Textual Ambiguity in Financial Disclosures and Information Asymmetry among Investors

Prior literature documents a temporary spike in information asymmetry between sophisticated and unsophisticated traders around corporate disclosures because the former process new information faster. Using advances in textual analysis, we show that when management issues more ambiguous or less readable financial statements, the resulting spike in information asymmetry is significantly lower than for firms which use less ambiguous text. Furthermore, textual ambiguity measures of the disclosures are negatively associated with Intermarket Sweep Order (ISO) volume, an order type commonly used by sophisticated traders. This suggests sophisticated traders and algorithms are less able to extract value-relevant information from financial disclosures when they are either ambiguous or less readable.