Annual report readability and equity mispricing

Abstract

This study examines the association between annual report readability and equity mispricing. Consistent with low annual report readability impeding the efficient and accurate assimilation of information into stock prices, less readable annual reports are associated with greater equity mispricing. This association extends to both equity underpricing and equity overpricing. Cross-sectional analysis indicates that the association between less readable annual reports and equity underpricing is accentuated when individual investors’ share ownership is high, whereas the association between less readable annual reports and equity overpricing is attenuated when more experienced financial analysts follow a firm. Overall, our findings contribute to the literature on readability and equity mispricing and serve to inform managers about the underlying consequences of issuing less readable annual reports and regulators about the need for additional projects that enhance the understandability of financial reporting.