It pays to write well

Byoung-Hyoun Hwang and Hugh Hoikwang Kim

Journal of Financial Economics, 2017, vol. 124, issue 2, 373-394

Abstract: We quantify the effects of easy-to-read disclosure documents on firm value by analyzing shareholder reports of closed-end investment companies in which the company's value can be estimated separately from the value of the company's underlying assets. Using a copy-editing software application that counts the pervasiveness of the most important ‘writing faults’ that make a document harder to read, our analysis provides evidence that issuing financial disclosure documents with low readability causes firms to trade at significant discounts relative to the value of their fundamentals. Our estimates suggest that a one-standard-deviation decrease in readability decreases firm value by a full 2.5%. In situations in which investors are more likely to rely on annual reports, the readability effect on firm value increases to 3.3%.

Keywords: Disclosure characteristics; Readability; Firm value (search for similar items in EconPapers)
JEL-codes: M40 M41 M48 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:124:y:2017:i:2:p:373-394

DOI: 10.1016/j.jfineco.2017.01.006

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