Does Readability matter? Annual Report Readability and Its Effect on Swedish Listed Firms' Implied Cost of Equity

Sammanfattning

This thesis examines the effect of annual report readability on firms' implied cost of equity, and whether linguistic tone moderates this relationship. We employ OLS regressions with industry and year fixed effects on 547 firm-year observations from Swedish listed firms between 2019 and 2024, using robust standard errors. Readability is measured through textual complexity, captured by the Fog Index, and report length in the narrative sections of annual reports. Our results show that firms with more textually complex annual reports face higher implied costs of equity, suggesting that narrative complexity is priced by investors. In contrast, longer reports are associated with lower implied costs of equity. Linguistic tone is measured as the share of negative and ambiguous words in the narrative sections. We find that negative tone moderates the relationship between complexity and the implied cost of equity, while ambiguous tone shows no such effect. These findings suggest that annual report readability carries economic consequences and exhibits value relevance in the Swedish market.