# Impact of Readability on Corporate Bond Market

## Abstract

**:**

## 1. Introduction

## 2. Related Literature

#### 2.1. Readability Literature in the Equity Market

#### 2.2. Readability Literature in the Debt Market

#### 2.3. Other Literature Regarding Annual Reports (10-K Filings)

## 3. Readability Measures and Data

#### 3.1. Readability Measures

#### 3.2. Data

## 4. Hypotheses and Empirical Results

#### 4.1. Hypotheses

**Hypothesis**

**1.**

**Hypothesis**

**2.**

**Hypothesis**

**3.**

#### 4.2. Multivariate Results for USD Universe

#### 4.2.1. Impact of Readability on OAS

#### 4.2.2. Impact of Readability on OAS Volatility

#### 4.2.3. Impact of Readability on Trading Behavior: Transaction Costs (Average Price Spread), Transaction Cost Volatility, Trading Volume, Number of Trades, Trading Volume Volatility and Number of Trades Volatility

#### 4.3. Multivariate Results for EUR Universe

#### 4.3.1. Impact of Readability on OAS

#### 4.3.2. Impact of Readability on OAS Volatility

## 5. Conclusions

## Funding

## Acknowledgments

## Conflicts of Interest

## Appendix A

Control Variables | Definitions |
---|---|

Volatility30D | Volatility of stock return, based on 30 daily returns |

Log (Market Cap) | Natural logarithm of market capitalisation of stocks |

Debt/Enterprise Value | Debt to enterprise value ratio |

Ebidta/Total Assets | Ebitda to total assets ratio |

Rating Score | Rating scores of corporate bonds |

Modified Duration | Modified duration of corporate bonds |

Herfindahl Index | Herfindahl index based on revenues in different industry business segments Herfindahl index = sum of squares of percentage of revenue of individual industry segment in total revenue |

ExOASdailyVol_{(t−1,t)} | OAS volatility in excess of market OAS volatility based on daily OASs in time period t−1 to t |

Log (Days Since Issue Date) | Natural logarithm of number of days since issue date of corporate bonds |

Log (Market Value) | Natural logarithm of market value of corporate bonds |

Price Spread_{t} | Average daily price spread of corporate bonds in month t Daily price spread is defined as $100\times \left(mean\left(BuyPrice\right)/mean\left(SellPrice\right)-1\right)$ |

Price_Spread_STD_{t} | Standard deviation of daily price spreads of corporate bonds in month t |

TradingVolume_{t} | Total trading volume of corporate bonds in month t |

NoTrades_{t} | Total number of trades of corporate bonds in month t |

AvgTradeSize_{t} | Total trading volume/total number of trades of corporate bonds in month t |

VolumeDailyVol_{t} | Standard deviation of daily trading volume of corporate bonds in month t |

NoTradesDailyVol_{t} | Standard deviation of daily number of trades of corporate bonds in month t |

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1 | |

2 | The reason for using the ultimate parent company is that investors generally consider all companies under the ultimate parent company as sharing the same default risk. |

3 | Based on Quoniam Asset Management GmbH’s contracts with data providers I cannot publish the Worldscope data. |

4 | Based on Quoniam Asset Management GmbH’s contracts with data providers I cannot publish the FINRA Trace data. |

5 | The EUR universe makes up only 11% of the entire senior, unsecured, bullet investment grade EUR-denominated corporate bonds in the Merrill Lynch Global Corporate Index. The reason for this is that I only have 10-K filings for publicly traded firms in US. Annual reports for firms with EUR-denominated bonds and without 10-K filings are not available. |

6 | Due to availability of daily OASs I run this regression for the time period 2009–2017. |

7 | Other currencies have very small number of observations. Therefore, an analysis with other currencies is not possible here. |

8 | Due to availability of daily OASs, I run this regression for the time period 2009–2017. |

**Figure 1.**This figure shows the percentage of trading volume from small trades (trades with volume less than $100,000) to total trading volume in each month.

Jan. 1999–Dec. 2017 | USD Universe | EUR Universe |
---|---|---|

No. of bond and month: all corporate bonds | 1,366,934 | 417,640 |

No. of bond and month: investment grade, senior, unsecured, bullet USD corporate bonds | 818,018 | 271,332 |

No. of bond and month: investment grade, senior, unsecured, bullet USD corporate bonds with mapping filing data/Number of Words ≥ 3000 | 415,890 | 27,946 |

No. of bonds | 8259 | 640 |

No. of ultimate parent companies | 748 | 100 |

No. of companies | 1258 | 138 |

Year | Number of Ultimate Parent Companies | Total Number of Words | Fog Index |
---|---|---|---|

1999 | 399 | 22,789 | 23.26 |

2000 | 426 | 22,216 | 23.10 |

2001 | 452 | 25,214 | 23.17 |

2002 | 475 | 27,304 | 23.00 |

2003 | 492 | 37,036 | 23.39 |

2004 | 502 | 39,918 | 23.05 |

2005 | 508 | 43,703 | 23.00 |

2006 | 519 | 47,363 | 22.96 |

2007 | 551 | 49,305 | 22.98 |

2008 | 568 | 52,140 | 23.03 |

2009 | 581 | 56,707 | 23.06 |

2010 | 580 | 57,526 | 23.18 |

2011 | 587 | 58,406 | 23.29 |

2012 | 595 | 58,834 | 23.38 |

2013 | 594 | 58,956 | 23.32 |

2014 | 587 | 59,571 | 23.45 |

2015 | 575 | 59,260 | 23.45 |

2016 | 545 | 60,859 | 23.50 |

2017 | 512 | 61,488 | 24.45 |

OAS_{it} | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
---|---|---|---|---|---|---|---|---|---|

Readability Measures: | |||||||||

Log (Number of Words) | 3.60 (5.81) | 3.00 (4.78) | |||||||

Fog Index | 0.39 (1.91) | 0.31 (1.42) | |||||||

Average Sentence Length | 0.21 (2.50) | 0.21 (2.29) | |||||||

Percentage Complex Words | −0.64 (−1.90) | −0.83 (−2.59) | |||||||

Control Variables | |||||||||

Volatility30D | 2.78 (15.54) | 2.77 (15.44) | 2.78 (15.54) | 2.78 (15.53) | 2.78 (15.51) | 2.80 (15.39) | 2.81 (15.53) | 2.81 (15.52) | 2.81 (15.48) |

Log (MarketCap) | −16.98 (−16.75) | −17.39 (−17.20) | −16.99 (−16.76) | −16.98 (−16.74) | −16.92 (−16.40) | −17.76 (−16.27) | −17.42 (−15.87) | −17.42 (−15.87) | −17.37 (−15.67) |

Debt/Enterprise Value | 74.73 (18.76) | 73.63 (18.53) | 74.93 (18.86) | 74.84 (18.82) | 74.26 (18.51) | 73.51 (17.88) | 74.56 (18.14) | 74.54 (18.12) | 73.88 (17.83) |

Ebidta/Total Assets | −72.11 (−7.24) | −68.24 (−6.93) | −71.63 (−7.24) | −71.88 (−7.24) | −73.37 (−7.24) | −62.49 (−6.03) | −65.04 (−6.25) | −65.17 (−6.24) | −66.91 (−6.28) |

Rating Score | 10.62 (33.42) | 10.33 (32.44) | 10.62 (33.39) | 10.60 (33.15) | 10.58 (33.90) | 10.43 (32.22) | 10.68 (32.95) | 10.66 (32.70) | 10.62 (33.28) |

Modified Duration | 5.77 (47.09) | 5.75 (46.79) | 5.77 (47.11) | 5.77 (47.07) | 5.77 (46.61) | 5.66 (44.86) | 5.67 (45.06) | 5.67 (45.03) | 5.68 (44.64) |

Herfindahl Index | −14.23 (−5.51) | −14.67 (−5.70) | −14.78 (−5.77) | −15.17 (−6.11) | |||||

Fixed Effect: Month | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |

R-squared | 62.79% | 62.82% | 62.79% | 62.79% | 62.79% | 62.51% | 62.48% | 62.49% | 62.49% |

Observations | 415,890 | 415,890 | 415,890 | 415,890 | 415,890 | 399,008 | 399,008 | 399,008 | 399,008 |

ExOASdailyVol_{(t,t+1)} | 1 | 2 |
---|---|---|

Readability Measures: | ||

Log (Number of Words) | 0.36 (1.64) | |

Control Variables | ||

ExOASdailyVol_{(t-1,t)} | 0.66 (20.79) | 0.66 (20.76) |

Log (Days Since Issue Date) | 0.10 (1.28) | 0.10 (1.28) |

Log (Market Value) | 0.26 (1.11) | 0.21 (0.93) |

Rating Score | 0.21 (1.95) | 0.18 (1.86) |

Fixed Effect: Month | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes |

R-squared | 52.99% | 53.01% |

Observations | 16,587 | 16,587 |

_{(t,t+1)}) in each regression is daily OAS volatility in excess of daily market spread volatility, in the month following publication of 10-K filings. Log (Number of Words) is the natural logarithm of the total number of words in each filing. Definitions of control variables can be found in Appendix A. All regressions include an intercept, month fixed effect and industry sector fixed effect. T-statistics are in parentheses, with standard errors clustered by month and industry.

Price Spread_{t+1} | 1 | 2 |
---|---|---|

Readability Measures: | ||

Log (Number of Words) | 0.03 (2.72) | |

Control Variables | ||

Price Spread_{t} | 0.01 (1.11) | 0.01 (1.12) |

Log (Days Since Issue Date) | 0.05 (10.38) | 0.05 (10.47) |

Log (Market Value) | −0.09 (−7.27) | −0.09 (−7.45) |

Volatility30D | 0.01 (6.02) | 0.01 (5.96) |

Rating Score | −0.004 (−0.82) | −0.01 (−1.61) |

Modified Duration | 0.03 (19.03) | 0.03 (19.03) |

Fixed Effect: Month | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes |

R-squared | 27.88% | 27.94% |

Observations | 13,008 | 13,008 |

_{t}

_{+1}) in each regression is the average price spread, in the month following publication of the 10-K filing. Price Spread is average daily bid/ask spread estimates for a certain month. Daily bid/ask spread is calculated as average buy price/average sell price −1 of a certain day. Log (Number of Words) is the natural logarithm of the total number of words in each filing. Definitions of control variables can be found in Appendix A. All regressions include an intercept, month fixed effect and industry sector fixed effect. T-statistics are in parentheses, with standard errors clustered by month and industry.

Price_Spread_STD_{t+1} | 1 | 2 |
---|---|---|

Readability Measures: | ||

Log (Number of Words) | 0.02 (1.92) | |

Control Variables | ||

Price_Spread_STD_{t} | 0.001 (1.37) | 0.001 (1.42) |

Log (Days Since Issue Date) | 0.03 (5.44) | 0.03 (5.46) |

Log (Market Value) | −0.06 (−4.84) | −0.06 (−4.94) |

Volatility30D | 0.01 (6.83) | 0.01 (6.77) |

Rating Score | 0.0005 (0.11) | −0.001 (−0.23) |

Modified Duration | 0.03 (17.40) | 0.03 (17.26) |

Fixed Effect: Month | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes |

R-squared | 20.45% | 20.51% |

Observations | 8719 | 8719 |

_{t+1}) in each regression is the daily price spread volatility, in the month following publication of the 10-K filing. Daily bid/ask spread is calculated as average buy price/average sell price −1 of a certain day. Log (Number of Words) is the natural logarithm of the total number of words in each filing. Definitions of control variables can be found in Appendix A. All regressions include an intercept, month fixed effect and industry sector fixed effect. T-statistics are in parentheses, with standard errors clustered by month and industry.

Dependent Variables: | TradingVolume_{t+1} | NoTrades_{t+1} | AvgTradeSize_{t+1} |
---|---|---|---|

Readability Measures: | |||

Log (Number of Words) | 0.50 (0.45) | 3.82 (1.68) | −0.02 (−1.68) |

Control Variables | |||

TradingVolume_{t} | 0.58 (7.89) | ||

NoTrades_{t} | 0.84 (17.75) | ||

AvgTradeSize_{t} | 0.03 (1.76) | ||

Log (Days Since Issue Date) | −5.94 (−2.50) | −0.80 (−0.52) | −0.20 (−16.96) |

Log (Market Value) | 38.40 (7.43) | 29.41 (5.43) | 0.12 (7.82) |

Volatility30D | 0.13 (1.62) | 0.19 (1.39) | −0.0001 (−0.19) |

Rating Score | 1.19 (2.27) | −1.86 (−1.05) | 0.09 (11.12) |

Modified Duration | −0.35 (−2.44) | −1.40 (−3.97) | 0.03 (9.70) |

Fixed Effect: Month | Yes | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes | Yes |

R-squared | 57.05% | 71.46% | 9.23% |

Observations | 27,428 | 27,428 | 26,148 |

Dependent Variable: | VolumeDailyVol_{t}_{+1} | NoTradesDailyVol_{t}_{+1} |
---|---|---|

Readability Measures: | ||

Log (Number of Words) | 0.08 (0.82) | 0.15 (1.76) |

Control Variables | ||

VolumeDailyVol_{t} | 0.08 (2.92) | |

NoTradesDailyVol_{t} | 0.46 (8.33) | |

Log (Days Since Issue Date) | −1.19 (−12.68) | 0.004 (0.07) |

Log (Market Value) | 4.43 (21.67) | 1.34 (7.61) |

Volatility30D | 0.02 (2.08) | 0.01 (1.85) |

Rating Score | 0.18 (4.85) | −0.06 (−0.90) |

Modified Duration | −0.03 (−2.34) | −0.07 (−4.42) |

Fixed Effect: Month | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes |

R-squared | 17.32% | 40.88% |

Observations | 27,233 | 27,233 |

OAS_{it} | 1 | 2 | 3 | 4 | 5 |
---|---|---|---|---|---|

Readability Measures: | |||||

Log (Number of Words) | 4.80 (4.11) | 4.85 (4.00) | |||

Fog Index | 0.38 (0.58) | 0.37 (0.54) | |||

Control Variables | |||||

Volatility30D | 2.68 (13.38) | 2.64 (13.04) | 2.68 (13.39) | 2.63 (12.83) | 2.67 (13.20) |

Log (MarketCap) | −16.83 (−6.10) | −18.33 (−6.29) | −16.87 (−6.08) | −19.79 (−5.88) | −18.23 (−5.70) |

Debt/Enterprise Value | 40.71 (4.91) | 39.08 (4.74) | 41.21 (5.01) | 40.61 (4.72) | 42.93 (5.02) |

Ebidta/Total Assets | −242.65 (−6.07) | −236.78 (−5.96) | −243.01 (−6.06) | −248.07 (−5.71) | −253.38 (−5.77) |

Rating Score | 8.40 (10.19) | 7.76 (8.89) | 8.40 (10.22) | 7.70 (8.37) | 8.36 (9.68) |

Modified Duration | 5.36 (20.27) | 5.35 (20.27) | 5.36 (20.26) | 5.25 (19.28) | 5.26 (19.30) |

Herfindahl Index | −10.93 (−1.78) | −11.63 (−1.88) | |||

Fixed Effect: Month | Yes | Yes | Yes | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes | Yes | Yes | Yes |

R-squared | 63.74% | 63.79% | 63.74% | 63.89% | 63.83% |

Observations | 27,946 | 27,946 | 27,946 | 27,350 | 27,350 |

ExOASdailyVol_{(t,t+1)} | 1 | 2 |
---|---|---|

Readability Measures: | EUR | EUR |

Log (Number of Words) | 0.79 (1.19) | |

Control Variables | ||

ExOASdailyVol_{(t−1, t)} | 1.42 (19.04) | 1.41 (19.20) |

Log (Days Since Issue Date) | 0.60 (3.00) | 0.56 (2.95) |

Log (Market Value) | −1.31 (−1.09) | −1.46 (−1.17) |

Rating Score | −0.29 (−0.86) | 0.23 (0.68) |

Fixed Effect: Month | Yes | Yes |

Fixed Effect: Industry Sector | Yes | Yes |

R-squared | 60.96% | 60.99% |

Observations | 1182 | 1182 |

_{(t,t+1)}) in each regression is daily OAS volatility in excess of daily market spread volatility, in the month following publication of 10-K filings. Log (Number of Words) is the natural logarithm of the total number of words in each filing. Definitions of control variables can be found in Appendix A. All regressions include an intercept, month fixed effect and industry sector fixed effect. T-statistics are in parentheses, with standard errors clustered by month and industry.

© 2019 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).

## Share and Cite

**MDPI and ACS Style**

Fang-Klingler, J. Impact of Readability on Corporate Bond Market. *J. Risk Financial Manag.* **2019**, *12*, 184.
https://doi.org/10.3390/jrfm12040184

**AMA Style**

Fang-Klingler J. Impact of Readability on Corporate Bond Market. *Journal of Risk and Financial Management*. 2019; 12(4):184.
https://doi.org/10.3390/jrfm12040184

**Chicago/Turabian Style**

Fang-Klingler, Jieyan. 2019. "Impact of Readability on Corporate Bond Market" *Journal of Risk and Financial Management* 12, no. 4: 184.
https://doi.org/10.3390/jrfm12040184