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Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

Published online by Cambridge University Press:  21 April 2017

Mine Ertugrul ,
Jin Lei ,
Jiaping Qiu  and
Chi Wan
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Abstract

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This paper investigates the impact of a firm’s annual report readability and ambiguous tone on its borrowing costs. We find that firms with larger 10-K file sizes and a higher proportion of uncertain and weak modal words in 10-Ks have stricter loan contract terms and greater future stock price crash risk. Our results suggest that the readability and tone ambiguity of a firm’s financial disclosures are related to managerial information hoarding. Shareholders of firms with less readable and more ambiguous annual reports not only suffer from less transparent information disclosure but also bear the increased cost of external financing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 2 , April 2017 , pp. 811 - 836
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

Qiu acknowledges financial support from the Social Sciences and Humanities Research Council of Canada. Wan acknowledges financial support from the Program for Innovative Research Team of Shanghai University of Finance and Economics. We thank Tim Loughran (the referee) and Paul Malatesta (the editor) for constructive comments.

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