Workforce Diversity and Financial Statement Readability

The Securities and Exchange Commission (SEC) has associated readability with a range of linguistic features largely determined by the language style of its users. We examine the impact of a firm’s workforce diversity on its financial statement readability. Based on linguistic literature, we argue that a more diverse workforce increases the linguistic heterogeneity of the inputs of financial statements, hindering financial statement readability. We show that financial statement readability decreases with the ethnic diversity of the workforce, and that this effect is more pronounced for firms located in a community with a high crime rate or low social capital. We further break down diversity by ten job categories and find that while ethnic diversity impairs readability across all categories, the impact of white-collar employee diversity on readability is greater than that of blue-collar employee diversity. Overall, our study suggests that workforce diversity is an important determinant of financial statement readability.