Abstract
This paper investigates the impact of annual report readability on the corporate bond market. My findings indicate that in the US corporate bond market, firms with less readable annual reports tend to have higher credit spreads, higher credit spread volatilities, higher transaction costs, higher transaction costs volatility, smaller trade size, higher number of trades and higher number of trades volatility. This paper also provides the first answers to the question as to whether annual report readability matters to international market participants in the corporate bond market. My findings provide evidence that in the EUR corporate bond market, firms with more readable annual reports are associated with lower credit spreads.
Highlights
Annual reports are very important information sources concerning publicly traded companies
This section reports the empirical results of the impact of readability on Option Adjusted Spreads (OAS), transaction costs, trading volume, number of trades, and trade size and volatility of the above variables
Bonsall and Miller (2017) find that bonds with less readable annual reports tend to receive split ratings and exhibit a higher difference between Moody’s and S&P ratings. This disagreement among equity analysts and bond rating analysts can cause or intensify disagreements among investors and dealers concerning pricing. This is in line with the findings of spread volatility; namely, that firms with less readable annual reports are associated with a higher information risk and higher dispersion, which leads to higher spread volatility in the time period following publication of the filings
Summary
Annual reports are very important information sources concerning publicly traded companies. This paper contributes to the existing literature in the following ways: First, I analyze the relationship between readability and credit spread of corporate bonds, and provide the first evidence for the impact of annual report readability on spread volatility,. In the corporate bond market, firms can issue corporate bonds in different currencies, which means that a group of firms that submit mandatory filings to the SEC have corporate bonds in other currencies than USD This allows me to conduct the first international examination regarding the impact of readability. I find that one element of the Fog Index (percentage of complex words) shows a significant negative impact on corporate bond spreads This result is not unexpected and is in line with the findings of Loughran and McDonald (2014), who provide similar evidence for equity market data.
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