The Impact of Corporate Reporting Readability on Informational Efficiency

Asian Review of Accounting, Vol. 27 No. 4, pp. 489-507, 2019

DOI: ARA-11-2018-0203

Posted: 28 Dec 2019

See all articles by Reza Hesarzadeh

Reza Hesarzadeh

Ferdowsi University of Mashhad

Javad RajabAlizadeh

Ferdowsi University of Mashhad (FUM)

Date Written: September 17, 2019

Abstract

Purpose – Informational efficiency is a fundamental aspect of capital market quality, and therefore, regulators, managers and practitioners attempt to find ways to improve the informational efficiency. Since prior studies majorly focus on the numerical attributes of corporate reporting, it is not yet adequately known whether or not the linguistic attributes of corporate reporting affect informational efficiency. Thus, the purpose of this paper is to examine whether corporate reporting readability (readability), as an important linguistic attribute of corporate reporting, affects informational efficiency.

Design/methodology/approach – To measure readability, this paper uses Fog index. Moreover, to measure informational efficiency, the paper uses stock return variance ratios.

Findings – The findings reveal a positive and significant association between readability and informational efficiency. Moreover, the findings show that the association of readability and informational efficiency is stronger for firms with higher information asymmetry. The findings further document the spillover effect of readability, in the sense that the readability of economically related public firms affects a firm’s informational efficiency. Overall, the results support the arguments that readability enhances informational efficiency.

Originality/value – This study contributes to the literature by providing evidence on the internalities and externalities of readability in the context of informational efficiency. Thus, the study will be of interest to regulators, managers and practitioners, especially in the emerging capital market, who tend to find practical and easy ways to improve the informational efficiency.

Keywords: Processing Fluency, Spillover Effect, Readability, Informational Efficiency, Emerging Capital Markets

JEL Classification: G10, G11, M10, M21, M40, M48

Suggested Citation

Hesarzadeh, Reza and RajabAlizadeh, Javad, The Impact of Corporate Reporting Readability on Informational Efficiency (September 17, 2019). Asian Review of Accounting, Vol. 27 No. 4, pp. 489-507, 2019. Available at SSRN: https://ssrn.com/abstract=3455294

Reza Hesarzadeh (Contact Author)

Ferdowsi University of Mashhad ( email )

Mashhad, 9177948974
Iran

HOME PAGE: http://Hesarzadeh.profcms.um.ac.ir/

Javad RajabAlizadeh

Ferdowsi University of Mashhad (FUM) ( email )

P.O. Box 91775-1163
Mashhad
Iran

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