This study examines whether the linguistic complexity of corporate risk factor disclosures affects trading behavior. Using a sample of 8,297 firm-year observations from 1,489 unique firms spanning 2006-2024, the analysis examines the relationship between multiple readability measures and abnormal trading volume. The findings reveal that more complex disclosures are associated with reduced trading activity, consistent with theoretical predictions that complex information increases processing costs and reduces investor participation. The effect is economically meaningful, with a one-standard-deviation increase in complexity associated with a 42% reduction in abnormal trading volume for the median firm. The relationship is stronger for larger firms and has intensified over time, suggesting growing importance of disclosure clarity in modern markets.
Pieter de Jong (Mon,) studied this question.