Effects of 10-K readability on institutional blockholder monitoring of risk management

Using the Plain Writing Act (PWA) of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investors' monitoring of firm risk management. The results indicate that the negative association between monitoring in...

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Bibliographic Details
Published in:Applied economics letters 2023-10, Vol.30 (18), p.2657-2666
Main Authors: Kim, Daniel Sungyeon, Chung, Chune Young, Fard, Amirhossein
Format: Article
Language:English
Subjects:
10-K report readability
Economic analysis
Institutional investments
institutional monitoring
Ownership
plain writing act
Readability
Risk management
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Summary:Using the Plain Writing Act (PWA) of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investors' monitoring of firm risk management. The results indicate that the negative association between monitoring institutional ownership and systematic risk is stronger when firms provide more readable 10-K reports. The impact of readability improvement on the relation between institutional monitoring and risk is more pronounced after the PWA. This finding confirms our hypothesis that improved readability provides institutional investors with more complete firm information with which to conduct their monitoring efforts, thus inducing more effective risk management.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2022.2103075