Financial reporting readability: Managerial choices versus firm fundamentals

Hesarzadeh, Reza; Bazrafshan, Ameneh; Rajabalizadeh, Javad

doi:10.1080/02102412.2019.1668219

Cited by 20 publications

(27 citation statements)

References 81 publications

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“…Consistent with past studies (e.g. Li, 2008; Lehavy et al , 2011; Hesarzadeh and Bazrafshan, 2018; Hesarzadeh et al , 2019), this paper applies the Fog index to measure the readability. This index (or its components) is (are) usually used to measure the readability of English and non-English texts such as Spanish (e.g.…”

Section: Methodsmentioning

confidence: 76%

The impact of corporate reporting readability on informational efficiency

Hesarzadeh

Rajabalizadeh

2019

ARA

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Purpose Informational efficiency is a fundamental aspect of capital market quality, and therefore, regulators, managers and practitioners attempt to find ways to improve the informational efficiency. Since prior studies primarily focus on the numerical attributes of corporate reporting, it is not yet adequately known whether or not the linguistic attributes of corporate reporting affect informational efficiency. Thus, the purpose of this paper is to examine whether corporate reporting readability (readability), as an important linguistic attribute of corporate reporting, affects informational efficiency. Design/methodology/approach To measure readability, this paper uses Fog index. Moreover, to measure informational efficiency, the paper uses stock return variance ratios. Findings The findings reveal a positive and significant association between readability and informational efficiency. Moreover, the findings show that the association of readability and informational efficiency is stronger for firms facing higher information asymmetry. The findings further document the spillover effect of readability, in the sense that the readability of economically related public firms affects a firm’s informational efficiency. Overall, the results support the arguments that readability enhances informational efficiency. Originality/value This study contributes to the literature by providing evidence on the internalities and externalities of readability in the context of informational efficiency. Thus, the study will be of interest to regulators, managers and practitioners, especially in emerging capital markets, who tend to find practical and easy ways to improve informational efficiency.

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Section: Methodsmentioning

confidence: 76%

The impact of corporate reporting readability on informational efficiency

Hesarzadeh

Rajabalizadeh

2019

ARA

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“…In line with previous studies, a set of control variables found to have an association with dependent variables were also included. Auditor type is a commonly used control variable related to the quality of disclosure (Hesarzadeh et al , 2020; Luo et al , 2018; Xu et al , 2018; Hesarzadeh and Bazrafshan, 2018; Ginesti et al , 2017). The focus of this study is on the association of readability with agency cost and firm performance; hence, the element of auditors as participants in the communication of the annual reports is not included in this study.…”

Section: Methodsmentioning

confidence: 99%

“…While prior studies have examined listed firms in China (Luo et al , 2018), Qatar (Hassan et al , 2019), France (Bacha and Ajina, 2019; Boubaker et al , 2019), Australia and New Zealand (Fisher et al , 2019), Malaysia (Smith et al , 2006), the USA (Hasan and Habib, 2020; Baxamusa et al , 2018; Xu et al , 2018; Hasan, 2020, Loughran and Mcdonald, 2014), Brazil (De Souza et al ., 2019), Iran (Hesarzadeh et al , 2020), these have not specifically focused on financial sector firms. This is because financial sector firms have institutional and regulatory differences compared to other sectors (Hasan and Habib, 2020).…”

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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“…Given the wide dispersion of information in the financial report, users must sort through it to find the value-relevant information. As such, a clear presentation could reduce the cost of information acquisition and valuation activities due to an increasing processing fluency (Blankespoor, 2019;Hesarzadeh et al, 2020;Hirst and Hopkins, 1998;Kim et al, 2019). This improves investors' beliefs that they can rely on the disclosure information to make informed decisions (Maines and McDaniel, 2000).…”

Section: Effects Of Disclosure Characteristicsmentioning

confidence: 99%