Annual report readability and trade credit financing: Evidence from China

Abstract

The clarity of an annual report is crucial for stakeholder understanding and trust, notably so in China, which is characterized by its unique high-context culture. This study investigates the impact of annual report readability on trade credit financing in Chinese listed companies. Beyond the measure derived from the Fog index, we employ innovative methodologies, including machine learning and the application of Chinese linguistic “hedge words”, to refine the understanding of the relationship between annual report readability and trade credit financing. Our findings indicate that poor readability significantly restricts firms’ access to trade credit financing, particularly for companies with limited international engagements and those with weaker product market power. These results remain consistent across different measures of report readability and trade credit financing.