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Journal of Finance Vol. 69 No. 4 2014

Measuring Readability in Financial Disclosures

Tim Loughran1; Bill McDonald2

1 University of Notre Dame · 2 Tim Loughran and Bill McDonald are at the Mendoza College of Business, University of Notre Dame. We thank Jeff Burks, Peter Easton, Paul Gao, Campbell Harvey (Editor), Stephannie Larocque, Jennifer Marietta-Westberg, Richard Mendenhall, Paul Tetlock, two anonymous referees, an anonymous Associate Ed

Abstract

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commission's plain English initiative. We propose defining readability as the effective communication of valuation‐relevant information. The Fog Index—the most commonly applied readability measure—is shown to be poorly specified in financial applications. Of Fog's two components, one is misspecified and the other is difficult to measure. We report that 10‐K document file size provides a simple readability proxy that outperforms the Fog Index, does not require document parsing, facilitates replication, and is correlated with alternative readability constructs.

DOI
10.1111/jofi.12162
Volume
69
Issue
4
Pages
1643-1671
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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