Readability of Narrative Disclosures in 10-K Reports: Does Managerial Ability Matter?

Abstract

This study examines the association between managerial ability and the readability of narrative disclosures in 10-K reports. Using a large US sample from 1994 to 2015, we find that managerial ability is significantly positively associated with the readability of narrative disclosures in 10-K reports. We also find that this association is more pronounced for firms with a higher level of profitability. An additional analysis reveals that firms’ financial performance mediates the association between managerial ability and the readability of 10-K reports. Finally, we show that the association between managerial ability and the readability of 10-K reports is more pronounced before the implementation of the plain English disclosure rules. These results are robust to alternative specifications of managerial ability, 10-K reports’ readability, and the endogeneity concern. Our findings contribute to the emerging research that stresses the importance of 10-K reports’ readability for improving corporate transparency.