Everyone understands the importance of effective written communications in business, but could bad writing be costing your company real money? Darla Moore School of Business finance professor Hugh Hoikwang Kim set out to answer just that after reading a rather incomprehensible corporate disclosure report.
“One day, I opened up a well-known company’s disclosure documents,” he said. “When I opened up the file, it was several hundred pages long. Even as a finance professor with a Ph.D. in the field, it was very hard to understand what was going on.”
Kim decided to look into the financial impact of poor writing by examining the correlation between the price an investor is willing to pay for a company’s stock and the quality of that company’s writing in corporate disclosures. What he and his colleague, Byoung-Hyoun Hwang, assistant professor of finance at Cornell University’s SC Johnson College of Business, found is that the two are linked.
“Investors want to trade the company’s stock at a discount price when the company’s disclosure document is written in a complex way,” Kim said.
The researchers looked specifically at closed-end funds, which are typically held by companies that are smaller, making the disclosure document an important source of information on the company. If that information is too difficult to understand, potential shareholders lose interest.
The original research article, “It Pays to Write Well,” was published in the Journal of Financial Economics, one of the top three major finance journals, and was featured in the Wall Street Journal. This finding reaffirms the idea that good communication matters regardless of your field.
“I think the title says it all: It really pays to write well — not just in the world of literature, but also in the world of finance,” Kim said. Beyond that, this research statistically rejects the idea that hard numbers are the only thing that matter when it comes to selling shares. “These are still human beings you’re dealing with,” Kim said. “To have an impact on the community, an idea should be well-delivered to the audience.”
Kim plans to continue this line of research by looking at the readability of academic journal articles as it relates to the number of citations those articles get.
By Madeleine Vath