0.24
Note: The exhibit reports regression model results with various measures of report
length and squared report length to measure non-linearity effects. The dependent
variable is Q-ratio winsorized at 2.5 percent level. Panels A-C report results for
regressions with logarithm of length of the 10K form, logarithm of length of annual
report and logarithm of size of the 10K filing in bytes on SEC EDGAR website,
respectively. The standard error is corrected for clustering following Peterson
Exhibit 5. Piecewise value regressions
  (1) (2) (3) (4) (5) (6)
Panel A. Results for regressions with logarithm and squared logarithm of number
of pages in 10K
Logarithm form. 10K), < 25-
(pages, -0.14 -0.11 -0.12 -0.11 -0.12
percent
Logarithm (pages, 10K), 25-75-0.24*** -0.17* -0.15 -0.17* -0.14 -0.17*
percent
Logarithm (pages, 10K), > 75-0.30*** -0.20** -0.15* -0.17** -0.14* -0.17**
percent
R-squared 0.36*** 0.18
0.08 0.33 0.36 0.41 0.37
 Panel B: Selected output for models with    
logarithm  
and  
squared  
logarithm   
of annual report
Logarithm (pages, length.
annual report), < 0.05 0.20* 0.14 0.12 -0.03 0.11
25 percent (pages, annual report), 0.02
Logarithm 0.16 0.08 0.07 -0.03 0.06
25-75 percent
Logarithm (pages, annual report), > -0.05 0.10 0.08 0.06 -0.01 0.05
75 percent
R-squared 0.02 0.16 0.34 0.38 0.52 0.40
 Panel C: Selected output for models with    
logarithm  
and  
squared  
logarithm  of size
of 10K filing in
Logarithm bytes. 10K), < 25-0.04 0.01
(bytes, 0.01 -0.01 0.03 0.02
percent
Logarithm (bytes, 10K), 25-75-0.03 0.01 -0.00 -0.01 0.03 0.01
percent
Logarithm (bytes, 10K), > 75-0.06 0.00 -0.02 -0.03 0.02 -0.01
percent
R-squared 0.02 0.15 0.30 0.34 0.52 0.36
Note: The exhibit reports selected piecewise regression model results to measure
non-linearity effects. Breakpoints of 33.3 percent and 66.67 percent are used as
cut-offs for length metrics. Model specifications is the same as in Exhibit 4; for
brevity, only beta coefficients on variables of interest and goodness-of-fit
statistics are reported. The dependent variable is Q-ratio winsorized at 2.5
percent level. Panels A-C report results for regressions with logarithm of length
of 10K form, logarithm of length of annual report and logarithm of size of 10K
filing in bytes on SEC EDGAR website, respectively. The standard error is
corrected for clustering following Peterson (2006); intercepts are suppressed.
*,**, and *** indicate a p-value of 10%, 5%, and 1%, respectively.
Exhibit 6. 3-yr growth and 3-yr change in profitability models
Panel A. Results for regressions with logarithm and squared logarithm of number
 of pages in the 10K form. (1) (2) (3) (4) (5) (6) (7) (8)
Dependent variable g, 3y g, 3y g, 3y g, 3y ROA, ROA, ROA, ROA,
Log (pages, 10K) - - -0.011* - -3y -3y -3y -3y
  0.019** (0.00)
(0.00) 0.016** (0.10) (0.00)
0.019** (0.00)
0.016** (0.00)
0.019** (0.00)
0.019** (0.00)
0.021**
Log (assets, $mln) 0.001 -0.002 0.000 -0.003 - - - -
  (0.85) (0.34) (0.90) (0.34) (0.01) 0.010** (0.00)
0.007** (0.00)
0.009** (0.00)
0.010**
Return on assets     0.247**        
      (0.00)        
Return on equity        0.000       0.000
         (0.70)       (0.24)
Payout        -0.000       -
       (0.86)       4E+4**
(0.00)
Debt at MV/assets        -       0.000
         (0.00)       (0.13)
R&D intensity   0.135**       -0.016    
    (0.02)       (0.64)    
CapEx intensity   -0.032       -3E+6*    
    (0.24)       (0.08)    
Logarithm (age) -       0.003      
  0.024**  
(0.00)     (0.25)      
Log (N. geog.0.009       0.003      
 segm.) (0.12)       (0.56)      
Log (N. bus. segm.) -       -0.008*      
  0.016**  
(0.01)     (0.07)      
Financial sector 0.040** 0.031** 0.023* 0.032** - - - -
  (0.00) (0.03) (0.06) (0.02) (0.01) (0.00) (0.00) (0.00)
AR (1) 0.032 0.060** 0.057** 0.065** 0.346* 0.477**0.461**0.359**
(0.26) (0.02) (0.03) (0.00) (0.08) (0.00) (0.00) (0.00)
N 3,370 3,814 2,820 3,809 3,457 3,945 3,952 3,942
R-squared 0.061 0.045 0.052 0.042 0.508 0.565 0.544 0.507
 Panel B. Selected output   for models
   
with  
logarithm  and squared
   
logarithm   of
annual(pages,
Log report length.
ann.- - -0.009* -0.011**-0.001 -0.001 -0.000 -0.000
 rep.) 0.012** (0.03)
(0.02) 0.011** (0.07) (0.04) (0.59) (0.63) (0.96) (0.94)
AR (1) 0.030 0.068 0.061 0.063 0.757**0.749**0.744**0.741**
(0.52) (0.13) (0.17) (0.16) (0.00) (0.00) (0.00) (0.00)
N 2,077 2,348 2,348 2,343 1,916 2,183 2,187 2,176
R-squared 0.094 0.072 0.083 0.081 0.785 0.784 0.768 0.768
 
Panel C. Selected output  for models
    logarithm
with   and  squared  logarithm
  of  size
of 10K
Log filing10K)
(bytes, in bytes.- - -0.005 - -0.008* - - -
  0.010** (0.02)
(0.00) 0.007** (0.14) (0.00)
0.009** (0.02) (0.00)
0.006** (0.00)
0.007** (0.00)
0.009**
AR (1) 0.046* 0.079** 0.072** 0.083** 0.391**0.482**0.455**0.355**
(0.08) (0.00) (0.00) (0.00) (0.05) (0.00) (0.00) (0.00)
N 3,908 4,424 4,424 4,417 4,261 4,857 4,876 4,848
R-squared 0.063 0.051 0.060 0.048 0.539 0.571 0.539 0.503
Note: The exhibit reports selected regression output for specifications with growth
in sales and change in return-on-assets as dependent variables over 3-year periods.
In panels A-C, independent variables include changes in length of annual filings,
including 10K form, annual reports and size of the 10K filing in bytes on SEC
EDGAR website, respectively. The standard error is corrected for clustering
following Peterson (2006); intercepts are suppressed. All models include fixed year
Exhibit 7. Free cash flow problems, bad mergers and earnings
manipulation
  (1) (2) (3) (4)
Panel A. Probit regressions with free cash flow problem next year.
Logarithm (pages, 10K) 0.206*** 0.276*** 0.159*** 0.253***
  0.000 0.000 0.004 0.000
Logarithm (assets, $mln) 0.033 0.007 -0.103***0.064***
  0.149 0.733 0.000 0.003
Return on assets     -7.053*** 
      0.000  
Return on equity       -0.114*
        0.095
Payout       -0.367***
        0.000
Debt at market value/assets       -0.031**
        0.039
R&D intensity   -0.519    
    0.285    
CapEx intensity   -1.957***   
    0.000    
Logarithm (age) -0.202***     
  0.000      
Logarithm (N. geographic segments) -0.377***     
  0.058      
Logarithm (N. business segments) 0.263***      
  0.000      
Financial sector 0.995*** 1.162*** 0.913*** 1.257***
  0.000 0.000 0.000 0.000
Fixed year effects Yes Yes Yes yes
N 4,759 5,432 5,446 5,294
Wald 423.5*** 605.3*** 653.4*** 618.8***
Panel B. Selected output for probit models with next year goodwill write-
offs.
Logarithm (pages, 10K) 0.114*** 0.134*** 0.120*** 0.139***
  0.006 0.000 0.001 0.000
Wald 156.0*** 91.9*** 85.8*** 98.0***
 Panel C. Selected output for OLS models
   
with current  
year   
accruals. (pages, 10K)
Logarithm 0.992 0.790 -0.861 0.763
  0.203 0.246 0.208 0.263
R-squared 0.094 0.088 0.089 0.090
Note: The exhibit reports selected regression model output for logarithm
of 10K form length and three dependent variables - categorical variables
that represent excess free cash flow and goodwill/intangible assets write-
off next year in panels A and B, respectively, and absolute value of
accruals in current period in panel C. The standard error is corrected for
Exhibit 8. Value regressions controlling for future growth and
profitability, free cash flow problems and goodwill write-offs
Panel A. Selected output for regressions with logarithm logarithm of number of
 pages in 10K form. (1) (2) (3) (4) (5) (6)
- - - - -
Logarithm (pages, 10K) 0.52** 0.33** -0.10* 0.31** 0.32** 0.28**
* * * * *
R-squared 0.25 0.30 0.47 0.35 0.33 0.36
 Panel B: Selected output for models
  with logarithm of annual report length 
       
Logarithm (pages, annual 0.02 0.06* -0.02 0.00 0.01 0.00
report)
R-squared 0.39 0.40 0.47 0.45 0.46 0.44
 Panel C: Selected output for models
           
with logarithm of size of 10K filing in bytes.
- - - -
Logarithm (bytes, 10K) 0.08** -0.03 -0.04 0.14** 0.14** 0.12**
* * * *
R-squared 0.21 0.27 0.46 0.33 0.31 0.36
Note: The exhibit reports selected regression output for model specifications
from Exhibit 4 augmented with growth and return-on-assets over 3-year period
after annual report filing, categorical variables that proxy for goodwill/intangible
assets write-off and cash flow problems next year, and next year abnormal
accruals. The dependent variable is Q-ratio winsorized at 2.5 percent level.
Panels A-C report results for regressions with logarithm of length of 10K form,
logarithm of length of annual report and logarithm of size of 10K filing in bytes