A new study in the American Accounting Association's Accounting Review has concluded that corporate financial reports are just as difficult for professional stock analysts to understand as for individual investors. Ironically, harder-to-understand reports create demand for analyst expertise and greater reliance on their earnings estimates. In addition, companies with the least readable reports tended to have higher analysts coverage--so that's one way to guarantee analyst coverage

As noted by Accounting Today, three University of Michigan academics applied the Fog Index, a measure of the linguistic complexity based on syllables per word and words per sentence, to tens of thousands of company filings over 12 years. They found that analysts' earnings forecasts for firms with less readable reports "have greater dispersion, are less accurate, and are associated with greater overall analyst uncertainty."

The index provides an estimate of the number of years of education required for a person of average intelligence to read the document once and understand it. The lower the score, the more readable the document. The mean Fog score for the entire sample was 19.53. Health care and insurance companies tended to pen filings that were hardest to understand at 20.22 and 20.16. Precious metals had the lowest score at 18.43. Berkshire Hathaway scored an impressive 17.23.

For the sake of comparison, the Fog score for Reader's Digest is 8, and the score for the Wall Street Journal is 12. Plain language has been an on-and-off concern for the SEC over the years, most recently in the Chris Cox era. Perhaps it's time to renew the call, just in time for U.S. corporate boards to meet the mandate to provide more disclosure and explanation of executive compensation policies.

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