Measuring Readability in Financial Disclosures

TLDR

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the SEC's plain English initiative. We propose defining readability as the effective communication of valuation relevant information. The Fog Index is poorly specified for financial disclosures, with one component misspecified and the other difficult to measure, whereas 10‑K document file size offers a simple, replication‑friendly readability proxy that outperforms the Fog Index and correlates with alternative readability constructs.

Abstract

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the SEC'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.