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Measuring Readability in Financial Disclosures
Author(s) -
LOUGHRAN TIM,
MCDONALD BILL
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12162
Subject(s) - readability , proxy (statistics) , computer science , index (typography) , valuation (finance) , parsing , commission , accounting , measure (data warehouse) , context (archaeology) , finance , actuarial science , natural language processing , data mining , business , world wide web , programming language , machine learning , paleontology , biology
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.