The Effects of Annual Report Readability on Subsequent Stock Price Volatility - An Empirical Study of Swedish Financial Markets

Abstract

This study investigates the effects of financial reporting on market behaviour. A global trend in the last decade has been the increasing scope of annual reports. This might result in a more complete reporting, but the advantages with increased disclosure should be put in relation to the risk of confusion. Therefore, it is of interest to further examine the effects of increased disclosure. Increased disclosure affects the readability of financial documents, where readability is the ease of which one can understand written text. Understanding how or if the readability of financial disclosures affects market behaviour is both of regulatory interest as well as that of investors. The aim of this study is to examine how annual report readability affects subsequent stock price volatility in a Swedish context. Using the proxy for readability put forth by Loughran & McDonald (2014), this study tests a hypothesis to determine the relation between the readability proxy and stock price volatility. This is done for annual reports as well as board of directors’ reports (förvaltningsberättelse), where the latter is unique to Sweden. In conclusion, a statistically significant relationship between annual report readability and subsequent stock price volatility is found. However, the economic impact of these findings is limited. A statistically significant relationship between board of directors’ report readability and subsequent stock price volatility can not be established.