Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

This paper investigates the impact of a firm’s annual report readability and ambiguous tone on its borrowing costs. We find that firms with larger 10-K file sizes and a higher proportion of uncertain and weak modal words in 10-Ks have stricter loan contract terms and greater future stock price crash risk. Our results suggest that readability and tone ambiguity of a firm’s financial disclosures are related to managerial information hoarding. Shareholders of firms with less readable and more ambiguous annual reports not only suffer from less transparent information disclosure but also bear the increased cost of external financing.

Keywords: Readability, Financial Report, 10-K, Crash Risk, Bank Loan

JEL Classification: G14, G38

Suggested Citation: Suggested Citation

Ertugrul, Mine and Lei, Jin and Qiu, Jiaping and Wan, Chi, Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing (July 23, 2015). Available at SSRN: https://ssrn.com/abstract=2432797 or http://dx.doi.org/10.2139/ssrn.2432797