Do complex bylaws harm the performance of financial cooperatives? Evidence from Brazil

What is it about?

This study investigates whether the way bylaws are written is related to the financial performance of Brazilian financial cooperatives. Bylaws are the most important governance documents in cooperatives, defining members’ rights, decision-making rules, and managerial responsibilities. However, these documents are often long, technical, and difficult for ordinary members to understand. Using data from 720 financial cooperatives in Brazil between 2016 and 2022, we examine whether lower readability in bylaws is associated with weaker financial outcomes. Readability is measured in three different ways: the size of the document file, the number of pages, and a linguistic index (Fog Index) that captures sentence length and the use of complex words. Financial performance is assessed using return on assets (ROA) and return on equity (ROE). To ensure robust results, we apply multiple empirical approaches, including ordinary least squares, instrumental variables, quantile regression, and propensity score matching. This allows us to test not only average effects, but also whether the relationship between bylaw readability and performance differs across stronger and weaker cooperatives. The findings show that longer and more voluminous bylaws are generally associated with poorer financial performance, particularly among low-performing cooperatives. This supports the idea that excessive length may reduce transparency and increase information processing costs for members. However, linguistic complexity measured by the Fog Index shows a different pattern: more syntactically complex bylaws are sometimes associated with higher performance, suggesting that legal precision and institutional maturity may also drive textual complexity. Overall, the study highlights that readability is not a one-dimensional concept. While overly long bylaws may hinder transparency, some degree of technical complexity can reflect formalization and governance quality rather than deliberate obfuscation.

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Photo by Luke Shaffer on Unsplash

Photo by Luke Shaffer on Unsplash

Why is it important?

This research is important because it shows that how governance documents are written can matter for organizational performance, especially in member-owned financial institutions. Financial cooperatives play a crucial role in financial inclusion and regional development, yet their governance depends heavily on members’ ability to understand and monitor managerial decisions. By showing that excessively long bylaws are associated with weaker performance—particularly among struggling cooperatives—the study provides evidence that document clarity and conciseness are relevant governance features, not merely stylistic choices. At the same time, the results caution against interpreting all textual complexity as intentional obfuscation, since linguistic complexity may also reflect legal rigor and institutional maturity in regulated environments. The findings are relevant for cooperative managers, board members, federations, and regulators seeking to improve transparency without compromising legal precision. They also contribute to the academic literature by extending readability research to non-English texts, emerging markets, and governance documents that have received little prior attention.

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