The chairman's statement in Malaysian companies: A test of the obfuscation hypothesis

Abstract

Purpose

The obfuscation hypothesis suggests that under‐performing firms will tend to obscure the meaning of their corporate narratives by deliberately adopting a textual complexity, most readily apparent through poor readability and the use of unnecessarily difficult language. This paper seeks to add to the literature in the area by comparing the textual complexity of corporate narratives, notably the chairman's statement, of main board and second board companies on the Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange), with their financial performance, and also to examine the impact of company size, board membership and degree of statutory regulation on the readability of corporate narratives.

Design/methodology/approach

Following the existing literature this paper uses readability as a proxy for textual complexity, in addition to more direct measures, and seeks to examine relationships between textual complexity and various measures of financial performance.

Findings

The findings suggest that there are significant relationships between corporate language and financial performance, but that these are not consistent with the obfuscation hypothesis.

Originality/value

The findings are consistent with the suggestion that increased regulation and statutory monitoring of disclosures are associated with improved readability of narrative. They do not provide support for the obfuscation hypothesis.

Citation

Smith, M., Jamil, A., Chik Johari, Y. and Ahmar Ahmad, S. (2006), "The chairman's statement in Malaysian companies: A test of the obfuscation hypothesis", Asian Review of Accounting, Vol. 14 No. 1/2, pp. 49-65. https://doi.org/10.1108/13217340610729464