10-K Readability and Shareholder Proposals on Corporate Governance

Abstract

Using the passage of the Plain Writing Act of 2010 as an exogenous source for an increase in 10-K readability within a difference-in-differences framework, we find that firms with poor 10-K readability prior to the Act experienced a decline in the likelihood of receiving corporate governance proposals. This effect is primarily concentrated in proposals sponsored by retail investors and is most pronounced in firms with entrenched management, those actively engaging in earnings management through discretionary accruals, and proposals related to executive compensation and disclosure. By providing evidence on the differential impact of 10-K readability on retail versus institutional investors, we shed light on the varying information processing capabilities and engagement strategies across investor types. Our findings also illuminate the interplay between disclosure readability, managerial entrenchment, and earnings management, offering insights into the mechanisms through which poor 10-K readability influences the initiation of shareholder proposals. Our findings underscore the effectiveness of the Plain Writing Act of 2010 in enhancing transparency and highlight the role of disclosure readability as a tool for shareholder engagement, particularly for retail investors. Further, we show that the Plain Writing Act achieved more than its original goal of promoting clear and transparent communication between the government and the public; it also achieved an unintended outcome by prompting firms to adopt clear writing norms.

Keywords: financial disclosure, readability, shareholder resolutions, shareholder proposals