Readability, Financial Literacy, and the Reliance of Investors

Abstract

In 1998, the SEC published Rule 421(d) to mandate the use of “plain English” in disclosures and filings in order to make such documents more readable, more informative, and thus more useful to investors. Past research shows that high readability increases investors’ reliance on the disclosure through increased feelings of processing fluency, which are subjective feelings of ease felt when
reading something easily comprehensible. Past research also shows that more financially literate investors process financial information differently from their less financially literate counterparts: the former is mediated by both processing fluency and understanding of the information, while the latter is mediated by processing fluency only. I predict and find that less financially literate investors—who are influenced to a greater degree by changes in processing fluency—would also be more sensitive to changes in readability levels.