DETROIT — Many company annual reports are difficult to read — and now we know why.

A new study by Feng Li, an assistant professor of accounting at the University of Michigan's Ross School of Business, suggests that annual reports of companies with lower earnings are harder to read — on purpose.

This may come as no surprise to the nation's stock market watchdog, the Securities and Exchange Commission, which ordered companies in 1998 to start writing their annual reports in plain English. Li said his research is designed to see how well companies comply.

Li studied more than 50,000 annual reports using two measures of readability. One was the Fog Index, which indicates the number of years of formal education a reader of average intelligence would need to read and understand a text. The other was the Kincaid Index, which rates text on a U.S. grade-school level.

By these indexes, annual reports in general are pretty awful. Li says the average Fog Index for all annual reports was a deplorable 19.4 (a score of 12-14 is ideal and higher than 18 is unreadable). In the same way, the annual report readability score on the Kincaid Index was 15.2 — about twice as high as the optimal score of 7-8.

Readability is defined in terms of the number of words in a sentence and the number of multi-syllabic words used. But if almost all reports were dense, the worst offenders were companies with bad earnings to report.

"It's definitely true that if you're in trouble, your report is going to be much longer and harder to read," Li said Tuesday.

If turgid reports fool ordinary investors, apparently they don't get by Wall Street experts. Li found no correlation between how a report is written and how a company's stock price does in future years.

Li suggests "the market does impound the implications of disclosure readability into stock prices."

Simply put, that means the pros cut through the baloney.