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It Pays to Write Well

57 Pages Posted: 5 Dec 2015 Last revised: 10 Jul 2016

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business, Department of Finance

Date Written: July 10, 2016

Abstract

We quantify the effects of easy-to-read disclosure documents on firm value by analyzing shareholder reports of closed-end investment companies in which the company’s value can be estimated separately from the value of the company’s underlying assets. Using a copy-editing software application that counts the pervasiveness of the most important ‘writing faults’ that make a document harder to read, our analysis provides evidence that issuing financial disclosure documents with low readability causes firms to trade at significant discounts relative to the value of their fundamentals. Our estimates suggest that a one-standard-deviation decrease in readability decreases firm value by a full 2.5%. Our results are particularly strong in situations in which investors are more likely to rely on annual reports.

Keywords: Disclosure characteristics, Readability, Firm value

JEL Classification: M40, M41, M48

Suggested Citation

Hwang, Byoung-Hyoun and Kim, Hugh Hoikwang, It Pays to Write Well (July 10, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2698761

Byoung-Hyoun Hwang (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business, Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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