The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts
University of Michigan - Stephen M. Ross School of Business
University of Michigan at Ann Arbor - Stephen M. Ross School of Business
Kenneth J. Merkley
Cornell University - Samuel Curtis Johnson Graduate School of Management
The Accounting Review, Vol. 86, No. 3, 2011
This study examines the effect of the readability of firm written communication on the behavior of sell-side financial analysts. Using a measure of the readability of corporate 10-K filings, we document that analyst following, the amount of effort incurred to generate their reports, and the informativeness of their reports are greater for firms with less readable 10-Ks. Additionally, we find that less readable 10-Ks are associated with greater dispersion, lower accuracy, and greater overall uncertainty in analyst earnings forecasts. Overall, our results are consistent with the prediction of an increasing demand for analyst services for firms with less readable communication and a greater collective effort by analysts for firms with less readable disclosures. Our results contribute to the understanding of the role of analysts as information intermediaries for investors and the effect of the complexity of written financial communication on the usefulness of this information.
Number of Pages in PDF File: 48
Keywords: analyst coverage, analyst's forecasts, disclosure, annual report readability
JEL Classification: D82, D83, G18, M41, K22Accepted Paper Series
Date posted: September 24, 2009 ; Last revised: March 5, 2012
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