Intelligibility vs Readability: Understandability Measures of Financial Information

Abstract

Decision-making is influenced by information, which must be understood so it can be useful. However, measuring understandability is not a simple task. Previous studies use readability metrics as proxies for understandability, but readability is a shallow metric ignoring discourse and language components. This research analyzes the notes to the financial statements using intelligibility metrics, an alternative to readability measures. Our sample comprised 44 Brazilian firms that presented their Portuguese notes (native language) and English (non-native) from 2012 to 2015. Focusing on the notes of Financial Instruments and Provisions, we found that, for most indexes where firms had worse readability levels, they showed better intelligibility levels. It indicates that both metrics measure different things. Our results also indicated that language impacts these metrics and that firms did not improve their information quality after the guideline OCPC 07 from the Brazilian Accounting Standards Committee.

Readability and Understandability of Notes to Financial Statements

“…The results of our research are consistent with the findings of Telles and Salotti (2020) and Souza and Borba (2022). The former found no evidence that readability and intelligibility (their proxy for understandability) metrics measure the same aspects of a text, while the latter found a low association between the original Flesch index and a modified version that included logical operators, tokens, and other text attributes that can be argued to be closer to understandability than the original Flesch.…”

“…There are conflicting results regarding the relationship between readability and understandability (Razik, 1969;Dreyer, 1984;Telles & Salotti, 2020). Intelligibility metrics may provide a more comprehensive and accurate assessment of understandability than readability measures (Telles & Salotti, 2020), suggesting a possible inverse relationship between readability and understandability. Souza and Borba (2022) also found a low association between commonly used readability metrics and a modified metric designed to include additional aspects of text complexity.…”

“…For our study, we used an adapted version of this metric specifically designed for the Portuguese language, as developed by Martins et al (1996) and used in previous studies (e.g. Telles & Salotti, 2020;Sena et al, 2023) To measure understandability, we used the Meaning Identification Test (MIT), which employs paraphrases that retain the meaning of the original sentence, as well as paraphrases that change the meaning. Jones and Smith (2014) examined several measures for assessing understandability in accounting texts and concluded that the MIT comprehension test yielded superior results compared to other measures in terms of measuring passage comprehension.…”

“…Recently, readability studies have emerged in other markets using different readability metrics (Ajina et al, 2016;Gomes et al, 2018;Bacha & Ajina, 2020;Hassan et al, 2019;Santos et al, 2019;Borges & Rech, 2019;Monteiro et al, 2020;Silva et al, 2020;Telles & Salotti, 2020;Soepriyanto et al, 2021;Sun et al, 2022;Cadorin & Theiss, 2022;Mendes & Lucena, 2022;Souza & Borba, 2022;Sena et al, 2023). However, these studies do not examine the proximity of readability to understandability.…”

IFRS 17: mensuração estocástica do ajuste de risco e evidenciação em notas explicativas

“…De forma semelhante, conforme Telles et al (2021), as habilidades de compreensão de quem lê uma divulgação financeira são mais significativas do que a legibilidade que o texto possui. Entretanto, mesmo leitores com experiência estão sujeitos à assimetria de informação, o que justifica a demanda por intermediários de informações, como analistas financeiros e agências de classificação de risco, que se dedicam à produção de informações de forma privada com objetivo de contornar a posição superior que os gestores possuem sobre as informações financeiras (Healy & Palepu, 2001).…”