Annual Report Readability and the Cost of Equity Capital

70 Pages Posted: 16 Mar 2021

See all articles by Hatem Rjiba

Hatem Rjiba

PSB Paris School of Business

Samir Saadi

University of Ottawa - Telfer School of Management

Sabri Boubaker

Ecole de Management de Normandie

Xiaoya (Sara) Ding

University of San Francisco - School of Management

Date Written: December 16, 2020

Abstract

Using a large panel of U.S. public firms, we examine the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors’ ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. In addition, we hypothesize and test whether the nature of the relation between readability and cost of capital depends on the tone of 10-K filings. Our results show that the effect of annual report complexity on cost of equity is greater when disclosure tone is more negative or more ambiguous. We also find that the effect of annual report readability on cost of equity capital depends on the degree of stock market competition, level of institutional investors’ ownership, and analyst coverage.

Keywords: Annual Report Readability, Bog Index, Disclosure Tone, Information Risk, Cost of Equity Capital

JEL Classification: G12, G14, G32, M41

Suggested Citation

Rjiba, Hatem and Saadi, Samir and Boubaker, Sabri and Ding, Xiaoya (Sara), Annual Report Readability and the Cost of Equity Capital (December 16, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3774039 or http://dx.doi.org/10.2139/ssrn.3774039

Hatem Rjiba (Contact Author)

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

Samir Saadi

University of Ottawa - Telfer School of Management ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

Sabri Boubaker

Ecole de Management de Normandie ( email )

9 rue Claude Bloch
Le Havre Cedex, Cedex 4 14052 Caen
France

HOME PAGE: http://https://www.em-normandie.com/en/sabri-boubaker

Xiaoya (Sara) Ding

University of San Francisco - School of Management ( email )

San Francisco, CA 94117
United States

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