Abstract
Purpose: Reducing annual report disclosure complexity has been a topic of serious debate for standard setters in recent years. In response to that, this study seeks to explore the effect of reducing such complexity on ERC, agency costs, proprietary costs, as well as interest rates on loans given by banks. Methodology: Based on listed companies in Indonesia for the year 2016, required data is collected through the IDX website. All empirical results in this study are obtained through the IBM SPSS Statistics software version 23 using the linear regression function for each hypothesis. Findings: The overall empirical results show that: 1) ERC and proprietary cost is not significantly affected by fog index, suggesting a less effective capital market in Indonesia, where information is not immediately processed in the market; 2) Agency costs are inversely related to disclosure complexity, suggesting that firms producing simpler reports are either mostly involved in tax planning, or larger Indonesian firms with lower fog usually bear higher monitoring costs; and 3) Interest rates on loans given by banks are greatly affected by disclosure complexity. Firms with more complex reports tend to get lower rates on bank loans as compared to those with much more readable reports, suggesting that providing debtholders with more complex information actually reassure them to offer lower rates. Originality: This paper is the first to explore the costs and benefits of reducing disclosure complexity in Indonesia.
Highlights
With the increasing level of accounting standards complexity and higher demands from financial report users for more information, disclosure readability has been a subject of interest in recent years for regulators, standard setters as well as accounting researchers
This paper is the first to explore the effects of reducing disclosure complexity on several aspects - earlier hypothesized as the costs and benefits - in Indonesia
We initially predicted that with more readable annual reports, earnings response coefficient (ERC) will be positively affected, information asymmetry will be reduced - lower agency costs, proprietary costs will increase with the increase in proprietary information revealed in a more readable report, and interest rates given by banks as lenders will be higher
Summary
With the increasing level of accounting standards complexity and higher demands from financial report users for more information, disclosure readability has been a subject of interest in recent years for regulators, standard setters as well as accounting researchers. This study uses companies’ annual reports as the basis of measuring disclosure complexity because it offers the most disclosure on the events that best describe a company’s financial and operational conditions. Since these reports are mostly narratives, the clarity of the reports’ disclosures is crucial in helping the users understand and interpret the conditions of the company. Most people find disclosures complex and ambiguous [2], and fail to serve as a useful source of information for decision-making
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