The effect of annual report readability on financial analysts behaviour

Abstract

Purpose- This article examines a little investigated issue in France concerning the effect of the readability of financial information upon the behavior of financial analysts. We investigate 88 companies listed on the French CAC All between 2009 and 2014. Readable annual reports are those that provide homogeneous, simple, clear, readable information that is understandable by all investors. Methodology - We investigate 88 companies listed on the French CAC All between 2009 and 2014. Readable annual reports are those that provide homogeneous, simple, clear, readable information that is understandable by all investors. To measure readability, we use the Gunning Fog index and the Flesh Reading Ease formula. Results indicate a positive relation between analyst following and the readability of the annual reports. Furthermore, the number of financial analysts corresponds to the increasing attention paid by institutional investors to companies. Findings- Readability reduces the agency costs and information asymmetry between investors, which attracts financial analysts, thus confirming the assumption of adverse selection. Conclusion- French companies need to issue understandable information to the markets; this would imply using short sentences, common words, or the active voice. The aim of such strategies is to reduce the cognitive distance between information senders and users.