Does better firm information disclosure enhance institutional blockholder monitoring on information asymmetry? Evidence from 10-K readability

Abstract

Using the Plain Writing Act of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investor monitoring of firms' information environments. This study reveals that the negative association between institutional monitoring and information asymmetry is more robust when firms provide 10-K reports with enhanced readability. Since the implementation of the Act, the impact of improved readability on the relationship between institutional monitoring and information asymmetry has become increasingly pronounced. This finding confirms our hypothesis that improved readability provides better firm information for institutional investor monitoring of firms, thus decreasing information asymmetry.