Annual Report Readability, Current Earnings, and Earnings Persistence

67 Pages Posted: 10 Mar 2006  

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Date Written: September 15, 2006

Abstract

This paper examines the relationship between annual report readability and firm performance and earnings persistence. This is motivated by the Securities and Exchange Commission's plain English disclosure regulations that attempt to make corporate disclosures easier to read for ordinary investors. I measure the readability of public company annual reports using both the Fog Index from computational linguistics and the length of the document. I find that the annual reports of firms with lower earnings are harder to read (i.e., they have higher Fog and are longer). Moreover, the positive earnings of firms with annual reports that are easier to read are more persistent. This suggests that managers may be opportunistically choosing the readability of annual reports to hide adverse information from investors.

Keywords: Disclosure, Annual report readability, Earnings Persistence

JEL Classification: D82, G18, M41, M45, G14

Suggested Citation

Li, Feng, Annual Report Readability, Current Earnings, and Earnings Persistence (September 15, 2006). Ross School of Business Paper No. 1028. Available at SSRN: https://ssrn.com/abstract=887382 or http://dx.doi.org/10.2139/ssrn.887382

Feng Li (Contact Author)

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

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