The size of a 10-K report, an annual filing required from public companies by the Securities & Exchange Commission SEC, is correlated with a stock’s price volatility. Stocks of companies with larger 10-K file sizes experience more price volatility in the period immediately following the filing date. These stocks also experience larger earnings surprises and have a greater dispersion of forecasts by the covering analysts.
These were the conclusions reached by two University of Notre Dame professors, Tim Loughran and Bill McDonald, in a forthcoming Journal of Finance paper. The two professors proposed replacing The Fog Index, a commonly used measure, with file size as a gauge for determining how readable a 10-K filing is. The professors believe the goal of readability should be “the effective communication of valuation-relevant information, whether it is directly interpreted by individual investors or assimilated and distributed by professional analysts.”