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Scientists confirm: "If you can’t dazzle them with brilliance….

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….baffle them with bullshit.”:

Apparently there’s a simple reason why [corporate] 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.

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.

“Opportunistic managers may have incentives to make the annual report harder to read, if good earnings of this year are not persistent or if poor earnings are very persistent,” the study said.

“On the other hand, firms with better future performance may want to disclose information more precisely to distinguish themselves from the ‘lemons’ by making their annual reports easier to read.”

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