Financial report readability and stock return synchronicity

Publication Type

Journal Article

Publication Date

1-2019

Abstract

In this study, we investigate the impact of firm-specific information-processing cost, proxied by annual report readability, on investors' firm-specific information usage, proxied by firm stock return synchronicity. We expect that more readable financial reports would reduce firm-specific information-processing costs and, therefore, reduce stock return synchronicity. We propose a new readability measure and demonstrate that, as the readability of annual reports increases, the firm's future stock return synchronicity decreases. Furthermore, the effect of report readability on stock return synchronicity is more concentrated on firms with low analyst coverage or institutional ownership. Finally, the impact of readability on stock synchronicity is more concentrated on firms with high information asymmetry, such as firms small in size, with high R&D spending, or with high growth. The benefit of incorporating more firm-specific information (e.g. from a more readable financial report) into stock price is consistent with the SECs continuous attempt to make public company reports easier to comprehend. Managers of publicly listed firms should be aware of such a benefit and make their financial reports more readable by incorporating more tables, especially when their firms face high information asymmetry.

Keywords

Text mining, readability, stock return synchronicity, information asymmetry

Discipline

Databases and Information Systems | Finance and Financial Management | Numerical Analysis and Scientific Computing | Portfolio and Security Analysis

Research Areas

Information Systems and Management

Publication

Applied Economics

Volume

51

Issue

4

First Page

346

Last Page

363

ISSN

0003-6846

Identifier

10.1080/00036846.2018.1495824

Publisher

Taylor and Francis Group

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1080/00036846.2018.1495824

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