Summarized Disclosure of Risk Factors
Abstract
Given the increasing length and complexity of financial market disclosures, high-quality summa- rization 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 investigate how firms summarize information in security prospectuses and whether the quality of a summary provides valuable information about a security’s future performance. We develop an automatic approach for evaluating the quality of a summary by examining textual dis- closures on risk factors in bond prospectuses. Our results suggest that firms with poor performance tend to provide low-quality summaries and engage in impression management. The manipulation includes significant differences in readability, specificity, tonality, use of boilerplate, as well as dissimilarity in content between the summary and the full prospectus. Nevertheless, prospectus summaries are informative for investors as their quality can be shown to be a highly significant predictor of the default of the security.
