Does Government Report Readability Matter? Evidence from Market Reactions to AAERs

48 Pages Posted: 16 Dec 2019 Last revised: 25 Mar 2020

See all articles by Yu Flora Kuang

Yu Flora Kuang

The University of Melbourne

Gladys Lee

University of Melbourne

Bo Qin

The University of Melbourne

Date Written: November 18, 2019

Abstract

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Keywords: Government document; Plain Writing Act; Disclosure readability; Textual analysis; Market reaction

JEL Classification: M41, M48, G38

Suggested Citation

Kuang, Yu and Lee, Gladys and Qin, Bo, Does Government Report Readability Matter? Evidence from Market Reactions to AAERs (November 18, 2019). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3495151 or http://dx.doi.org/10.2139/ssrn.3495151

Yu Kuang

The University of Melbourne ( email )

Level 7, The Spot
198 Berkeley St
Carlton, Victoria 3053
Australia
+61383449361 (Phone)
+61393492397 (Fax)

Gladys Lee

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Bo Qin (Contact Author)

The University of Melbourne ( email )

Level 8, Department of Accounting
Carlton, Victoria 3053
Australia
+61383449361 (Phone)
+61393492397 (Fax)

HOME PAGE: http://www.findanexpert.unimelb.edu.au/display/person743093#tab-overview

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
34
Abstract Views
218
PlumX Metrics