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
Citation
BAI, Xuelian; DONG, Yi; and HU, Nan.
Financial report readability and stock return synchronicity. (2019). Applied Economics. 51, (4), 346-363.
Available at: https://ink.library.smu.edu.sg/sis_research/8044
Copyright Owner and License
Authors
Additional URL
https://doi.org/10.1080/00036846.2018.1495824