Are Words Beneficial to the Consumption of Numbers in Financial Reports

We propose that text in financial disclosures is used to complement, expand upon, and provide context to numerical disclosures. We use the ratio of words to numbers, which are often examined in silos, to consider how their combination contributes to disclosure quality. We focus on disclosures in three inherently complicated footnotes and the Management Discussion and Analysis (MD&A) in annual filings. Using comment letters (CLs) to capture regulators’ perspective of disclosure deficiencies, we find that the ratio of words to numbers in each disclosure is associated with a lower likelihood to receive a CL related to the topic of that disclosure. We further find that the ratio of words to numbers in the MD&A is associated with lower analyst forecast errors, a stronger market reaction, and greater liquidity. These results suggest that the use of more words to explain numbers in financial reports reduces the likelihood of regulators’ intervention and is more useful to analysts and investors. The paper’s findings suggest that to improve one dimension of disclosure quality, sufficient text should be disclosed to explain numerical information.