Firm information and risk: Evidence from the role of 10‐K report readability

Abstract

AbstractThis study uses the Plain Writing Act of 2010 as an exogenous variation in the readability of 10‐K reports to establish the impact of report improvements on firm risk. We find that better readability significantly decreases total and idiosyncratic risks for US firms experiencing shocks to their readability environment during 2001–2016. The impact is stronger among firms with poorer governance, less external monitoring, and greater product market competition. The results based on supporting the causal impact of readability on firm risk are robust. Our findings suggest that more readable 10‐K reports facilitate investor monitoring, inducing firms to manage risk better.