It Pays to Write Well
57 Pages Posted: 5 Dec 2015 Last revised: 10 Jul 2016
Date Written: July 10, 2016
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: Suggested Citation