Measuring Readability in Financial Disclosures

Abstract

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.

Does gender diversity in the audit committee influence key audit matters' readability in the audit report? UK evidence

“…Readability indexes were also linked with a limited value (see Loughran & McDonald, 2014. First, like archival studies, the study provides compelling evidence on whether and how gender diversity on the audit committee affects auditor reporting, rather than on the actual quality of gender diversity management and the degree of cooperation between the audit committee and the auditor.…”

From Accountability to Readability in the Public Sector: Evidence from Italian Universities

“…Instead, it must be checked in terms of the syntactical (concerning the financial statement's logic and expressivity) and lexical (to avoid terminological ambiguity) dimensions. In fact, disclosure should not be just useful and understandable; it must also ensure a good level of accountability (Lebar, 1982;Loughran & McDonald, 2014). …”

“…3;2017 Empirically, many studies have focused on readability in the private sector. Some authors have assessed the main factors that provide higher or lower readability (Schrand & Walther, 2000;Bloomfield, 2002;Li, 2008), others have investigated its main effects (Lehavy et al 2011;Bozanic & Thevenot 2014), and still others have analyzed this level based on ad hoc information during special events (Flory et.al 1992;Courtis, 1995;Lehavy et al 2011;Loughran & McDonald, 2014). Chavkin (1997) examined the level of complexity of corporate texts (financial statements and other documents) with reference to two critical features, as follows: the difficulty of the words (a difficult word is a "technical" word) and the length of sentences.…”

11 Production modes: Writing as materializing and stimulating thoughts

“…Various factors have been examined that influence investment decisions, inter alia the investors' perspective on financial reporting disclosure (Singh and Peters 2013), their investment criteria (Feeney, Haines, and Riding 1999), and the role of investment newsletters (Brown, Cao Alvira, and Powers 2012). Closer to applied linguistics and writing research, Loughran and McDonald (2013) discuss the importance of readability in the context of financial disclosures. Closer to applied linguistics and writing research, Loughran and McDonald (2013) discuss the importance of readability in the context of financial disclosures.…”