Impact Of Readability Of Chinese Annual Report On Stock Market Performance

Agency Theory states that information disclosure is the main way to reduce information asymmetry and agency costs that allows external stakeholders to know the enterprises.Studies have shown that the quality of information disclosure of listed companies can affect investors' decision-making,thus further affecting the market efficiency.Readability of the financial disclosures becomes the most important indicator of the quality of information disclosure.It is the ability of individual investors and analysts to obtain valuation-related information from financial disclosure reports.Studies have shown that the readability of 10-Ks is closely related to their performance in the capital market.However,because of the differences between Chinese and English linguistic characteristics,popular English readability measures could not be directly applied to Chinese financial disclosures.Therefore,whether the readability of 10-Ks will affect the earnings of Listed Companies in China's capital market is still unknown.How to measure the readability of Chinese financial disclosure documents is still unknown.Based on the existing research results,this paper will revise the existing readability measures such as Fog Index in Chinese 10-Ks.A new readability measure,which is independent from languages is also proposed.The main conclusions of the papers are: First,from the perspective of the whole market,the readability of the 10-Ks in the Chinese market is decreasing with time.It is intuitively reflected in the increase of the length of 10-Ks and the values of readability measures such as Fog Index and Flesch-Kincaid Grade Level.It shows that information disclosures are becoming comprehensive,accompany with the low efficiency of information transfer between managers and investors.The market information is not fully reflected in market prices,and China's capital market has not yet reached an effective market.Second,The readability of 10-Ks is positively correlated with companies' future stock market returns,which means after controlling for other variables,the lower the readability of 10-Ks(the harder to be read),the lower the next stock returns of the enterprise.There is a Hysteresis Effect,the lower readability of the current 10-K report can affect investors' decision-making,which will be reflected in the next earnings of the enterprise.Third,this paper finds the pages of 10-K document a better proxy for readability than traditional measures,which is easier to obtain and not restricted by linguistic features,which means replicable.The research is still inadequate,and there are two main research directions in the future.First,this paper only considers the linguistic characteristics of Chinese,and further studies can consider users' reading habits to build readability measures.Second,exchange the causality to study the impact of corporate earnings on financial disclosure writing.