CEO social capital and the readability of 10-K reports

Abstract

This paper examines how CEO social capital affects the readability of 10-K reports. Drawing on social capital theory, we show that firms led by CEOs with higher social capital, measured in terms of their centrality within their social networks, tend to issue less readable reports. Cross-sectional analysis reveals that this association becomes more prominent when CEOs are more influential and powerful, when their peers more often issue less readable reports, suggesting the existence of contagion within the social network, and when they operate in competitive industries, supporting the evidence that less readable reports are used to avoid losing competitive advantages. Collectively, our results show that CEO social capital can shape the linguistic quality of corporate disclosure and forms an important determinant of 10-K report readability. Overall, we contribute to the literature by highlighting that social capital does not necessarily lead to better financial reporting quality. Instead, it can lead to the adoption of opportunistic behaviours aimed at masking firms’ fundamental accounting information.