Analyst Report Readability, Earnings Uncertainty and Stock Returns

Abstract

This study investigates the association among readability of analyst reports, stock price and expectations of future earnings. Readability is one important feature of analyst reports that may affect value relevant information. We find that readability reduces analyst dispersion but is not associated with revision news, and stock markets reactions are significantly positive to the issuance of more readable reports. In addition, we document that market reacts positively to the predicted component of forecast dispersion reduction due to report readability. Finally, the positive effect of readability on stock prices is higher when it effectively reduces investors' uncertainty, specifically when the uncertainty is higher, when analysts are more experienced, or when forecasts are issued after earnings announcements. Overall, our empirical findings suggest the linguistic features of analysts' reports reduce uncertainty about future earnings, and investors price that reduction of uncertainty. This is the Pre-Published Version 3

Is there any association between real earnings management and crash risk of stock price during uncertainty? An evidence from family-owned firms in an emerging economy

“…Empirical output depicts the statistically significant and positive association between REM and SPC for all proxies of REM and SPC reporting that higher the practice of REM, greater will be chances for the crash of stock prices as evident by literature [21,39,43,30]. Empirical estimations for control instruments are also supported by earlier studies.…”

Readability of 10‐K Reports and Stock Price Crash Risk

“…Other studies that use the Fog Index to measure readability include those of Allee and DeAngelis (), Biddle et al (), Bonsall and Miller (), Bozanic and Thevenot (), Bushee et al (), Callen et al (), Guay et al (), Laksmana et al (), Lang and Stice‐Lawrence (), Lawrence (), Lee (), Lehavy et al (), Lo et al (), Lundholm et al (), Merkley (), Miller (), Nelson and Pritchard (), and Rogers et al () for corporate disclosures; De Franco et al () and Hsieh and Hui () for financial analysts’ reports; and Dougal et al () for news articles.…”

The impact of analyst report complexity on trading decisions in an experimental setting

“…For a sample of more than 350,000 analysts' reports, De Franco et al (forthcoming) find that reports using straightforward language generate more trading volume and also higher abnormal returns (price changes). Hsieh and Hui (2013) also find a positive association between readability and stock market returns for a sample of 2930 reports. They attribute this finding to a reduction in the dispersion of expected future earnings brought about by readable reports, and thus a lower discount rate in valuing the firm.…”