Information flow and market efficiency -unintended side effects of the Plain Writing Act

Abstract

This paper investigates the impact of precise language, specifically financial jargon, on market efficiency. We examine the interplay between regulatory language simplification, as imposed by the Plain Writing Act of 2010, and information asymmetries around earnings conference calls. In order to identify the effect of financial jargon on market efficiency, we analyze the language used during earnings conference calls and employ the act in an instrumental variable setting. Our findings suggest that the Act's promotion of plain language usage results in a reduction of (complex) financial jargon. Paradoxically, this reduction in jargon is associated with a decrease in market efficiency, implying that the Act may inadvertently hinder information flow and, hence, impair the market's price setting mechanism.

Keywords: market efficiency, information asymmetry, earnings conference calls, precise language, jargon, Plain Writing Act