Camellia Sodki, Kyung Hyun Lee
Concerns about the complexity of corporate disclosures have been raised by investors and regulators alike as financial statements are becoming incomprehensible to ordinary investors. This study examines the relationship between exogenous shocks such as terrorist attacks on the readability of narrative disclosures in 10-K reports. Using a large US sample from 1994 to 2016, we find that attack proximity is significantly negatively associated with the readability of narrative disclosures in 10-K reports. We also find that this association is less pronounced for firms with more experienced CEOs. In addition, we find evidence suggesting that managers use voluntary disclosures to mitigate the reduced informational environment of the firm following terrorist attacks. Further analysis shows that the association is robust to the use of alternative readability measures and alternative specification of attack proximity measure. We also document that the economic magnitude of the effect is larger when the distance between the firms and attack sites is shorter. Parallel assumption test results alleviate the concerns that our findings are due to reverse causality or model misspecification. Overall, findings from our study suggest that exogenous shocks outside of the firms’ control such as terrorist attacks matter for the readability of corporate disclosures.