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Abstract
The purpose of this study was to investigate the usage of three selected readability indices and the Cloze Procedure to assess the understandability of narrative disclosures in financial reports. Specifically, the dissertation study was conducted to (1) determine validity of Cloze Procedure tests as measures of narrative disclosure communication; (2) clarify the relationship among Dale Chall Readability Formula, Flesch Reading Ease Index, Gunning's Fog Index, and the Cloze Procedure when used in conjunction with financial narrative disclosures; and, (3) examine the effect of user groups and narrative disclosures on the ability of the Cloze Procedure to discriminate understandability.
Six financial narrative disclosures were used to develop Cloze Procedure tests and multiple choice questions designed to measure comprehension. Three Cloze Procedure tests were combined as Cloze Procedure test booklets. Three narrative disclosures and sets of five multiple choice questions were combined as multiple choice test booklets. Twenty-six chartered financial analysts and forty-seven financial accountants completed both type of test booklets.
Readability index scores were computed for each of the six financial narrative disclosures using the Dale Chall Readability Formula, Flesch Reading Ease Index, and Gunning's Fog Index.
The results from correlation analysis and analysis of variance, regression method (1) did not support the Cloze Procedure as a valid measure of narrative disclosure communication; (2) did not support significant relationships among the four readability techniques; and, (3) supported Cloze Procedure scores as being sensitive to type of narrative disclosure, but found no support for sensitivity of user groups.
The conclusions from the study are as follows: (1) The usage of Cloze Procedure to measure understandability of narrative disclosures in financial accounting is questionable. (2) It makes little difference which readability technique is used to evaluate the understandability of narrative disclosures in financial reports. (3) The Cloze Procedure tests are efficient measures to discriminate between type of narrative disclosures but are not for user groups.
