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Jian Zhang's Abstract

The purpose of this paper is to shed some light on the linkage between textual characteristics of firms’ annual reports and firms’ discretion over earnings. In specific, this study focuses on the relation between insurers’ financial statements and insurers’ reserving behavior. Based on ‘management obfuscation hypothesis’ (Bloomfield, 2002), firms can use complex annual reports to hide their true performance when their performance is bad. In this study, we focus on 10-K filings of 40 insurer groups over 2000-2013 and find that insurers with negative loss reserve errors (underreserving) have more complex annual reports, in terms of length and readability. Moreover, insurers with negative loss reserve errors (underreserving) use less uncertainty words and negative words in their reports. These results partly suggest that insurers with bad performance are prone to use more complex annual reports to obfuscate their performance and status. This paper contributes to the literature in two ways. Firstly, this paper concentrates on the textual analysis of insurance companies. Secondly, this paper extends the literature about loss reserve errors and offers evidence for the association between textual characteristics and reserving behavior.