Energy hedging and annual report readability

Abstract

PurposeUsing a sample of oil and gas firms in the USA, the study examines the relation between the presence of hedging and annual report readability.Design/methodology/approachThe authors use regression analysis to examine the relation between the presence of hedging and annual report readability.FindingsThe authors find that annual reports of firms with the use of hedging are less readable (i.e. difficult to read and understand). The authors also find that the primary results are more pronounced for firms with a higher level of business volatility.Originality/valueThe study contributes to the finance literature on the use and value of hedging and to the accounting literature on the determinants of annual report readability. The Securities and Exchange Commission (SEC) has persistently asked companies to improve the readability of their disclosures to stakeholders (SEC, 1998; 2013, 2014). Hence, the study not only identifies a potential determinant (i.e. hedging) that may influence the level of readability but also supports the current regulatory policy by the SEC, which is encouraging companies to improve readability.