Does intellectual capital and corporate governance have an impact on annual report readability? Evidence from an emerging market

Abstract

PurposeThis study examines the impact of intellectual capital efficiency and corporate governance mechanisms on the annual report readability of Oman's financial sector companies.Design/methodology/approachThe study uses a sample of 150 firm-year observations of listed financial sector companies in the Muscat Securities Market, Oman, from 2014 to 2018. Flesch Reading ease and Flesch Kinkaid Index are used as proxies for annual report readability. As part of sensitivity analysis, the study also uses the natural logarithm of annual report pages as alternative readability measures. The investigation is conducted using random effects regression analysis and supported with system GMM estimation for robustness.FindingsThe findings of this study demonstrate a decrease in intellectual capital efficiency associated with better readability of annual reports for the financial sector firms. Alternatively, banks report a positive association of intellectual capital efficiency with the Flesch Reading ease score of the annual report. The structural capital and capital employed efficiency are also found to be negatively associated with annual report readability. Corporate governance mechanisms such as dispersed ownership and audit committee size also result in easy-to-read annual reports that support agency theory.Research limitations/implicationsThe research was conducted for financial firms of Oman, and thereby the findings can be generalized to the financial sector of countries with similar settings, such as the Gulf Cooperation Council (GCC) region.Practical implicationsThe policy implications arising from this study suggest a strengthening of the intellectual capital efficiency and corporate governance mechanisms to improve the readability of the firms and thereby increase investor confidence.Originality/valueThis paper's uniqueness is in the model used to investigate the impact of intellectual capital efficiency and corporate governance mechanisms on the annual report readability of an emerging market.