LLMs Reveal How Companies Bury Bad News in Annual Reports

Hiding in Fine Print..

Made with Ideogram

Just like how companies bury bad news with a Friday-before-a-holiday-regulatory filing, they try to hide bad performance deeper into their annual reports, according to new research from Chicago Booth.

Using large language models, researchers found that instead of discussing company metrics in order of importance, they’ll dump bad news later in the MD&A section where they have more discretion, especially when they:

• Have negative sentiment news to deliver

• Face more intense competition

• Report lower profitability

• Have higher earnings volatility

The authors developed a measure called "Information Positioning" which scores how forthcoming companies are with their information. Large, mature firms tend to place important information up-front more consistently, while companies that report losses, have lower profitability, higher earnings volatility, or negative sentiment tend to have lower information positioning scores.

This is just one of the findings of the …