Readability of compensation discussion and analysis: the impact of the Plain English initiative

After the initial requirement of compensation discussion and analysis (CD&A) in proxy documents, SEC reviewed 350 companies' CD&A in 2007 and reported lack of readability and clarity in this document. Hence we examined the readability measures of CD&A from 2007 to 2013. We also compared the CD&A to the 'letter to the shareholders' and the management discussion and analysis (MD&A) of annual report in 2012 for the differences in readability. As expected, the CD&A was less readable than the letter to shareholders, but more readable than MD&A. We also found that although year-to-year change in readability was small, readability of CD&A had improved significantly over the years. In addition, we found that the higher the excess CEO compensation, the more readable the CD&A, providing evidence for the litigation and legitimacy theories.

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