The profits of companies with difficult-to-read annual reports are lower in following years, according to a study by a University of Michigan business professor.

"Managers may be opportunistically choosing the readability of annual reports to hide adverse information from investors," said assistant professor of accounting at the Stephen M. Ross School of Business, Feng Li, in a statement. "Firms with lower earnings not only tend to file annual reports that are more difficult to read, but a decrease in earnings from the previous year also results in annual reports that are harder to read, compared with the previous year's reports."

Using a sample of more than 55,000 reports since 1994, Li measured annual report readability by examining syllables per word and words per sentence in companies' 10-K filings.

Industries with the most difficult to read annual reports included insurance, health services, and electric, gas and sanitary services. Those that were easier to read belonged to airlines and the stone, clay, glass and concrete products industry.

Overall, annual reports of public companies are difficult to read, Li said. The average Fog Index for all annual reports is 19.4 (a score of 12-14 is ideal and higher than 18 is unreadable). Likewise, the annual report readability score on the Kincaid Index is 15.2 --about twice as high as the optimal score between 7 and 8.Li said there is a drop in the text difficulty in the years right after 1999, which suggests the SEC's plain English disclosure regulation of 1998 did make companies take efforts to make their annual reports more readable. He said that trend reversed dramatically after 2002 and the annual reports filed by public firms have become even more difficult to read, compared with the years prior to 1998.

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