Disclosure Readability and Stock-Market Reactions in the United States: Ev idence from Financial and Non-Financial Corporate Reports
Abstract:
This highlights the importance of clear communication, particularly where disclosure standards are evolv ing, narrative content is complex, and interpretive uncertainty is high. Grounded in disclosure theory and information-processing cost frameworks, it assesses whether linguistic complexity influences the speed and effectiveness with which investors incorporate information into prices. Using a broad panel of U.S. publicly traded firms from 2010 to 2024, the analysis measures readability in the forms 10-K, MD&A sections, and ESG reports through established textual metrics, including the Fog Index, Flesch Reading Ease, and plain-English indicators. Market responses are captured by cumulative abnormal returns, trading volume, return volatility, and post-disclosure return drift. The researcher finds that higher readability is associated with stronger imme diate market reactions, faster price adjustment, higher trading activity, lower volatility, and reduced post-dis closure drift. These effects are economically meaningful and robust across specifications. Notably, readability effects are significantly stronger for ESG disclosures than for financial disclosures and are amplified during periods of elevated market uncertainty. The findings extend the disclosure literature by identifying readability as a key mechanism through which narrative disclosures affect price formation and market efficiency.
