“It pays to write well” by Byoung-Hyoun Hwang
Hugh Hoikwang Kim
We quantify the impact of having easy-to-read annual reports on firm value. We analyze shareholder reports of closed-end investment companies in which the overall value of the company and the value of the company’s underlying assets can be evaluated separately. Using a copy-editing software, which counts the pervasiveness of the most important ‘writing faults’ that make a document harder to read, our analysis provides evidence that financial disclosure documents whose readability rates are low cause firms to trade at a significant discount relative to the value of their fundamentals. Our estimates imply that a one standard deviation increase in readability increases firm value by a full 1%. This effect is particularly pronounced when the underlying firm has significant numbers of retail investors among its shareholders.