dannylesmy / item7-readability

this repository contains code for calculating the readability of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" from the annual report alongside other corpora

Item7-readability

this repository contains code for calculating the readability of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" from the annual report

Employing Item 7 of the 10-K reports over a 26-year period, this study examines the evolving readability of financial reporting. Using a dataset of more than 200,000 reports retrieved from SEC EDGAR filings, we observe a noticeable decline in readability over time. Using the Fog Index as a measure, we can see that each year, the number of years of schooling required to comprehend a given text grows by over a month. Financial reports are becoming increasingly inaccessible to a significant segment of the population as a result of this trend. Additionally, we incorporate data from diverse corpora encompassing almost 10 million documents, offering a broader understanding of financial text complexity. The Wall Street Journal stands as a notable exception to our finding that financial texts, in general, do not demonstrate a significant increase in complexity over time and may even exhibit a tendency to decrease in complexity.

The following figure represents the core findings of our study, providing a comprehensive visualization of the temporal evolution of the Fog index across various corpora with a regression fitted line for CI and P-value calculation. It serves as a powerful tool for illustrating the changes in text complexity over time. Of particular significance is the growth observed in the Fog index for Item 7. Starting at a score of 17.6 in 1996, it has steadily increased to 20.19 in 2022, at an average rate of 0.09 per year. Our results emphasize the importance of addressing the increasing complexity in financial reporting, as it potentially hampers effective communication between corporations and investors. By quantifying the readability using the Fog index, our study provides tangible evidence of the gradual decline in accessibility over the years.