Readability of Quarterly Reports: Do companies mislead investors?

Financial reports can be regarded as the primary means of communication between a company’s management and its shareholders. The reports also address all other kinds of stakeholders like employees, suppliers, customers, competitors, governments, potential investors, bond holders and, in a broad sense, the entire society. Still, it is questionable whether managers really deliver true information in their reports. One possible way of obscuring corporate information when results are negative, or of being forthcoming in disclosing information when results are good, is to adjust the reports’ readability which can influence understandability as a consequence. The concrete aim of this study is to focus on the readability of letters to the shareholders of bilingual (German and English) quarterly reports of listed companies at Frankfurt Stock Exchange. It is examined how various factors influence the readability of company reports.



Text Sample:

Chapter 2.4, Specifics of Reports at Frankfurt Stock Exchange Prime Market:

2.4.1, The Frankfurt Stock Exchange:

The very early history of Frankfurt Stock Exchange (FSE) dates back until 1150. The year 1585 is widely known as the natal hour FSE.

Nowadays FSE is an important player in the world’s financial markets. The traded securities are divided into three main levels of transparency, so-called segments:

Prime Market – A market regulated by the European Union that is mainly intended for companies that position themselves against an international investor base. Companies in this segment have to fulfill high requirements of transparency such as:

Quarterly reporting in German and English.

IFRS/IAS or US-GAAP.

Publication of a company calendar.

At least one analysts’ conference per year.

Ad-hoc disclosures in German and English.

The Prime Market of FSE forms the basis of the sample that is used throughout the empirical part of this study.

General Standards – A market regulated by the European Union that follows the minimum legal requirements. The requirements of transparency in this segment are lower and cover:

Ad-hoc disclosures.

IFRS/IAS or US-GAAP.

Publication of one interim report.

Open Market – The majority of traded securities in this segment are non-German. The market is not regulated by the European Union but by the stock exchange (regulated unofficial market).

Entry Standard – A market that offers an alternative capital allocation for small and medium sized companies. It is not regulated by European Union transparency law but by the stock exchange. It forms part of the Open Market but has higher standards of transparency.

2.4.2, Annual Reports at Frankfurt Stock Exchange Prime Market:

Section IV./2. of the directives of FSE regulates the publication of a Jahresfinanzbericht of companies listed on the Prime Market. § 50 (1) thereby refers to § 37v (2) WpHG which determines the minimum requirements of such a report:

An audited annual report according to national law of the company’s country of residence.

Management report.

Declaration according to German Commercial Code (HGB) that the report has been prepared to the best of knowledge and judgment (so-called Bilanzeid).

Proof on the entitlement of the auditor.

The directive of FSE requires publishing both in German and in English. Companies with residence outside of Germany are allowed to provide annual reports solely in English. The reports have to be submitted four months after the respective period at the latest. No regulatory obligation exists that claims the publication of a letter to the shareholders.

In general, all other regulatory laws remain unaffected. Exceptions granted by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) are valid, unless they contradict with basic ideas (‘tragende Gedanken”) of the Prime Market.

2.4.3, Quarterly Reports at Frankfurt Stock Exchange Prime Market:

The directives of FSE regulate the publication of quarterly reports in § 51. Semi-annual reports (end of second quarter) underlie separate rules. Companies have to deliver quarterly reports that, according to §37w, comprise shortened financial statements and an interim management report.

Quarterly reports must date at the end of the first and third quarters and have to be submitted within two months (three months if the residence lies outside of the European Economic Area). Regarding the language, the same rules apply as for annual reports.

Quarterly reports can be audited on a voluntary basis. Different from annual and semi-annual reports, the auditors can be assigned by the management itself.

2.5, Market Functioning:

2.5.1, Introduction

Reports, as the primary means of communication between firms and shareholders, are crucial when it comes to investment decisions and the functioning of the capital market. The elementary role of this market is the allocation of ownership and resources in terms of capital. Investors base their investment decisions on the information that is provided. Nevertheless, it has to be scrutinized whether markets are ‘efficient” and ‘fully reflect all available information”. Two hypotheses on market efficiency that are important for the course of this study are discussed below. Due to conflicting theoretical and empirical results, no conclusion on the accuracy of one model can be provided.

2.5.2 Efficient Markets Hypothesis:

The Efficient Markets Hypothesis represents a prime area of research in capital market theory. The central statement of the hypothesis is that security markets are highly efficient in providing information about individual stocks and their sum.

Efficiency in this respect is subject to the following three conditions:

No transaction costs are involved.

All information available is obtainable without cost.

An agreement exists that all information available is reflected by market prices.

As soon as new, market-relevant information arises, it is immediately reflected in the prices of securities. This happens by fast spreading of information without time delay. As a result, it is not possible to make advantage of buying or selling securities that are not priced correctly.

The hypothesis is historically based on the model of random walk which states that all price changes of securities are random in respect to their starting point. This also implies that future stock prices cannot be predicted since they are solely depending on information that is available in future. Past development also does not allow drawing conclusions about future expectations. Therefore, a completely inexperienced investor that buys stocks randomly would have the same rate of return as an expert.

Based on the works of Fama, the following classification of information efficiency for capital markets can be set up:

Weak-form information efficient capital markets – current market prices reflect all information on past price developments (poor empirical validation).

Semi-strong-form information efficient capital markets – current market prices reflect all current publicly available information (empirical validation).

Strong-form information efficient capital markets – current market prices reflect all publicly available and private information (falsified).

Despite its popularity gained in the 1970s, the Efficient Markets Hypothesis nowadays underlies criticism among scholars. Having reviewed a broad range of previous studies, Heun concludes that the existence of strong-form information efficient capital markets has to be denied. For semi-strong and weak form information efficient markets the empirical validations point out the practical limitations of the theory. The semi-strong form is empirically best proven. Moreover, the model of random walk is empirically not validated.

Bloomfield summarizes ‘The EMH [Efficient Markets Hypothesis] has been highly influential among academics, but practitioners and regulators appear unconvinced.”



Bernhard Stellner, born 1988, is an Austrian business economist. He holds a bachelor degree in business administration and a master degree in “Strategy, Innovation and Management Control“ both from Vienna University of Economics and Business. He is among the very few writers in the German-speaking area that deal with readability of corporate reports.