Financial Opacity and Firm Performance: The Readability of REIT Annual Reports

We examine the capital market pricing implications of firm disclosure opacity as measured by the linguistic readability of REIT annual reports. The SEC has expressed concern that firms selectively manage the transparency of disclosures in order to hide adverse information. After controlling for othe...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2012-08, Vol.45 (2), p.450-470
Main Authors: Dempsey, Stephen J., Harrison, David M., Luchtenberg, Kimberly F., Seiler, Michael J.
Format: Article
Language:English
Subjects:
Access to information
Annual reports
Capital costs
Capital market
Capital markets
Cost of capital
Costs
Economics
Economics and Finance
Efficient markets
Financial disclosure
Financial Services
Hypotheses
Investments
Organizational effectiveness
Prices
Readability
Real estate investment trust (REIT)
Regional/Spatial Science
REITs
Return on assets
Risk
Studies
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Summary:We examine the capital market pricing implications of firm disclosure opacity as measured by the linguistic readability of REIT annual reports. The SEC has expressed concern that firms selectively manage the transparency of disclosures in order to hide adverse information. After controlling for other non-experimental factors that influence the readability of REIT financial statements, we find (1) financial opacity is negatively related to reported firm performance, and (2) the residual opacity that remains after controlling for other determinants of annual report readability has incremental explanatory power for returns beyond the Fama and French (1992, 1993) risk factors. The opacity risk-return premium persists after controlling for a (heretofore undocumented) stark monotonic decrease in annual report readability following the Sarbanes-Oxley Act of 2002.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-010-9263-2