The Association between Human Readability versus Machine Readability and Retail Investor Trading Behaviour

In this paper I analyse the association between human readability and machine readability, and their associations with retail investor trading behaviour. Based on principal component analysis I construct a human readability measure that incorporates all main elements of the SEC New Plain English Rule. I find that human readability and machine readability are positively related. Moreover, in contrast to prior research, I do not find evidence of an association between either type of readability and retail investor trading behaviour. Additional analysis on the relation between readability and institutional investor trading behaviour suggests that institutional investors are influenced by the readability of 10-K filings, and there is some evidence of machine readability being related to trading behaviour. These results suggest that in more recent time periods, retail investors may have reduced their reliance on firms their disclosures, which is of importance to the SEC and managers alike. Based on this thesis, future research may consider under which conditions retail investors are affected by the readability of 10-K filings.