Does Board Independence Influence Annual Report Readability?

Abstract

We examine whether board independence improves the readability of annual reports. Using a sample of 11,938 firm-year observations over the period 1997–2016, we empirically show that board independence decreases the readability of annual reports. This result is consistent with the notion of managerial avoidance of costly board monitoring. We also run an array of cross-sectional tests to understand the settings in which the association is either more or less pronounced. Even though managerial ability and SEC’s Plain English Rule of 1998 improve readability, we find that the negative relationship between board independence and readability continues to persist. Our results also reveal that directors’ tenure and CEO duality attenuate the board independence–readability relationship, while CEO tenure enhances this association. Overall, our findings provide additional insights into the link between board independence and annual report readability.