The Information Content of 10-K File Size Change

Change in 10-K file size robustly and negatively predicts future stock returns. The documented return predictability reflects mainly information content of 10-K file size change on future cash flow news. We examine whether this return predictability derives from managers’ risk disclosures or disclosure obfuscation. We find that the return predictability increases in future return horizon. It is driven by positive file size changes and is stronger for firms with high information asymmetry. It is stronger when managers have more “skin in the game.” It persists even when investor attention is high. It derives from the component of file size change that cannot be explained by business fundamentals. Although word count changes in specific 10-K items can predict future stock returns, word count change in Item 1A, the risk disclosure section, has no return predictability. Our findings are broadly consistent with the managerial disclosure obfuscation explanation and suggest that lengthier 10-K disclosure, to the extent it is used by managers to obfuscate bad news, does not necessarily benefit shareholders.