We explore how the readability of annual reports varies with earnings management. Using the Fog Index to measure readability (Li, 2008), and focusing on the management discussion and analysis section of the annual report (MD&A), we predict and find that firms most likely to have managed earnings to beat the prior year's earnings have MD&As that are more complex. This disruption of the overall pattern of readability increasing with the level of earnings found in Li (2008) challenges the ontological explanation that good news is inherently easier to communicate, and shows that obfuscation contributes to making disclosures more complex.

We examine the effects of implementing a U.S. approach to the enforcement of mandatory disclosure in China. Using a hand-collected sample of comment letters (CLs) issued by the Shanghai Stock Exchange over the period of 2013 to 2018, we show that stock price reactions to CL receipts and replies are negative and significant. Using textual analysis to match issues raised by regulators to targeted firms’ changes in disclosure, we show that these firms do address CL issues point by point, but do not experience significant improvements in their information environments. Our article highlights the importance of incentives rather than regulation/enforcement in reducing information asymmetry.

We examine the readability of text and the use of numbers in the annual filings and earnings press releases of foreign firms listed on U.S. stock exchanges. We find that foreign firms generally write clearer text and present relatively more numerical data than their U.S. firm counterparts. More importantly, we find that the readability of the text and use of numbers increases as the foreign firms get geographically further from the U.S. It also increases as the foreign firm's home country has greater differences in accounting standards or investor protection laws relative to the U.S. Further corroborating our results, we also find that these communication efforts are partially successful. Within a country, firms that produce relatively more readable disclosures attract relatively more U.S. institutional ownership. Collectively, our results suggest that foreign firms are responding to a perceived reluctance on the part of U.S. investors to own them and attempt to lower the investors' information disadvantage or psychological distance by providing clearer and more concrete disclosures.