Textual Information of 10-K Filings and the Idiosyncratic Volatility Puzzle

Title: Textual Information of 10-K Filings and the Idiosyncratic Volatility Puzzle

Abstract: Textual information in 10-K filings provides detailed descriptions of a firm's operations. Relying on all 10-K filings between 1996 and 2019, we investigate whether this textual information is priced among high IVOL stocks, as these drive the overall IVOL puzzle. We find clear heterogeneity in the expected returns of high IVOL stocks, based on their operating activities. On average, firms focusing on research & development are fairly priced, while those operating in oil and gas appear overvalued, earning negative future returns. The results are robust with respect to explanations commonly proposed in the literature. Furthermore, they are not driven by the firms’ industry affiliation.