Financial report readability and stock return synchronicity

Abstract

ABSTRACTIn 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.