Does annual report readability affect labor investment efficiency?

This study examines whether the complexity of textual narratives captured by annual report readability affects a firm's labor investment efficiency. Analyzing a large sample of U.S. firms, we find that clearer, less complex financial disclosures are associated with significantly more efficient labor investment, particularly among firms with weaker external monitoring. These results are robust to alternative measures, controls, and endogeneity concerns. To establish causality, we exploit the implementation of eXtensible Business Reporting Language as quasi-natural experiments and find that mandated improvements in report clarity led to greater labor investment efficiency. Although the identification setting and effect of magnitude are specific to the U.S. reporting environment, the underlying insight is broader: where public narrative disclosure is an important input to monitoring and external finance, information accessibility can affect real resource allocation. The evidence supports both agency and financing-friction explanations, with stronger relative support for the financial-constraint channel.