Does Litigation Risk Make Financial Reports Less Readable?

Financial reports can be opaque, complex, and difficult to understand. As far back as 1998, this was the premise behind the SEC’s Plain English Rule: an unsuccessful attempt to encourage firms to write more readable financial reports. In a new paper, we show that the turgid nature of financial reports could be an unintentional response to litigation risk. Indeed, firms’ concerns about satisfying disclosure requirements lead to more voluminous, and more complex, disclosures. We ensure that our results are well identified and take steps to mitigate endogeneity concerns.

What we investigate

We start with the observation that decreasing readability … Read more