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The 10-K code
The clues to a company's future financial performance are all in the annual report  – if you know where to look

The Form 10-K, the annual report required by the US Securities and Exchange Commission (SEC), is the most information-rich disclosure that most companies make. With a compulsory 15 sections covering everything from risk to executive compensation, and often over 50 pages of explanatory notes and analysis, it is arguably the key communication to help investors understand a company’s financial performance.

But it seems that they don’t always process this information fully. Blindsided by positive-sounding earnings announcements and perhaps unwilling to trawl through pages of text that appear to be identical to those uploaded the year before, investors tend to miss the signals buried in the Management Discussion and Analysis (MD&A) and Notes.

In their research, Amir Amel-Zadeh and his co-author Jonathan Faasse have lifted the lid on these hidden clues and how they can serve as predictors of future stock and accounting returns.


Quarterly earnings announcements

The CEO, CFO, and Investor Relations Director hold a conference call with investors and analysts, usually immediately following the publication of quarterly results. While there is usually an overview of events of the previous quarter, most of the call will focus on future performance.

10-K filing

This lengthy report is filed within 90 days of the end of the fiscal year. The financial statements are clearest and they are what most people focus on.  There is a lot of narrative and a lot of boilerplate text, especially in the Notes, that just repeats what was filed last year.

But hold on!

Not all the narrative is exactly the same as last year. There are some subtle changes.

In fact …

Sometimes, especially in the MD&A, there are really quite a lot of changes.

This tells us something

Variations in 10-K narrative disclosures can predict future stock and accounting returns.
Companies with a lot of textual changes in the MD&A have been shown to perform poorly in the year after filing, compared with the S&P500.

The truth will out

Although upbeat presentations may have a short-term positive effect, it doesn’t reverse the poor performance indicated by the narrative clues.


‘Investors don’t seem to pick up on these clues, probably because there is so much text and so little time in which to process it,’ said Dr Amel-Zadeh. ‘Comparing footnotes from different years could certainly be a laborious process. As the point of the SEC’s disclosure requirements is to ensure that a ‘reasonable’ investor should have the necessary information with which to make an informed voting or investment decision, something has to change: whether it’s the reporting format itself, a reduction in the amount of narrative by firms, or just helping investors know where to look.’  


Amir Amel-Zadeh

Amir Amel-Zadeh View profile

Amir Amel-Zadeh is Associate Professor of Accounting at Saïd Business School and Research Fellow at Green Templeton College, Oxford. His research interests encompass the economic effects of financial accounting and disclosure as well as accounting and regulatory issues at financial institutions.