The fatter a company’s annual report, the shakier its stock price

Over a few days in late February and early March, the biggest five banks in the US collectively published more than 1,600 pages worth of financial reports. Simply reading—much less understanding—these monsters is a Herculean task.

Heavily regulated and intensely litigated, banks are a special case, but even the average US-listed firm filed a hefty 152-page annual report with the Securities and Exchange Commission in its latest financial year, according to the Wall Street Journal (paywall). This isn’t exactly a breezy read for harried analysts, either.

Two Notre Dame professors think that long reports should be a red flag for investors. In a forthcoming paper in the Journal of Finance, Tim Loughran and Bill McDonald crunched the numbers on every annual report filed with the SEC since 1994—more than 66,000 filings—to see what effect report length had on investors’ understanding of a company’s prospects.

The existing literature on the readability of reports focuses on textual analysis, using the length of sentences and complexity of words to gauge the difficulty of understanding a report. But Loughran and McDonald reckon that the sheer length of a report matters more than what’s inside. To test their theory, they compared the file size of plain-text reports published electronically with the SEC to various measures of market volatility, from stock price movements to the dispersion of analysts’ earnings forecasts.

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