Measuring Readability in Financial Disclosures
44 Pages Posted: 1 Sep 2011 Last revised: 16 Jul 2013
Date Written: July 16, 2013
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: Suggested Citation