Measuring Readability in Financial Disclosures

Abstract:     
The recent increase in large scale textual analysis along with the SEC’s plain English initiative makes it important to identify a proxy for measuring readability in financial disclosures. Using a large sample of 10 K filings during 1994–2011 we show that of the two components comprising the most commonly applied readability measure — the Fog Index — one is difficult to implement and the other is misspecified. Using post-filing date return volatility, standardized unexpected earnings, and analyst dispersion to measure the information environment, we find that 10-K document file size provides a simple proxy for readability that outperforms the Fog Index, does not require any parsing of the document, facilitates replication, and is broadly correlated with alternative readability constructs.

Number of Pages in PDF File: 38

Keywords: Readability, Fog Index, textual analysis

JEL Classification: G14, G18, M41

working papers series