Summarization in Financial Disclosures: Determinants and Effects of Prospectus Summaries

Abstract

Given the increasing length and complexity of financial market disclosures, high-quality summarization becomes ever more important, especially for retail investors. However, little is known about the informativeness of summaries in disclosure documents such as security prospectuses. In this study, we develop an automatic approach for evaluating the quality of a summary in bond prospectuses. Based on this, we investigate (1) the determinants of the summary quality, (2) the reaction of retail investors to different quality levels, and (3) the informativeness of the summary quality regarding the security’s future performance. Our results suggest that firms with poor performance tend to provide low-quality summaries. Quality manipulations include significant differences in readability, specificity, tonality, use of boilerplate, and dissimilarity in content between the summary and the full prospectus. Unfortunately, retail investors seem unable to detect these reporting biases. Prospectus summaries can nevertheless be shown to be informative as their quality is closely related to the securities’ future performance, thus helping to improve investment decisions.