Plain English, Readability, and 10-K Filings

Abstract:     
We examine readability of company disclosures by applying three different measures to a sample of 42,357 10-Ks during 1994-2007. Although all three measures find that better written documents have greater stock price reaction at the filing date, only one measure indicates an upward trend in readability over the sample period. Our readability measure, derived from SEC documentation surrounding the plain English initiative, appears to better capture text informativeness when compared with traditional measures that were originally designed to identify textbook grade levels. We show that traditional readability measures such as the Fog Index are not appropriate when applied to business writing. We find significant relations between improved 10-K readability and increased small investor trading, the likelihood of seasoned equity issuance, and better corporate governance.

Keywords: Readability, disclosure, Fog, Flesch, textual analysis

Working Paper Series