Does financial disclosure readability predict shareholder activism?

Abstract

We examine the impact of financial disclosures’ readability on future shareholder activism, as expressed by shareholder-initiated proxy proposals. Based on a sample of 1,560 proposals made by shareholders of 818 S&P 1500 firms between 2000 and 2014, we find that the semantic complexity of the MD&A section of the 10-K filings significantly predicts future shareholder proposals. Ceteris paribus, firms with more unreadable MD&A sections are more likely to face a higher incidence of shareholder proposals, up to two years in the future. We show that our results are robust to the inclusion of several alternative readability metrics; reverse causality check, and instrumental variables approach; subsample analyses, as well as a variety of confounding events.