The Journal of Real Estate Finance and Economics

, Volume 45, Issue 2, pp 450-470

First online:

Financial Opacity and Firm Performance: The Readability of REIT Annual Reports

  • Stephen J. DempseyAffiliated withUniversity of Vermont
  • , David M. HarrisonAffiliated withTexas Tech University Email author 
  • , Kimberly F. LuchtenbergAffiliated withOld Dominion University
  • , Michael J. SeilerAffiliated withOld Dominion University

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We examine the capital market pricing implications of firm disclosure opacity as measured by the linguistic readability of REIT annual reports. The SEC has expressed concern that firms selectively manage the transparency of disclosures in order to hide adverse information. After controlling for other non-experimental factors that influence the readability of REIT financial statements, we find (1) financial opacity is negatively related to reported firm performance, and (2) the residual opacity that remains after controlling for other determinants of annual report readability has incremental explanatory power for returns beyond the Fama and French (1992, 1993) risk factors. The opacity risk-return premium persists after controlling for a (heretofore undocumented) stark monotonic decrease in annual report readability following the Sarbanes-Oxley Act of 2002.


REITs Opacity Performance Readability Cost of capital