This paper examines the effect of annual report readability on the cost of equity capital in a sample of unique 288 French firms between 2002 and 2006. After controlling for several risk factors, the results show that firms with less readable annual reports exhibit a higher cost of equity capital. This finding is consistent with the notion that more complex corporate disclosures deter investors’ ability to process and interpret annual reports, who require in turn a higher cost of capital. This study supplements the huge body of research that investigates the relation between disclosure quality and the cost of equity capital with novel results and enhances our understanding of the role of corporate narrative disclosures in capital markets. Our results are shown to be robust to the use of various econometric methods and to the inclusion of alternative proxies for annual report readability.
