We examine the relationship between earnings disclosure content and the use of trustwords, such as “character,” “ethical,” and “honest,” in the MD&A section of the 10-K. We find that earnings announcements from firms using trust words have lower information content than earnings announcements from firms that do not use trust words. We also find that the value relevance of benefits is lower for firms using trustwords than for those that do not use trustwords. Additionally, companies using trustwords are more likely to receive a comment letter from the SEC, pay higher audit fees, and have lower corporate social responsibility scores. Overall, our results suggest that companies using trust words in the 10-K are associated with negative outcomes, and that trust words are an inverse measure of trust.
It’s from Can we trust trustwords in 10-K?, by Myojung Cho, Gopal V. Krishnan and Hyunkwon Cho. Via the excellent Kevin Lewis.
