Poorly Written Shareholder Reports Reduces Value

PenA study found that poorly written shareholder reports cause stocks to trade at lower values. In an upcoming article in the Journal of Financial Economics, the authors describe their process for evaluating disclosure documents and the results:

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%. Our results are particularly strong in situations in which investors are more likely to rely on annual reports.

The study looked at closed-end funds, which have little public information and typically are owned by individual investors. So the authors mention the caveat, "We're actually not sure to what degree our findings extend to large, visible firms, such as Apple Inc."

Morningstar summarizes the significance:

Their data suggest that "higher readability generates more trust and higher perceived managerial skill," Messrs. Hwang and Kim say. They write, "When a firm's annual report becomes difficult to read, investors become suspicious, perceive the firm and its managers to be of lower quality or subconsciously develop negative sentiments."

"The results strongly suggest that investors value clear and concise communication," says Mr. Kim. "If annual reports or corporate disclosure documents are written in a complex way, investors will trade the firm at a discount."

The authors used the program StyleWriter, which I hope is better than Grammarly. I wrote an analysis of that software last year.

Image source.


  • The Morningstar article suggests avoiding these "traps": legal words, hidden verbs, passive verbs, overwriting and wordy phrases. What other advice would you offer authors of disclosure statements?
  • How do you think this study might translate to larger companies? What other factors are involved?