Measuring Readability in Financial Disclosures

44 Pages Posted: 1 Sep 2011 Last revised: 16 Jul 2013

See all articles by Tim Loughran

Tim Loughran

University of Notre Dame

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance

Date Written: July 16, 2013

Abstract

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the SEC’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.

Keywords: Readability, Fog Index, textual analysis

JEL Classification: G14, G18, M41

Suggested Citation

Loughran, Tim and McDonald, Bill, Measuring Readability in Financial Disclosures (July 16, 2013). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1920411 or http://dx.doi.org/10.2139/ssrn.1920411

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance ( email )

University of Notre Dame
Notre Dame, IN 46556-0399
United States
574-274-2333 (Phone)

HOME PAGE: http://sites.nd.edu/bill-mcdonald

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
4,183
Abstract Views
18,964
Rank
4,552
PlumX Metrics