Do Co-Opted Boards Lead to Managerial Obfuscation? Evidence From the 10-K Report Readability

Abstract

This paper examines the relationship between board co-option and managerial obfuscation captured through linguistic complexity of 10-K reports. Using 7912 US firm-year observations from 2003 to 2018, we find that firms with a higher proportion of co-opted directors obfuscate the readability of the 10-K reports. The findings are robust across various variable definitions, sample specifications and remain significant after addressing endogeneity concerns through multiple approaches, including lead-lag regression, entropy balancing, instrumental variable analysis, the system GMM, and difference-in-difference estimations. Further analysis reveals that our main finding is driven by firms with weak internal (i.e., those with high CEO power and low board meeting attendance) and external (i.e., those with low institutional ownership and less analyst following) monitoring. The paper provides useful policy insights and implications for investors, regulators, and policymakers.