Analyst Report Readability and Stock Returns

Abstract

© 2016 John Wiley & Sons Ltd.This study investigates the market's response to analyst report readability. We posit that readable reports decrease uncertainty of earnings expectations and by extension increase stock prices. Our results show that the equity market reacts more positively to readable reports and that this positive reaction is attributable to a reduction in uncertainty of future performance. Moreover, we find that the effect of readability on stock prices is significantly positive only for firms with greater R&D spending, higher bid-ask spreads, a greater proportion of uninformed investors, and more experienced analysts, which suggests that readability matters only when information asymmetry in the equity market is high.