When language matters: How the readability of annual reports affects the cost of equity

A new bachelor's thesis from the Stockholm School of Economics shows that the readability of annual reports has a clear correlation with companies' cost of equity and that the effect is particularly evident in the financial services sector. The results strongly support the importance of well-thought-out and professional financial communication.

In their bachelor's thesis Does Readability Matter?, Matilda Hellström, analyst at AVA Corporate Communications, together with Saga Bolmgren, has investigated how linguistic readability in Swedish listed companies' annual reports affects investors' required rate of return.

The study covers Swedish listed companies during the period 2019–2024 and focuses on the narrative parts of the annual report. This includes the sections where companies describe their operations and explain and put the year's results in a broader context, such as in the CEO's statement, market descriptions, strategy sections, corporate governance reports and risk sections.

The correlation was analysed using linear regression, where readability was measured using an established index that gave each annual report a score based on linguistic complexity. The cost of equity was calculated using models based on analysts' growth forecasts and the share price at the time of publication of the annual report.

Readability and comprehensive content lower the cost of equity

The results show that companies with more linguistically complex annual reports tend to face a higher cost of equity. In other words, investors demand higher returns when reports are written in difficult language.

At the same time, the study shows that longer annual reports are associated with a lower cost of equity. The results suggest that when reports include more content that explains strategy and business model, contextualises financial data and provides additional context to operations and results, uncertainty for investors is reduced. This in turn contributes to a more positive risk assessment and a lower required rate of return.

A particularly interesting finding is that the correlation between readability and cost of equity is strongest for companies operating in financial services. The study also shows that linguistic complexity has an even greater impact on the cost of equity when reports are characterised by a more negative tone, which further reinforces the importance of balance, structure and precision in communication.

This reinforces the notion that the annual report is not only a regulatory document, but also a strategic and important communication tool. How the information is presented affects how the company is perceived, valued and assessed from a risk perspective. This is particularly important for companies in capital-intensive industries with extensive regulation, such as financial services.

At AVA Corporate Communications, we work daily to help companies translate their operations, financial information and complex regulations into clear, accessible and trust-building communication.

The study confirms what we see in practice: when the annual report is well-written, easy to follow and linguistically consistent, it creates better conditions for understanding, trust and, ultimately, long-term value creation.