» Posted by Martin Weil on June 22, 2006

Apparently there's a simple reason: managers, in many cases, are trying to hide something.

This article explores the conclusions of a recent University of Michigan study on the topic of annual report readability. Bottom line - readable annual reports are more apt to be written by managers confident of their company's future earnings.

"Feng Li, an assistant professor of accounting at the university, measured annual report "readability" using a sample of more than 55,000 company reporting years. He examined syllables per word and words per sentence in reports filed with the Securities and Exchange Commission.

He used two readability measures.

First, the "Fog Index" indicated the number of years of formal education a reader of average intelligence would need to read the text once and understand it...

Second, the Kincaid Index rated the reports on a US primary school level.

According to the study, annual reports of companies with lower earnings were more difficult to read. Similarly, companies that had volatile earnings were more likely to produce abstruse reports."

Thanks again to Marginal Revolution.

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