Analyst Report Readability, Earnings Uncertainty and Stock Returns
51 Pages Posted: 4 May 2013 Last revised: 25 Jun 2013
Date Written: June 2013
This study investigates the association among readability of analyst reports, stock prices, and expectations of future earnings. Readability is one important feature of analyst reports that may affect value-relevant information. We find that analyst report readability reduces forecast dispersion but is not associated with revision news, and that market reactions are significantly positive towards more readable reports. In addition, we document that the market reacts positively to the reduction of forecast dispersion predicted by report readability. Finally, the positive effect of readability on stock prices is higher when it effectively reduces investors’ costs to process analyst report information, specifically when forecasting firms have more R&D spending, when transaction costs are higher, when analysts are more experienced, or when forecasts are issued after earnings announcements. Overall, our empirical findings suggest that the writing of analysts’ reports reduces uncertainty about future earnings, and investors price that reduction of uncertainty. This contributes to the understanding of the role of analysts as information intermediaries for investors.
Keywords: Readability, Analyst Report, Earnings Uncertainty, Stock Returns
JEL Classification: G10, M40
Suggested Citation: Suggested Citation