Measuring Readability in Financial Disclosures
University of Notre Dame
University of Notre Dame - Mendoza College of Business - Department of Finance
July 16, 2013
Journal of Finance, Forthcoming
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.
Number of Pages in PDF File: 44
Keywords: Readability, Fog Index, textual analysis
JEL Classification: G14, G18, M41
Date posted: September 1, 2011 ; Last revised: July 16, 2013
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