Thursday, June 08, 2006

Reduced Readability of Financials Leads to Lower Future Profits

University of Michigan researcher Feng Li found that difficult to read SEC filings were associated with lower earnings in the following year. Li ran over 55,000 reports since 1994 using two tests of readability: the Fog index and the Kincaid index. Under both methods, SEC filings were rated difficult to read--in fact, the Fog index rated them almost unreadable (wow, you don't say :0). Insurance and healthcare companies were among the worst offenders with airlines being one of the easiest to read.

Li's research should be a boon to Michelle Leder and Footnoted, who heroically slogs through annual reports and SEC filings for her blog. An additional thought, based on this premise; maybe the IRS can generate more revenue without raising taxes simply by simplifying the Internal Revenue Code.


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