Summarization in financial disclosures: Determinants and effects of prospectus summaries in high-yield debt markets

Even though retail investors are known to be unable to absorb vast quantities of information and frequently abstain from reading the hundreds of pages of security prospectuses, issuers of financial securities nowadays disclose more information than ever. Even mandatory summaries that should convey only the most essential information may run up to several pages. Academics and practitioners, therefore, question whether such short-form disclosure documents function as intended-namely, as an accurate and comprehensive representation of the information provided in the full prospectus. The recent development of new and alternative debt capital market segments for retail investors around the world makes this issue even more pressing, as especially small and mid-sized enterprises in such high-yield segments, often enter public capital markets for the first time and secondary sources of information are usually not available, rendering the prospectus and its summary even more important. In this study, we develop an automatic approach for evaluating the quality of a summary in bond prospectuses. Based on this, we investigate (1) the determinants of the summary quality, (2) the reaction of retail investors to different quality levels, and (3) the informativeness of the summary quality regarding the security's future performance. Our results suggest that firms with poor performance tend to provide low-quality summaries. Quality manipulations include significant differences in readability, specificity, tonality, use of boilerplate, and dissimilarity in content between the summary and the full prospectus. Unfortunately, we find that investors appear unable to detect this reporting bias. Rather, they react positively to weak summary qualities for these poorly-performing firms. This is despite the fact that the summary quality turns out to be highly predictive of the future security performance and, as such, can help to improve investment decisions significantly if perceived correctly.