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A University of Michigan study looks at why annual reports are hard to read (via Tyler Cowen):

Apparently there's a simple reason why annual reports are hard to read: managers, in many cases, are trying to hide something.

The study, Annual Report Readability, Earnings and Stock Returns, found that the annual reports of underperforming companies are harder to read than those of companies that are performing well.

Feng Li, an assistant professor of accounting at the university, measured annual report "readability" using a sample of more than 55,000 company reporting years. He examined syllables per word and words per sentence in reports filed with the Securities and Exchange Commission.

He used two readability measures.

First, the "Fog Index" indicated the number of years of formal education a reader of average intelligence would need to read the text once and understand it. Fog = (words per sentence + per cent of complex words) x 0.4. Complex words were defined as words of three syllables or more.

Second, the Kincaid Index rated the reports on a US primary school level.

According to the study, annual reports of companies with lower earnings were more difficult to read. Similarly, companies that had volatile earnings were more likely to produce abstruse reports.

Of course, there's always this:

Posted by edelfenbein at June 22, 2006 10:59 AM