Measuring Readability in Financial Disclosures

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commission's plain English initiative. We propose defining readability as the effective communication of valuation-relevant in...

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Bibliographic Details
Published in:The Journal of finance (New York) Vol. 69; no. 4; pp. 1643 - 1671
Main Authors: LOUGHRAN, TIM, MCDONALD, BILL
Format: Journal Article
Language:English
Published: Cambridge Blackwell Publishing Ltd 01.08.2014
Wiley Periodicals,Inc
Wiley
Blackwell Publishers Inc
Subjects:
Analytical forecasting
Business structures
Communication
Contextual analysis
Control variables
Correlation
Disclosure
Earnings forecasting
Englisch (Sprache)
English language
Exchange
Financial disclosure
Gunning Fog index
Indexberechnung
Indexes
Informationswert
Investors
Lesbarkeitsindex
Linear regression
Measurement
Measurement techniques
Parsing
Plain language
Readability
Studies
Syllables
Text analysis
Textual analysis
Unternehmenspublizität
Valuation
Vocabulary
ISSN:0022-1082, 1540-6261
Online Access:Get full text
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Summary:Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commission's plain English initiative. We propose defining readability as the effective communication of valuation-relevant information. The Fog Index—the most commonly applied readability measure—is shown to be poorly specified in financial applications. Of Fog's two components, one is misspecified and the other is difficult to measure. We report that 10-K document file size provides a simple readability proxy that outperforms the Fog Index, does not require document parsing, facilitates replication, and is correlated with alternative readability constructs.
Bibliography:ArticleID:JOFI12162
istex:A1957495DF7CFB8088EC25123C5A0D4F379B4E79
ark:/67375/WNG-ZZ30CNG4-7
Tim Loughran and Bill McDonald are at the Mendoza College of Business, University of Notre Dame. We thank Jeff Burks, Peter Easton, Paul Gao, Campbell Harvey (Editor), Stephannie Larocque, Jennifer Marietta‐Westberg, Richard Mendenhall, Paul Tetlock, two anonymous referees, an anonymous Associate Editor, and seminar participants at Michigan State University, Rice University, and The University of Notre Dame for helpful comments. We are grateful to Jianfeng Zhu and Manisha Goswami for research assistance.
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ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12162