Are Disclosures Readable? An Empirical Test

Abstract

A major goal of federal disclosure laws is to ensure that pre-contractual disclosure documents are readable, i.e., easily understood by the average disclosee. Focusing as a case study on 523 U.S. disclosures in the franchise industry, this Article empirically indicates that disclosures are often difficult to read. Using the Gunning Fog linguistics readability index, this article indicates, inter alia, that prospective franchisees need, on average, more than 20 years of education to understand a franchise disclosure document on the first reading. This result undermines the readability goal of the federal franchise disclosure law since the highest level of education that most franchisees have completed is community college, which is normally the equivalent of 14 years of education. The results of our study also show a significant positive relationship between the franchise's size and age, and the readability of their disclosures. The empirical results of this study have significant implications, not only for the franchise industry, but also for the institutional design and enforcement of federal disclosure regulations.