Readability as a measure of textual complexity: determinants and evidence in Brazilian companies

Abstract

The aim of this article was to evaluate the effect of company earnings and of harmonization with IFRS on the readability of Management Reports in the Brazilian stock market. There is a gap to be filled both in the elaboration and adaptation of readability measures to the context studied, as the studies tend to replicate the original formulas, and in identifying the determinants of the readability of Brazilian company reports, as the research in this field remains in its infancy and the results are inconclusive. The results provide indications for investors to identify complex textual information and may help public policymakers to establish a simple writing manual, along the lines of the SEC’s 1998 Plain English Handbook. The modified metrics and the one developed overcome the criticisms regarding the use of readability formulas in accounting research and could be used in substitution of the original metrics in future studies. An econometric model was used that presents the determinants of readability. Readability was calculated for the Results Analysis section of the Management Report. The resulting construct is understood via three attributes: persistence, current performance, and the reference benchmark. Harmonization with IFRS is a dummy variable, which delimits the pre- and post-IFRS periods. The hypotheses were tested in a sample of Brazilian companies made up of 714 company-year observations covering the period from 2006 to 2019. The descriptive results show that there is an apparent improvement in the readability of the reports in the pre- and post-IFRS period comparison. The econometric evidence shows that, in general, companies with persistent and positive earnings present less complex reports and are more likely to have highly readable reports, because managers publish reports with better readability to signal positive results to the market.

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.…”

“…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.…”

“…Samantha Valentim Telles / Bruno Meirelles Salotti 2018; Borges & Rech, 2019;Silva et al, 2020;Cadorin & Theiss, 2022;Mendes & Lucena, 2022;Souza & Borba, 2022;Sena et al, 2023). The lack of a relationship between readability and information quality, as found by Sena et al (2023), or a firm's disclosure strategy that uses narrative complexity to maintain social legitimacy, as found by Hassan et al (2019), could explain this.…”

“…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.…”

Legibilidade nos releases de resultados das Companhias Brasileiras Abertas

“…Quanto ao grau de legibilidade, convém destacar que, na contramão da maioria das pesquisas identificadas para o mercado brasileiro que utilizam fatos relevantes (Silva & Fernandes, 2009), relatórios financeiros (Miranda et al, 2018), notas explicativas (Gomes et al, 2019;Holtz & Santos, 2020), relatório de auditoria independente (Reina et al, 2021) e relatório da administração (Souza & Borba, 2021) este estudo se propôs a analisar os releases de resultados que naturalmente têm suas particularidades quanto à elaboração, à regulação e à divulgação.…”