Business strategies and annual report readability

Habib, Ahsan; Hasan, Mostafa Monzur

doi:10.1111/acfi.12380

Cited by 53 publications

(77 citation statements)

References 51 publications

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“…This study makes several contributions to the finance and accounting literature. First, unlike prior studies – which have used readability measures such as the fog index (Hsieh et al , 2016; De Franco et al , 2015; Li, 2008; Bacha and Ajina, 2019), the Flesch reading ease (Bacha and Ajina, 2019; Hassan et al , 2019; Courtis, 1995), the Flesch−Kincaid indices (Hassan et al , 2019), the Bog index (Habib and Hasan, 2020) – this study uses three proxies of readability. Readability is measured in terms of length of annual report as the reciprocal of the log of the number of pages.…”

Section: Introductionmentioning

confidence: 99%

Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

Dalwai

Chinnasamy

Mohammadi

2021

JAEE

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PurposeThe readability of annual reports is an important feature that determines the quality of communication between a firm and its stakeholders. Extant literature has demonstrated that readability characteristics of annual reports are crucial in facilitating the investor's ability to process and analyze information, resulting in higher firm performance and lower agency costs. This study examines the relationship between annual report readability, agency costs and the firm performance of listed financial sector companies in Oman.Design/methodology/approachUsing a sample of 150 firm-year observations of listed financial sector companies on the Muscat Securities Market (MSM) over the period 2014 to 2018, a panel regression analysis is used, along with the system generalized method of moments (GMM) estimation to address endogeneity concerns. The readability of annual reports is proxied by the length of the annual report, the Flesch reading ease and the Flesch–Kincaid index.FindingsThe ordinary least squares (OLS) results suggest that readability proxied by the length of the annual report has no significant relationship with agency cost, return on assets (ROA) or stock returns. The OLS results are confirmed through the system GMM estimation model for agency costs, Tobin's Q and stock returns. Easier-to-read annual reports measured by the Flesch reading ease demonstrate high asset utilization ratio and Tobin's Q. These results emphasize Flesch reading ease measure in explaining the economic significance of agency cost and Tobin's Q. In contrast, difficult-to-read annual reports are observed for firms with high ROA.Research limitations/implicationsThe study is limited to the financial sector. Its generalizability could be extended to a similar sector or countries with features similar to Oman. Future studies on readability could be extended to other sectors of Oman, and financial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures also including cross-country comparisons.Practical implicationsFinancial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures.Originality/valueWhile the study extends prior literature on readability, agency costs and firm performance, it is also one of the first to examine the financial sector of an emerging country, namely, Oman. The study supports the obfuscation hypothesis through the association of readability measure with agency cost. Unlike prior research that has focused on common computational linguistic literature, this study uses three proxies for readability to assess information quality.

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Section: Introductionmentioning

confidence: 99%

Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

Dalwai

Chinnasamy

Mohammadi

2021

JAEE

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“…Although recent studies examine the influence of business strategy on financial reporting indiscretions and audit fees (Bentley et al , 2013), tax aggressiveness (Higgins et al , 2015), firm's information environment (Bentley-Goode et al , 2017), over/underinvestment (Navissi et al , 2017), future crash risk (Habib and Hasan, 2017), 10-K annual report readability (Habib and Hasan, 2018) and firms' market value in R&D-intensive industries (Ballas and Demirakos, 2018) and the effect of business strategy in the cash holding decision have been remarkably ignored. In this study, the Miles and Snow’s (1978, 2003) typology is adopted because of its strong theoretical background.…”

Section: Introductionmentioning

confidence: 99%

The impact of business strategy on corporate cash policy

Magerakis

Tzelepis

2020

JAAR

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PurposeThe purpose of this study is to explore the association between cash holdings and business strategy for nonfinancial and nonutility US firms over the period from 1970 to 2016.Design/methodology/approachThe authors have used Miles and Snow's (1978, 2003) theoretical background and followed Bentley et al. (2013) to construct a strategy index. Thus, the authors have distinguished two extreme corporate strategies, prospectors and defenders, based on a firm's resource allocation and investment behavior patterns. Following the methodology of Bates et al. (2009), the authors have used the multiple regression analysis to explore the relationship between business strategy and corporate cash holdings.FindingsThe empirical results show that business strategy is positively related to cash holdings. Prospectors are more likely to hold higher cash levels than defenders. Furthermore, the authors have found that cash holding's speed of adjustment (SOA) is slower for prospectors than for defenders, suggesting that business strategy influences cash holding's trend. Interestingly, the results show that the market value of cash increases significantly only for the firms that pursue a defender strategy.Research limitations/implicationsThe results of this work have valuable implications for researchers, by unveiling the relationship between corporate strategy and firm's cash holdings. This study, however, is limited to a sample of US firms; empirical evidence based on international samples of firms would add value to the current literature.Practical implicationsThe findings could be useful to financial managers and investment strategists, who seek to maximize firm value through the adoption of an effective liquidity policy. What is more, this study provides support for the view that strategic choice and optimal cash management are of great importance for firms' market value.Originality/valueThis study enriches the knowledge of business strategy's impact on financing policy of firms and contributes to the empirical literature of cash holdings' determinants. In addition, it complements previous studies on US firms by documenting the effect of business strategy on the SOA in cash holdings and firm value.

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“…Panel B also shows that compared to the ANALYZE group, the PROSPECT firms are significantly less profitable, younger and more volatile, pay less dividends, operate in more geographic segment markets, have more growth opportunities, suffer more from equity overvaluation, have more volatile earnings, volatile operating cash flows, and higher idiosyncratic volatility. These statistics clearly indicate the importance of controlling these firm‐level characteristics in the regression model (Habib and Hasan 2018).…”

Section: Sample Selection and Descriptive Statisticsmentioning

confidence: 88%

“…Bentley et al (2013) adapted some measures from Ittner et al (1997), and extended other measures based on the Miles and Snow (1978, 2003) framework, 3 in constructing their composite STRATEGY score. This measure has been used extensively in contemporary empirical strategy literature (Bentley et al 2013; Higgins et al 2015; Chen et al 2017; Habib and Hasan 2017, 2018; Bentley‐Goode et al 2017a, 2017b). Characteristics included in constructing the strategy score are: (i) the ratio of research and development to sales (measure of a firm's propensity to seek new products); (ii) the ratio of employees to sales (firm's ability to produce and distribute its goods and services efficiently); (iii) a measure of employee fluctuations (standard deviation of total employees); (iv) a historical growth measure (1‐year percentage change in total sales) (proxy for a firm's historical growth); (v) the ratio of marketing (SG&A) to sales (a proxy for firms’ emphasis on marketing and sales); and (vi) a measure of capital intensity [net property, plant, and equipment (PPE) scaled by total assets] (designed to capture a firms’ focus on production).…”

Section: Methodsmentioning

confidence: 99%

Business Strategy and Labor Investment Efficiency*

Habib

Hasan

2019

Int Rev Finance

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This paper examines the relation between business strategy and labor investment efficiency. Since business strategy affects both the agency problem and firm‐level uncertainty, as well as the overall shape of corporate behavior, we would expect the efficiency of labor investment to vary with the particular business strategy a firm pursues. Using a large sample of US data, we find that firms having a prospector‐type business strategy are associated with inefficient labor investment, while those having a defender‐type business strategy are associated with efficient labor investment. We provide evidence that uncertainty, rather than the agency problem, causes prospector‐type firms to exhibit inefficient labor investment. Finally, we document that inefficient labor investment by prospectors leads to relatively low profitability in subsequent periods. These findings are robust when subjected to a series of sensitivity tests.

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Business strategies and annual report readability

Cited by 53 publications

References 51 publications

Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

The impact of business strategy on corporate cash policy

Business Strategy and Labor Investment Efficiency*

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