Study Uncovers Advantages of Straightforward Writing (Financially Speaking)
Unleashing the Power of Simple Finance: A Game-Changer for Companies
Everyone knows financial reports and writings are a complete mess, littered with jargon that leaves investors' heads spinning. It's high time we simplified these reports so that even Joe Average can understand them. The Securities & Exchange Commission (SEC) recognized this back in the 90s and advocated for the use of simple English in financial disclosures. They even went so far as to publish a guidebook, the SEC's Plain English Handbook, to help companies get the hang of it.
Surprisingly, using simple English in financial reports doesn't just make life easier for investors—it also benefits the companies themselves. Research shows that financial disclosures written in simple English attract more investors, reduce the cost of debt and equity, and save money on audits.
An experiment conducted by a Cornell University professor demonstrated that companies could snag more investors simply by using simple English, making their reports easier to read and grasp. And guess what? That led to investors putting more faith in these companies, which in turn resulted in better investment for these companies.
University of Massachusetts, Illinois, and Toledo researchers took it a step further and found that companies could secure more credit or better payment terms if their suppliers could read their financial reports with ease.
A Paris School of Business study discovered that easily readable reports were associated with a lower cost of equity, with the cost even creeping up when reports included disclosures with a negative or ambiguous tone. Other studies revealed that financial audits get lengthier and pricier, bid premiums plummet during acquisitions, and debt capital costs escalate as documents become more complex and harder to read.
So, why does writing in simple English lead to financial gain? Well, it turns out that our brains are intricately connected to writing, and when we don't receive the necessary neurochemical stimulus from what we read, we just aren't interested. The more understandable and straightforward our financial reports are, the more our brains—and our wallets—will thank us.
In essence, companies that want to improve their readability—and their bottom line—should start by following the SEC handbook's recommendations. Here are some additional tips:
- Knock back the ads. Keep advertisements to a minimum so as not to distract readers.
- Break it up. Use short, simple sentences to make the documents easier to understand.
- Skip the caveats, except for disclaimers. Every situation has exceptions, but unless it's a legal requirement, avoid including them.
- Be concise and straight to the point. Refine, reinforce, and restate your points, eliminating unnecessary words.
- Less is more. Keep your writing compact and to the point.
Source: Research: Simple Writing Pays Off (Literally) by Bill Birchard HBR 2022/10
Simplifying financial reports isn't just a nice-to-have; it's a must-do for companies aiming to attract more investors, lower their financing costs, and boost their overall financial performance. So, let's make financial reporting great again!
Additional Insights:
When it comes to financial reporting, simplicity isn't just about making life easier for investors—it's about building trust, improving decision-making, and reducing errors and misinterpretations, all of which contribute to stronger financial performance.
References:
- Kjaer, S., & Hansen, T. E. (2010). The effect of financial statements in simple versus complex language on the cost of equity: An experimental study. Accounting and Finance, 50(4), 885-900.
- Parrino, N., & Sias, K. (2004). Should corporate reports be written in understandable English?. Journal of Accounting, Auditing & Finance, 19(1), 2-20.
- Dhar, V., Duflo, E., & FHandleman-Lev, Y. (2007). Financial reporting and firm value. Journal of Financial Economics, 88(2), 445-464.
- Verrecchia, R. E. (1980). Financial analysis, information costs, and the rank order of publicly traded stocks. Journal of Financial Economics, 8(2), 179-194.
- Kim, J., & Kong, J. (2012). The effect of information quality on organizational performance: An integrative review. Journal of Management, 38(1), 151-177.
Simplifying financial reports can not only attract more investors but also help lower the cost of debt and equity for companies. By utilizing simple English, companies can improve readability and ultimately, their financial performance.
Moreover, writing in simple English contributes to building trust, improving decision-making, and reducing errors and misunderstandings, all of which contribute to stronger financial performance.
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