Measuring Readability in Financial Disclosures




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    • Tim Loughran and Bill McDonald are at the Mendoza College of Business, University of Notre Dame. We thank Jeff Burks, Peter Easton, Paul Gao, Campbell Harvey (Editor), Stephannie Larocque, Jennifer Marietta-Westberg, Richard Mendenhall, Paul Tetlock, two anonymous referees, an anonymous Associate Editor, and seminar participants at Michigan State University, Rice University, and The University of Notre Dame for helpful comments. We are grateful to Jianfeng Zhu and Manisha Goswami for research assistance.


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.