The aim of this study is to examine the association between complexity and ambiguity of information that managers disclose in annual reports and the level of cash that they choose to hold. Reports that are more complex and therefore, difficult to read, indicate a managers’ attempt to obfuscate accounting information. After reviewing the literature extensively, we find that empirical evidence in this field is scarce and thus, whether readability and ambiguity of 10-Ks are associated with corporate cash holdings is a research question that remains open. In this light, the first research question of this study is postulated as: “Is there a significant relationship among complexity of financial reporting and firm’s cash holdings?” and the second: “Is ambiguity of accounting information related with corporate’s cash holdings policy?”

An algorithmic approach is used for textual analysis of accounting disclosures of U.S. firms in Python programming language and the dictionary method suggested by Loughran and McDonald, is used to parse the 10-Ks (Loughran and McDonald, 2011). The database that was created after the implementation of textual analysis of annual reports, was merged with the database that contained financial data from Compustat. In addition, Stata software is used for the regression analyses of the final dataset. The final sample contains 29,994 observations from 1999 to 2016.

According to the empirical evidence of this paper, managers that disclose more complex and vague information tend to hoard cash. This is in line with the agency and the precautionary motive from cash holdings literature. Prior findings suggest that firms with less readable or ambiguous reports have difficulties to raise external capital and borrowing is likely to be more expensive for them (Rjiba et al., 2021; Xu et al., 2020; Ertugrul et al., 2017). On top of that, research indicates that firms with less access to external financing and with higher costs of borrowing hold more cash according to precautionary motive (Kim et al., 1998). Furthermore, according to management obfuscation hypothesis, managers disclose more complex and vague information to hide poor performance from stakeholders and to act opportunistically for their interests (Schrand and Walther, 2000; Bloomfield, 2002; de Souza et al., 2019; Li, 2008).

This study contributes to the existing literature stream in several ways. First, this work fills the gap in the research that examines the extend that readability and ambiguity of firm’s narrative disclosures are related with cash holdings. Furthermore, this paper extends the existing literature in the research field by adopting alternative measures of readability and ambiguity of corporate disclosures to examine their association with cash holdings. Particularly, we use the number of words that are included in a 10-K to measure readability and the percentage of modal weak words (along with other measures) to measure ambiguity. Lastly, in this work, all the sections of the annual reports are included in the analysis, unlike prior research which has focused only on the MD&A section of 10-Ks and earnings press releases.