Statement Readability Research Articles

The bright side of common ownership: Evidence from bank transparency

Over 74% of US banks share common ownership with other banks. Our analysis of a large sample of US banks reveals that those with greater common ownership demonstrate heightened transparency. This manifests as reduced discretion in loan loss provisions, improved financial statement readability, and enhanced comparability. We pinpoint three underlying mechanisms: decreased private information gathering, increased stock liquidity, and diminished managerial incentives for opacity. Furthermore, these commonly owned banks exhibit lower crash risk due to their improved transparency. Our findings hold after using various proxies and two endogeneity-reduction methods: a difference-in-differences analysis based on the 2009 Blackrock–Barclays Global Investors merger and an instrumental variable approach using Russell 2000 index inclusions. Overall, our study underscores the positive impact of common ownership in the banking sector.

Sustainability assurance joint provision and assurance statement readability: does the assurance provider gender diversity matter?

PurposeThe primary objective of this paper is to investigate the relation between the joint provision of sustainability assurance and the readability of sustainability assurance statements. Additionally, it explores whether the presence of a female assurance partner influences the relation between the joint provision of sustainability assurance and the readability of sustainability assurance statements.Design/methodology/approachWe analyzed a dataset comprising 882 firm-year observations from companies operating in sustainability sensitive industries for the period that spans the years 2016–2018.FindingsThe research indicates that joint sustainability assurance provision is associated with a more readable sustainability assurance statement, consistent with the “four-eyes” principle. Furthermore, the presence of a female assurance provider influences the joint assurance provision’s impact on sustainability assurance statement readability. Collectively, these results remain robust as they hold unchanged after controlling for endogeneity concerns.Research limitations/implicationsThis study provides novel insights into the recent sustainability assurance literature, being the first to examine joint assurance provision, assurance partner gender and sustainability assurance statement readability.Practical implicationsThis study has the potential to catalyze regulatory and policy initiatives by providing compelling evidence in favor of mandating joint audits within the area of sustainability assurance practices. Additionally, this research contributes to the ongoing discussion about gender diversity in accounting and nonaccounting assurance firms, providing evidence of the positive impact of female assurance partners on sustainability assurance statement readability.Originality/valueThe regression results provide preliminary evidence on how the presence of a female audit partner influences the relationship between the sustainability assurance joint provision and sustainability assurance statement readability, an issue that has not been examined before.

Does audit quality moderate the relationship between financial statements readability and stock price crash risk?

Purpose This study aims to examine the correlation between the readability of financial statements and the likelihood of future stock price crashes in nonfinancial companies listed on the Egyptian Stock Exchange. It further explores the possible moderating effect of audit quality on this relationship. Design/methodology/approach The study uses ordinary least squares regression, generalized least squares estimation and two-stage least squares methodology to examine and validate the research hypotheses. The sample comprises 107 nonfinancial companies registered on the Egyptian Stock Exchange from 2016 to 2019. Findings The results reveal a significant negative association between the readability of financial statements and stock price crash risk. This suggests that companies with more complex financial statements tend to experience higher future crash risks. Additionally, the study identifies audit quality as a significant moderating factor. Higher audit quality, often indicated by engagements with Big-4 audit firms, strengthens the influence of financial statements readability on stock price crash risk. This implies that while high audit quality enhances investor confidence and market stability, it also accentuates the negative consequences of complex financial statements. Practical implications The findings of this paper have significant implications for regulators and standard-setting bodies in Egypt. They should consider refining and revising existing standards to emphasize the importance of enhancing the readability of financial reports. Additionally, auditing firms should actively engage in efforts to ensure clearer and more transparent financial reporting. These actions are vital for boosting investor confidence, strengthening Egypt’s capital market and mitigating potential risks associated with information opacity and complexity. Originality/value This study represents a pioneering endeavor within the Arab and Egyptian financial environments. To the best of the author’s knowledge, it is the first examination of the association between the readability of financial statements and stock price crash risk in these contexts. Furthermore, it explores factors such as audit quality that may influence this connection.

Simplifying the complex: 10-K readability and asset structure

This study explores the relationship between corporate asset intensity and the readability of 10-K forms within the U.S. lodging industry over the period 1994–2020. Using OLS regressions, the study reveals that as a company's asset intensity decreases, so does the readability of its 10-K form. Additionally, we show that this relationship has become more pronounced since 1998 and is stronger for larger companies or those in the hotel industry. These results suggest that, in light of ongoing discussions and policies surrounding the readability of financial statements, companies produce more comprehensible documentation when their business operations are less specialized. This finding indicates that companies that need to address a more diverse investor base try to be as understandable as possible. This should also lead to social implications in terms of enhanced transparency, improved financial literacy, investor confidence, and a positive impact on corporate responsibility for stakeholders.

Political Connections and Readability of Financial Statements: Evidence from China

High-quality information disclosure improves the accuracy of investors’ judgment and efficiency in resource allocation. With a focus on the readability of information disclosed, this study analyzes how political connections affect the readability of financial statements by taking A-share private-owned companies listed on Shanghai and Shenzhen Stock Exchanges as research sample from 2008 to 2019. We use ordinary least squares model and moderating effect model as our main methodology. A series of robustness tests are also carried out. Our research finds that companies with political connections are more likely to issue less readable financial statements. This negative impact is diminished for the firms with a higher marketization level, better corporate governance, and greater analyst coverage. Further research on the economic consequences demonstrates that political connections would weaken the positive effect of the readability of financial statements on the firm’s future market value. This study enriches the research on the factors influencing the readability of financial statements and reveals the economic consequences of political connections in terms of textual information disclosure quality. It is therefore an important reference for regulatory authorities to formulate guidelines on text information disclosure and supervise the compliance of politically affiliated enterprises, while facilitating listed companies to enhance the readability of their financial statements. La divulgación de información de alta calidad mejora la precisión del juicio de los inversores y la eficiencia en la asignación de recursos. Centrándose en la comprensibilidad de la información divulgada, este estudio analiza cómo las conexiones políticas afectan a la comprensibilidad de los estados financieros tomando como muestra de investigación las empresas privadas de acciones A cotizadas en las bolsas de Shanghái y Shenzhen entre 2008 y 2019. Utilizamos el modelo de mínimos cuadrados ordinarios y el modelo de efecto moderador como metodología principal. También se llevan a cabo una serie de pruebas de robustez. Nuestra investigación encuentra que las empresas con conexiones políticas son más propensas a emitir estados financieros menos comprensibles. Este efecto negativo disminuye en las empresas con mayor nivel de comercialización, mejor gobierno corporativo y mayor cobertura de los analistas. Otras investigaciones sobre las consecuencias económicas demuestran que las conexiones políticas debilitarían el efecto positivo de la comprensibilidad de los estados financieros sobre el futuro valor de mercado de la empresa. Este estudio enriquece la investigación sobre los factores que influyen en la legibilidad de los estados financieros y revela las consecuencias económicas de las conexiones políticas en términos de calidad de la divulgación de información textual. Por lo tanto, constituye una referencia importante para que las autoridades reguladoras formulen directrices sobre la divulgación de información textual y supervisen el cumplimiento de las empresas con conexiones políticas, al tiempo que facilita a las empresas cotizadas en bolsa la mejora de la legibilidad de sus estados financieros.

An analysis of the relationship between readability of the chairman's statement and firm financial performance in South Africa

Stakeholders receive a comprehensive message that includes financial information, non-financial information, and a forecast for the future. Chairman’s disclosure is susceptible to manipulation by directors resulting to less transparency and thereby misleading the stakeholders. An evaluation of the chairman's messages in relation to financial performance is conducted in this study. The study examined the top 40 listed companies on the Johannesburg Stock Exchange for the year 2021, using the Gunning Fog Index as a measure of readability of the chairman's statement and Return on Equity (ROE) as a measure of financial performance. In order to determine the relationship between the chairman's statement readability and the company's financial performance, multiple linear regression was applied. This study found that as company performance increases, readability becomes more difficult. In contributing to existing literature, the study examines how the chairman's statement is correlated with financial performance from a South African viewpoint.

Sustainability reporting, board diversity, earnings management and financial statements readability: evidence from an emerging economy

PurposeThis paper aims to investigate the moderating effect of sustainability reporting on the relationship between the independent variables of board diversity, and earnings management and the dependent variable of readability of financial statements.Design/methodology/approachThe study panel data regression analysis involved 36 Kenyan-listed companies from 2016 to 2020.FindingsKey findings were that increased board diversity was found to significantly improve the readability of financial statements. Discretionary earnings management was found to significantly reduce the readability of financial statements. Sustainability reporting was found to significantly increase the readability of financial statements, and it moderated the relationship between board diversity, earnings management and financial statements readability in Kenya.Research limitations/implicationsThe study sample of 36 non-financial listed in the Nairobi Securities Exchange was very small and was affected by the problem of thin trading; hence, caution should be adopted when interpreting the findings.Practical implicationsThe Capital Markets Authorities (CMA) as a policymaker should enforce sustainability reporting by Kenyan listed firms as there is evidence that the reporting enhances the readability of financial statements. The Institute of Certified Public Accountants as a policymaker should closely monitor the published financial statements of firms for earnings management and punish the perpetrators, as there is empirical evidence that the practice reduces the readability of financial statements.Social implicationsSustainability reporting is successful as a moderating variable between readability of financial statements and determinants of readability of financial statements.Originality/valueThis study contributes to knowledge by studying sustainability reporting as a moderating variable between the independent variables of board diversity and earnings management and the dependent variable of readability of financial statements and measured sustainability reporting using a dummy variable for the period before and after the enactment and release of CMA code of 2016 on corporate governance that required sustainability reporting by Kenyan listed companies.

Classification of RBA monetary policy announcements using ChatGPT

ChatGPT is a tool that has gained much attention and has accelerated the adoption of Artificial Intelligence across many applications. Using monetary policy decisions made by the Reserve Bank of Australia (RBA), we test whether ChatGPT's classifications of monetary policy announcements are consistent with market-observed characteristics, whether this has changed with the update from GPT-3.5 to GPT-4, and whether this provides additional informativeness for changes in the yield implied by interest rate futures. Our results indicate that, regardless of statement readability, ChatGPT provides a classification of hawkish / dovish tone that is consistent with “Target Surprises” and “Path Surprises” and although it seems to improve in the latest version has more difficulty with “sentiment” classification. However, this information does not appear to help to explain changes in interest rate markets on the day of the policy announcement.

Political uncertainty and financial statement readability

In this paper, we examine the impact of political uncertainty on financial statement readability. Using the turnovers of local government leaders in China as the proxy for political uncertainty, we find that financial statement readability is lower when political uncertainty is higher. The negative relation between political uncertainty and financial statement readability is more pronounced for corporates with lower capital market concerns, lacking political connections, and under weaker external reporting scrutiny. We further identify the incentives of local government leaders as the underlying driver for the relation between political uncertainty and financial statement readability. The findings extend our understanding of how political uncertainty may affect corporate behaviors.

Does financial statement readability alleviate the informational disadvantage of foreign investors?

PurposeThis paper aims to explore whether financial statement readability overcomes the information disadvantage of foreign equity investors.Design/methodology/approachA comprehensive data set of Indian firms listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for 2007–2019 has been used to evaluate the proposed research questions. This study uses the Panel data method to investigate the research question.FindingsThe results reveal that readable financial statements attract foreign investments. The readability benefits are more noticeable for firms operating in less competitive industries and having poor earnings quality.Originality/valueThis study suggests that foreign investors facing informational disadvantages prefer firms with better readability as a substitute for informational acquisition, processing and monitoring.

Workforce diversity and financial statement readability

AbstractThe Securities and Exchange Commission has associated readability with a range of linguistic features largely determined by the language style of the information producers, including sentence length and the use of personal pronouns, familiar words, surplus words and active voice. We examine the impact of a firm's workforce ethnic diversity on its financial statement readability. Based on linguistic literature, we argue that a more diverse workforce increases the linguistic heterogeneity of the inputs into financial statements, hindering financial statement readability. We show that financial statement readability decreases with the ethnic diversity of the workforce, and that this effect is more pronounced for firms located in a community with a high crime rate or low social capital. We also find that the market reacts less to the earnings surprises of firms with less readable financial statements. We further find that the impact of white‐collar employee diversity on readability is greater than that of blue‐collar employee diversity. The results of robustness tests suggest that workplace diversity does not reduce firms' overall information production quality, which rules out the alternative explanation that employee diversity hinders financial statement readability through increasing employee conflict and communication errors. Overall, our study suggests that workforce diversity is an important determinant of financial statement readability.

Celebrity CEOs and financial statement readability

Celebrity CEOs and financial statement readability

Determinants of readability of financial statements in Kenya

The current study set out to investigate the determinants of readability of financial statements of Kenyan-listed firms. A deductive approach was employed and data was collected from a sample of 59 companies listed in the NSE in a census study over 5 years between years 2014 to 2018. Prais Winsten regression model was employed and the findings indicated that file size had a significant and negative effect on the readability of financial statements in Kenyan listed firms. The implication is that large-size financial statements are more difficult to read than smaller ones. This finding is consistent with reality since it will take less time to read small-sized financial statements than larger ones. Preparers of financial statements who are the firm managers should thus be careful about this finding. Regulatory authorities should develop policies that encourage the production of smaller volume financial statements to enhance their readability by the end-users. The current study is the first in East Africa since there has been no study on the readability of financial statements that have employed readability indices and that has regressed determinants against the readability of financial statements in this region.

Celebrity CEOs and Financial Statement Readability

Celebrity CEOs and Financial Statement Readability

The Effect of Management Characteristics on Audit Report Readability

The present study investigates the relationship between management characteristics (managerial entrenchment, CEO narcissism, overconfidence, board effort, real and accrual-based earnings management) and the audit report readability of listed firms. In other words, this paper seeks to answer the question of “whether management characteristics can have a favourable effect on the audit report readability or not.” The multivariate regression model is used for this study. Research hypotheses were also examined using a sample of 1004 observations on the Tehran Stock Exchange during 2012–2018 and by employing multiple regression patterns based on a panel data technique and fixed effects model. The results show a negative and significant relationship between managerial entrenchment and real and accrual-based earnings management and the audit report readability, based on the FOG index, and a positive and significant relationship between management narcissism, CEO overconfidence, and board effort and the audit report readability, based on the FOG index. Moreover, a negative and significant relationship exists between management entrenchment, CEO overconfidence, real and accrual-based earnings management, and audit report readability based on text length and Flesch indices. A positive and significant relationship was evident between CEO narcissism and board effort and audit report readability based on the same indices. Besides, research models were also examined for more confidence using other additional methods, including FE, T + 1, ABB, and GMM, which confirm the study’s preliminary results. Since the present study is the first paper to investigate such a topic in the emergent markets, it provides valuable information about intrinsic and acquisitive characteristics of management for users, analysts, and legal institutions that contribute significantly to financial statement readability.

Financial statement readability and credit rating conservatism

AbstractThe paper examines the relation between the financial statement readability and credit rating conservatism. The Fog Index of the financial statements of the United States publicly listed companies and the text length of their financial statements are employed as the readability indicators. I find that: (1) firms with annual reports that are harder to read (i.e., they have a higher Fog index and longer length) have more conservatism; (2) rating agencies have become more conservative in assigning credit ratings during dot.com bubble and financial crisis; (3) rating agencies have faced increased regulatory pressure result in becoming more conservative after Sarbanes‐Oxley Act; and (4) as firms have lower readability, it will influence the rating agencies becoming more conservative during crises or after SOX act.

The relationship between intellectual capital and financial statements readability: the role of management characteristics

PurposeThe present study aims to investigate the relationship between intellectual capital and the readability of financial statements with the mediating role of management characteristics of companies listed on the Tehran Stock Exchange. In other words, this research tries to find the answer to whether intellectual capital can positively affect the readability of financial statements.Design/methodology/approachA multivariate regression model was used to test the hypotheses for this purpose. The research hypotheses were tested using a sample of 1,309 observations listed on the Tehran Stock Exchange from 2012 to 2018 and a multiple regression model based on panel data and fixed-effects models.FindingsThe results indicate that intellectual capital has a positive and significant relationship with the readability of financial statements, which means that with increasing intellectual capital in companies, financial statements’ readability also increases. Based on the hypothesis test results, it has been determined that narcissism, accrual and real earnings management have a negative effect on the relationship between intellectual capital and the readability of financial statements.Originality/valueSince the present study examines such an issue in emerging markets, it provides users, analysts and legal entities with useful information about management’s inherent and acquired characteristics that significantly impact the purchase of audit opinion. This study’s results also contribute to developing science and knowledge in this field and close the literature gap.

Post‐CEO retirement appointments and financial accounting—Evidence from CEO turnovers

AbstractPrior research has shown that when boards seek to appoint CEOs as outside directors, the director labor market rewards CEOs' accounting performance. This study examines whether the external labor market's assessment of the accounting performance is moderated by CEOs' past exercise of financial reporting discretion in the form of accruals and real earnings management and financial statement readability. Our results show a positive association between post‐CEO board opportunities and within‐GAAP accruals management as well as to more readable financial statements. Earnings restatements are associated with fewer board positions and director pay. However, the director labor market appears to punish R&D expenditure above the industry median, suggesting that boards view overinvestment as a risky avenue for growth. Finally, the results suggest that for CEOs with planned retirement, the director labor market provides some mitigating effect on the horizon problem.

The roles of XBRL and processed XBRL in 10‐K readability

AbstractThe size and composition of the 10‐K file have changed dramatically since the mandatory adoption of XBRL. We re‐examine 10‐K file size as a readability proxy by decomposing 10‐K file size into its main components, which include XBRL, processed XBRL (a twin to XBRL that allows XBRL information to be accessed using viewer software) and text. We find that 10‐K file size reduces readability before XBRL's adoption in 2012 but enhances readability after adoption and that the XBRL‐related components can explain the reversal of this relation. As the XBRL‐related components only include financial statement information, our results indicate that more XBRL data improves users’ understanding of the financial statements, which is in contrast to the text component of the 10‐K where a larger file size is associated with lower readability. As such, our study identifies financial statement readability as a distinct and important dimension of disclosure quality that has been overlooked in the prior literature.

Do earnings management practices define the readability of the financial reports in India?

Using a sample of the listed firms over the period 2007–2019, we examine the impact of financial statement readability on the earnings management in a large emerging economy, India. Besides, we test for the readability of financially distressed and financially constrained firms. We use the fog index to measure the readability of the Management Discussion and Analysis (MDA) section of the annual report, and earnings management is measured using the Jones model. Our results indicate that the firms practicing earning management activities prepare lesser readable financial reports. Our results remain the same after adding the firm‐fixed effect to control for firm‐specific characteristics. Thus, more financial manipulation practices by the firm make the financial reports more complex to comprehend.