The Impact of Obscuring Firm Performance Through the Manipulation of Annual Report Readability

This paper studies how the readability of annual reports relates to firm performance over the two years following their filing date. Furthermore, this paper looks into whether analysts’ earnings forecasts are affected by low readability of annual reports. To understand these relationships, I look at 48,642 unique annual reports and quantify their reading ease. The impact of readability on firm performance and subsequently analyst forecasts is then examined. I find that firms whose annual reports score low on readability have on average lower earnings than firms whose annual reports score well. Further, I find that analysts’ forecasts are impacted by the readability of annual reports. Analysts forecasting error increases and consensus amongst analysts decreases as annual reports become more difficult to read. Lastly, I find that low readability of annual reports results in analyst forecasts that are systematically lower than actual earnings, supporting the need for firms to produce clear disclosures.