Do textual attributes of management commentary matter for analyst coverage and information quality: evidence from the United Kingdom

Abstract

Purpose This study examines whether the readability of management commentary is associated with analysts' coverage and the precision of analysts' information sets. It further investigates whether analysts' experience, access to resources and forecast boldness moderate these relationships. Design/methodology/approach Using 5,117 firm-year observations from 974 UK-listed firms, we employ ordinary least squares (OLS) regression models to examine the association between management commentary readability and analyst outcomes. To address potential endogeneity concerns and assess the robustness of our findings, we conduct additional analyses using entropy balancing, the Heckman (1979) two-stage procedure, omitted variable bias analysis, instrumental variable estimation and alternative measures of readability. Findings We find that firms with less readable management commentary have greater analyst coverage and higher precision of analysts' information sets. Decomposing total information precision into public and private components, we find that lower readability is positively associated with both public and private information precision. These findings are consistent with lower readability increasing the value of analysts' information-processing and information-production activities and suggest that analysts respond to less readable commentary by both processing publicly available information and acquiring additional private information. We further show that analyst experience and forecast boldness strengthen the positive association between lower readability and both analyst coverage and information precision. In contrast, analysts' access to resources strengthens the association between lower readability and analyst coverage but does not significantly moderate the association with information precision. Additional analysis indicates that the component of textual complexity attributable to observable business complexity is positively associated with analyst coverage and with total and public information precision, but not with private information precision. Research limitations/implications The findings have implications for regulators, standard setters, firms and investors by highlighting the need to distinguish unnecessary complexity from textual complexity arising from economically relevant information. Originality/value This study contributes to the literature on narrative disclosures readability and analyst behaviour by highlighting analysts' information-provider role and demonstrating that the association between management commentary readability and analyst outcomes varies with analysts' attributes, particularly their experience and forecast boldness.