The Effect of Quarterly Report Readability on Information Efficiency of Stock Prices

This paper investigates how quarterly report (10-Q) readability affects the information efficiency of stock prices, defined as the speed at which earnings news is impounded into security prices. Using quarterly reports filed with the SEC between 2001 and 2007, I find that less (more) of the earnings-related information is incorporated into stock prices during the three-day 10-Q filing (post-filing drift) window for firm-quarters with unexpectedly longer and more textually complex 10-Qs, consistent with the notion that more difficult-to-read quarterly reports delay the convergence of the stock price to the firm's fundamental value. These results hold after controlling for the firm's unexpected earnings, factors affecting the earnings-return relation, transaction costs of the firm's shares, and determinants of mandatory disclosure readability. The adverse effect of poorer unexpected readability on stock price efficiency is less pronounced for firm-quarters with more analyst following and larger institutional ownership, consistent with sophisticated information users being less affected by poorer unexpected 10-Q readability. Results from this paper suggest that difficult-to-read disclosure provides a partial explanation for the delayed price response to earnings news documented in the post-earnings-announcement-drift literature. [PUBLICATION ABSTRACT]