Financial Report Readability as a Signaling Device of Earnings Quality

We find that firms that meet or just beat last’s year earnings (henceforth, MBE firms) have a lower post-filing stock return volatility in the month following the 10-K filing. We also find that this negative relation is stronger for the MBE firms providing more readable 10-K. Furthermore, we document that this joint effect is more pronounced in scenarios where investors face higher screening costs. The results are consistent with firms facilitating the valuation process when meeting market expectations by providing precise and well-written financial reports. Our results inform the debate about the investors’ capacity to detect firms that falsely achieve market expectations by documenting the complementary role of readability in reducing valuation uncertainty