Capital Markets

Could Less Be More?

The longer the 10-K, the worse the stock?
Leslie SchultzAugust 1, 2001

Those daunting 10-Ks are getting their fair share of scrutiny from some notable quarters.

Technical analysts from brokerage giant Merrill Lynch & Co. recently released a study that notes an inverse relationship between the length of a company’s 10-K and the price movement of its stock. The conclusion: the longer the 10-K, the worse the stock performance.

Meanwhile, the Financial Accounting Standards Board finalized recommendations to the Securities and Exchange Commission that address redundancies between 10-K disclosure requirements and GAAP standards. The final report on streamlining 10-K reporting was delivered in March, but has yet to elicit SEC comment.

Is it much of a stretch to find a relationship between the Merrill Lynch study and FASB’s redundancy concerns? Not really. “Complicated explanations of financial dealings seem to make investors wary, if not suspicious,” says Zhen-Hong Fan, a technology strategist for Merrill Lynch who helped prepare the study. Merrill Lynch analysts correlated the size of a firm’s electronic filing on the SEC’s Edgar Web site with its stock price performance. For example, Adobe Systems Inc. boasted an 11 kilobyte filing and a stock price that fared relatively well (down only 37 percent) from March 31, 2000, to March 31, 2001, compared with Redback Networks Inc., which had more than 900 kilobytes in its filing and a price that lost 91 percent of its value.

FASB’s initiative to address redundancies may help boost stocks that are sagging from the weight of encyclopedic SEC filings, and that may make things easier. Robert H. Herz, chairman of the FASB working group that prepared the report, notes that financial reporting requirements “create confusion and inefficiency for preparers of financial statements.” — Leslie Schultz

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