The Effect of Uncertain and Weak Modal Words in 10-K Filings on Analyst Forecast Attributes

Abstract

This study examines the determinants of the use of uncertain and weak modal words in 10-K filings and the effect of these words on analyst forecast attributes. I find that the use of uncertain and weak modal words in 10-K filings is positively (negatively) associated with firm size, volatility of business and operations (firm age and number of business segments). More importantly, after controlling for readability and management tone, I find that the use of uncertain and weak modal words in 10-K filings is associated with greater analyst following, lower forecast dispersion, greater forecast accuracy, and lower uncertainty in analysts’ overall and common information environment. The results of this study provide more insights into why management uses uncertain and weak modal words in 10-K filings and how these words in 10-K filings affect analysts’ behavior and their forecast outcomes.

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