Is the Readability of Corporate Textual Disclosures Measurable?

Abstract

This paper reviews the accounting literature that studied readability of corporate narrative disclosures as a dependent variable being affected by firm performance, desire to highlight good news or hide bad news, risk exposures, among others, or as an independent variable affecting decision makers such as investors or analysts in their judgements. We limited the studies reviewed in this literature to those which quantitatively measured readability in terms of the Fog Index, Flesch Kincaid, Flesch Reading Ease, or even the file size as an overall measure of the level of readability of the textual disclosure. The purpose of the review is to document the increasing trend in the number of studies depending on these indices over the last two decades, and to show why, although these computational linguistic techniques might be appropriate for the purposes they were developed for, they might suffer several deficiencies when used in the financial disclosure field.