The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts

48 Pages Posted: 24 Sep 2009 Last revised: 5 Mar 2012

See all articles by Reuven Lehavy

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Abstract

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.

Keywords: analyst coverage, analyst's forecasts, disclosure, annual report readability

JEL Classification: D82, D83, G18, M41, K22

Suggested Citation

Lehavy, Reuven and Li, Feng and Merkley, Kenneth J., The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts. The Accounting Review, Vol. 86, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1477392

Reuven Lehavy (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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