A Plain English Measure of Financial Reporting Readability

Posted: 6 Feb 2015 Last revised: 13 Apr 2017

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Andrew J. Leone

University of Miami

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Kristina M. Rennekamp

SC Johnson Graduate School of Business; Cornell SC Johnson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2016

Abstract

Over the past decade, a burgeoning literature has emerged using textual analysis to examine the impact of financial reporting readability on capital markets. Despite the rapid growth of this literature, clear guidance on measuring readability in financial texts is rather limited. In this study, we introduce a new measure of readability, the Bog Index, which is designed to capture the plain English attributes of disclosure (e.g., active voice, fewer hidden verbs). We then validate this new measure based on a combination of regulatory guidance, experiments, and archival tests using a regulatory intervention related to the readability of prospectus filings. After validating this measure, we next examine the extent to which different readability measures are associated with future stock market volatility and equity analysts’ earnings forecast properties. We find that the Bog Index has nearly a twenty-five percent greater association with future stock return volatility than any other measure of readability. In contrast, only quantity-based measures of disclosure (e.g., total words, file size) are associated with analyst forecast accuracy. Combined, this evidence suggests that financial statement users may be affected by different attributes of readability. Finally, we use both archival and experimental evidence to demonstrate the importance of understanding the underlying drivers of quantity-based measures of readability. In particular, we caution researchers that a vast amount of the variation in the file size measure over time is driven by the inclusion of content unrelated to the underlying text in the 10-K (e.g., HTML, XML, PDFs).

Keywords: Voluntary disclosure; Plain English Reporting; Textual Analysis; Regulation

JEL Classification: G38; M41; L51

Suggested Citation

Bonsall, Samuel B. and Leone, Andrew J. and Miller, Brian P. and Rennekamp, Kristina M., A Plain English Measure of Financial Reporting Readability (May 31, 2016). Kelley School of Business Research Paper No. 15-33. Available at SSRN: https://ssrn.com/abstract=2560644 or http://dx.doi.org/10.2139/ssrn.2560644

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Andrew J. Leone

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Brian P. Miller (Contact Author)

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

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Kristina M. Rennekamp

SC Johnson Graduate School of Business ( email )

Ithaca, NY 14853
United States
607-255-0500 (Phone)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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