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The complexity of readability : the effect of industry complexity on annual report readability

Strømnes, August Joachim Holst; Skagseth, Eirik Fjelltveit
Master thesis
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URI
http://hdl.handle.net/11250/2611962
Date
2019
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  • Master Thesis [4657]
Abstract
We challenge the empirical relationship between annual report readability and subsequent

stock return volatility, used to validate readability measures’ ability to reflect the effective

communication of valuation-relevant information. We establish that vocabulary most

indicative of higher and lower readability scores are words specific to selected industries,

and that both readability measures and stock return volatility hold strong time trends.

When controlling for the unobserved time-varying heterogeneity across industries we

find that both the magnitude and the statistical significance of the association between

readability and volatility mitigates. Overall, the results support the notion that this

association reflects the underlying complexity of the firm’s business rather than the

effective communication of valuation-relevant information.

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