Measuring Readability in Financial Disclosures

2014/03/26 by TIM LOUGHRAN, Tim Loughran, BILL MCDONALD +1 · 1,498 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Actuarial science #Auditing, Earnings Management, Governance #Business #Commission #Computer science #Context (archaeology) #Credit Risk and Financial Regulations #Data mining #Finance #Financial Markets and Investment Strategies #Index (typography) #Machine learning #Measure (data warehouse) #Natural language processing #Parsing #Programming language #Proxy (statistics) #Readability #Valuation (finance) #World Wide Web

paper · doi:10.1111/jofi.12162

published in The Journal of Finance 69(4), 1643-1671 (Wiley)

openalex publication_date 2014/03/26 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05

Abstract

ABSTRACT Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commission's plain English initiative. We propose defining readability as the effective communication of valuation‐relevant information. The Fog Index—the most commonly applied readability measure—is shown to be poorly specified in financial applications. Of Fog's two components, one is misspecified and the other is difficult to measure. We report that 10‐K document file size provides a simple readability proxy that outperforms the Fog Index, does not require document parsing, facilitates replication, and is correlated with alternative readability constructs.

Citations

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