readability - Annual Report Readability, Current Earnings,...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Annual Report Readability, Current Earnings, and Earnings Persistence Feng Li Ross School of Business, University of Michigan 701 Tappan St., Ann Arbor, MI 48109 Phone: (734)936-2771 Email: Feng@umich.edu First Draft: July 2005 This Draft: September 15, 2006 The paper was previously titled Annual report readability, earnings, and stock returns. I acknowledge the financial support of the Harry Jones Endowment for Research on Earnings Quality at the Ross School of Business, University of Michigan. I thank Rob Bloomfield, Daniel Cohen, Ilia Dichev, Scott Richardson, Doug Skinner, Suraj Srinivasan, Franco Wong, and the participants of the Hosmer Lunch Workshop at the University of Michigan for comments. The comments and suggestions of Bob Holthausen (the editor) and an anonymous referee greatly improved the paper. All errors remain my own. Abstract This paper examines the relationship between annual report readability and firm performance and earnings persistence. This is motivated by the Securities and Ex- change Commissions plain English disclosure regulations that attempt to make corpo- rate disclosures easier to read for ordinary investors. I measure the readability of public company annual reports using both the Fog Index from computational linguistics and the length of the document. I find that the annual reports of firms with lower earnings are harder to read (i.e., they have higher Fog and are longer). Moreover, the positive earnings of firms with annual reports that are easier to read are more persistent. This suggests that managers may be opportunistically choosing the readability of annual reports to hide adverse information from investors. 1 1 Introduction Ever since the passage of the Securities Act of 1933, the Securities and Exchange Commission (SEC) has made consistent efforts to make the disclosure documents of public companies more readable(Firtel (1999)). The most recent of these efforts is the plain English disclosure rules adopted by the SEC on January 22, 1998. The underlying argument for the plain English disclosure regulation is that (1) firms could use vague language and format in disclo- sure to hide adverse information, and (2) the average investors may not understand complex documents and this could result in capital market ineciency. The relevance of the regulation, however, is not straightforward. First, there are other information sources (such as financial analyst reports) for investors. Depending on whether the different information sources are complements or substitutes, annual report readability may or may not be relevant. Second, some critics contend that disclosure should primarily be geared towards sophisticated investors due to the complicated nature of technical and financial information (Firtel (1999)). Finally, to the extent that the marginal investors are sophisticated and understand complex disclosure, stock price may not be distorted even if complicated language and format are used.complicated language and format are used....
View Full Document

This note was uploaded on 12/08/2011 for the course CIS 625 taught by Professor Michaelkearns during the Spring '12 term at Pennsylvania State University, University Park.

Page1 / 66

readability - Annual Report Readability, Current Earnings,...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online