Size Matters! The Performance and Readability of CEO Letters to Shareholders

Abstract

Based on a unique sample of 342 CEO letters to shareholders of the Dow Jones Industrial Average Index constituents between 2000 and 2011, this paper examines the relation between the readability of a firm's voluntary disclosures and firm performance. We measure the readability using the file size of the letters in kilobytes. We find that the CEO letters of firms that are harder to read (i.e., they have a larger file) have a lower performance and earnings that are lower than expected by financial analysts. We also find that the readability of CEO letters contains information value to predict future firm performance and future earnings surprises. This effect is robust after controlling for other qualitative-, firm- and industry-specific factors. We contribute to the literature by showing that: (i) managers strategically prepare their voluntary disclosures by manipulating the readability to obfuscate their bad performance; and (ii) the readability of firms' voluntary disclosures is a signal for future performance.